How to be a good middleman

Introduction

There’s basically two things to understand about being a good middleman. The middleman is like a gatekeeper to something valuable. Ideally it will be as valuable as possible and ridiculously rare. And a successful gatekeeper makes sure only he has the key.

Effect of volume

The other thing to understand is the effect of volume. If a middleman is handling a huge number of transactions on a daily basis then economies of scale kick in. This means their fee can go down which makes them more attractive to their customers, and hence more difficult to compete with.

Example - a services business

This might all sound quite theoretical, but consider this example. About a year ago I started a translation company. I was surrounded by people in my university who spoke many different foreign languages, so I thought it would be a good way to make some spare cash.

I was effectively a middleman charging a fee on each job. But the problem with translation is it’s neither very valuable or high volume. If it was high value then I could have charged a relatively high fee, and put some of that into acquiring more customers (via ad networks etc.). And if it was high volume then the low fee would be tolerable because the high volumes would result in overall high profits and greater efficiencies.

Not being in either of these camps made it very hard. The customer acquisition cost was too high, and swallowed up all the profits. If I was to try it again then I’d have to be be highly focused on a niche and providing a premium service so I could charge more, and make better use of targeted advertising.

Good middlemen

Lastly let me give some examples of companies which act as great middle men:

• High value: Art dealer, Agency (for high end technical skills)
• High volume: VISA, Paypal, Lastminute.com, food wholesaler

Of course some are both high volume and high value, which is the real sweet spot.