BUS-217  ·  Week 5

Case Study

Tutorspree

In 2011, Tutorspree emerged from Y Combinator, calling themselves "like Airbnb for tutors." If you were a parent looking for a math tutor for your kid, you could find one on Tutorspree. Similarly, if you were a grad student looking to make some money tutoring, you could list your services on the platform.

It was a huge potential market — their research indicated that tutoring was a $5 billion market and growing. The revenue model was simple: Tutorspree would take a fifty-percent cut on each tutoring session booked.

The economic model Tutorspree presented to investors looked very solid, especially because the three founders were SEO experts, so they knew how to make the website show up at the top of Google searches for tutoring services without having to pay for any marketing or advertising. The recurring nature of tutoring sessions is such that Tutorspree expected the lifetime value (LTV) of a new customer to be reasonably high. They figured the average new customer would book a total of six tutoring sessions, so if they made an average of $25 on each one, then their LTV would be $150. Their CAC would be nearly zero (since the founders were SEO experts, they figured they'd get Google search traffic for free). What could go wrong?

They touted their "proprietary algorithm" that would match students and tutors based on various factors, including location, background, preferences, and style.

Based on their solid economic model, they raised $1.8 million in capital from leading investors, including Y Combinator, Sequoia, and Quora co-founder Adam D'Angelo.

They signed up more than seven thousand tutors in the first few months after they launched, and soon customers began to appear, finding the site through Google and booking sessions with tutors.

However, the tutors weren't pleased about giving fifty percent of their fees to Tutorspree, so at the end of the first tutoring session, they would often tell the student, "Hey, just contact me directly next time instead of going through the platform." As a result, Tutorspree's estimate of a six-session customer lifetime value (LTV) turned out to be a bit off.

In March of 2013, Google changed its algorithm, and Tutorspree's SEO volume dropped by eighty percent overnight.

It looked like they would actually need to spend money on paid advertising, and that wasn't in the economic model they had prepared.

By September, they had ceased operations. The investor money was gone in less than two years.

Key Takeaways

01

Fundamentally, the Tutorspree story is a simple one: they underestimated their customer acquisition cost (CAC) and overestimated their lifetime value of a customer (LTV). It's a common issue in startup land. Every entrepreneur underestimates their CAC ("We're SEO experts, so we don't need to spend any money on advertising!"), and every entrepreneur overestimates their LTV ("Once we have a customer, they'll come back again and again!"). Finding out too late that your CAC is too high relative to your LTV will bring your startup to its knees faster than a tutor could have taught you the basic math you needed at the onset.

02

As we explored in the Marketplace Models section, one of the risks of a digital marketplace model is the threat of disintermediation. The marketplace model requires that you be in the middle of the transaction to take a cut — that's where your revenue comes from. If people want to go around you and transact off your platform, the model fails. Successful marketplaces like Airbnb and Upwork have worked hard to provide benefits that discourage buyers and sellers from bypassing them. Tutorspree failed to do this.