Dual-Sided ROI Equation
Price each acquisition to include the cost of acquiring the other side it needs, then push to your payback threshold
- Difficulty
- Advanced
- Time to result
- ~weeks to results
- Steps
- 3
- Confidence
- 90%
Instead of obsessing over marketplace balance ratios, build ROI equations for acquiring each side that internalize the marketplace dynamic — the cost of acquiring one side must load in the cost of acquiring the other side needed to serve it. With correct dual-sided equations you can largely ignore balance metrics and push acquisition to your acceptable payback period.
Origin
A modeling approach Dan Hockenmaier gravitated to after building many marketplace models and finding pure balance metrics less useful than fully-loaded ROI equations.
Core principles
- 01A new customer's true CAC includes the CAC of acquiring the supply needed for them to transact, and vice versa
- 02With fully-loaded dual-sided ROI, marketplace balance ratios can largely be ignored
- 03Watch for externalities the equation cannot capture (disillusionment, churn to competitor, bad word of mouth)
How to run it
- 1
Take the CAC of the side you are acquiring
For example, the cost to acquire an Uber rider.
- 2
Load in the fractional CAC of the other side
Add the CAC of the supply needed, scaled by the ratio between the two sides (e.g. if one driver serves ten passengers, add one-tenth of a driver's CAC per passenger).
- 3
Compare to LTV and derive payback period
Compare the fully-loaded CAC to the customer's LTV to calculate payback period.
Pro tip Push acquisition all the way out to the payback period you are comfortable with on either side rather than throttling to hit a balance ratio.
Watch out Check for externalities the equation cannot capture — extreme low-supply or low-demand scenarios where participants become disillusioned, switch, or badmouth the service.
In the wild
To acquire a rider, take the rider's CAC plus an additional amount of driver CAC times the ratio of drivers to riders acquired at that time — if you need one driver per ten passengers, add one-tenth of a driver's CAC to each passenger. That total CAC compared to LTV yields payback period.
→ A fully-loaded equation that lets you push acquisition to your payback threshold without micromanaging the marketplace balance ratio.
Common mistakes
Optimizing pure marketplace balance ratios in isolation
Buyer-to-seller ratios are worth monitoring but do not tell you whether acquisition is profitable; a fully-loaded ROI equation captures the cross-side dependency and is a better decision tool.
Ignoring uncapturable externalities
Pushing acquisition to the payback limit can still fail if, for example, too little demand leaves Uber drivers disillusioned enough to switch to Lyft or badmouth the service — some effects live outside the equation.
Is it for you?
Best for
Growth and finance leaders at marketplaces deciding how aggressively to spend on each side of acquisition.
Not ideal for
Single-sided businesses, or very early marketplaces without stable ratios and LTV data.
From the transcript
“can you write an Roi equation for acquiring supply and demand which fully internalizes the marketplace Dynamic”
“if you have dual sided Roi equations which are appropriately capturing this Dynamic I actually think you can somewhat ignore Marketplace balance”
“the one exception to this would be are there externalities which you can't capture in this equation”
“cap to acquire a rider and then an additional amount of CAC loaded on for for the supply the drivers”
From the episode
Developing a growth model + marketplace growth strategy
Dan Hockenmaier (Faire, Thumbtack, Reforge)