Service & Marketplace-model fit

Service & Marketplace-model fit

Services are ambiguous, and creating an online services marketplace requires finding a fit b/w the service and the marketplace model

The landscape of marketplaces for services is littered with failures. There are many a stories of promising startups that failed to create an enduring business. Services, by nature, are ambiguous and their lack of standardization makes it hard to create liquid online marketplaces. Plumbing, for example, isn’t a fixed priced SKU you can buy on Amazon and be 100% sure that it would solve the pipe leak in your house.

Services span a whole range complexity, from low complexity services such as food delivery to high complexity services such as home remodeling. There is no “one size fits all” marketplace model that works for all services. However, an understanding of the patterns of what marketplace models are best suited for what kind of services would make it easier to spot opportunities and to avoid failures.

My attempt here is to articulate these patterns by defining the 4 categories with a strong service & marketplace-model fit, and a couple that are misfits. Below is a chart that lays out services on complexity vs. frequency of service, and marks the 4 categories where successful marketplaces have been (and and can be) built.

Categories of marketplaces with a Service & Marketplace-model fit

Categories of Fits

Fit Category 1 — Lead generators for medium/high complexity (medium/low frequency) services

Given the ambiguity inherent in service marketplaces, lead generators have been the most obvious and the earliest way to bring services online. As the name suggests, lead generators are not involved in the transaction and make money simply on surfacing (or establishing connection) between the consumer and the lead.

The prime example of a marketplace in this category is Thumbtack, which is a lead generator for services across all complexities and across all frequencies. However, I suspect a big part of Thumbtack’s revenue comes from medium and high complexity services such as event photography compared to low complexity services such as home cleaning.

Lead generators could take a share of the market in any complexity level but typically, the value of the lead (and the trust the marketplace creates behind that lead) increases in proportion to the complexity of the service. There is no reason for one to use lead generators for procuring low complexity services when there might be specialized marketplaces, offering a much better consumer experience (Fit Category 2) for procuring those services.

A good example of a successful lead generation model in a specific domain (everything home related), but cutting across medium and high complexity services, is Houzz. It builds trust for the leads by showing detailed photos of their past projects, Houzz badges and awards, affiliations, reviews, etc. Arguably, Houzz has taken away some of Thumbtack’s market in home services but Thumbtack’s staying power comes from the trust and brand awareness it has engendered because of its breadth of services. Zola is another good example in the wedding domain.

Fit Category 2 —On-demand transaction marketplace for low complexity (high frequency) services

This category encompasses specialized marketplaces focused on low complexity (high frequency) services such as food delivery, ride hailing and grocery delivery. Prominent examples are DoorDash, Lyft, Uber Eats, Instacart, etc. These marketplaces go beyond lead generation, and into transactions, and they owe their liquidity to the demand that is generated (and maintained) on the promise of a much better consumer experience for buying services compared to lead generation marketplaces. In that sense, they deepen the market and create more liquidity than there would have been otherwise.

However, given the low complexity (and the commoditized nature) of the services being provided by supply side, trust mechanisms in these marketplaces are less important, and marketplaces in this category have a hard time preventing supply-side multi-tenanting with direct and indirect competitors. Supply-side keeps on switching across marketplaces and jobs (same person could do grocery delivery today with Instacart and ride hailing tomorrow with Uber), and this leads to very tough unit economics. Andrew Chen has a good post about it. Such marketplaces will continue to exist, though there will likely be consolidation that combines multiple low complexity and high frequency services into one marketplace.

Fit Category 3 — Managed transaction marketplace for medium complexity (medium frequency) services

This category is relatively underdeveloped, with Puls and Setter being good examples in home services, and Soothe and Glamsquad being good examples in wellness. The services offered by these marketplaces sit in the sweet spot of being complex enough that supply-side is not constantly churning (and multi-tenanting) and not complex enough that the buying experience can’t be standardized into a few clicks. This enables these marketplaces to offer a consumer experience 10x of what the lead generators could provide, thereby capturing sustainable demand.

These transaction marketplaces have a high degree of “managed” component. Puls, for example, vets its technicians and provides a 90-day guarantee on its services. Its buying experience is also very much tailored to each service with as much clarity on pricing as reasonably possible. Setter, on the other hand, introduces a trusted home manager into the mix to instantly help find the right provider.

More specialized marketplaces, on the lines of Glamsquad and Soothe, might emerge in this category as more service buying continues to move online, and more segments of services (e.g. dog training — just a random guess) become large enough to justify specialized marketplaces.

Fit Category 4 — Managed transaction marketplace for high complexity (low frequency) services

This category is also underdeveloped, with Upwork being the best example of being successful in the desk-work space. Note that some of Upwork’s services might better fit Category 3 above. The marketplaces in this category are what James Currier called Market Networks. The focus for the marketplaces here is to bring as much of the offline negotiation involved in a complex transaction online, into an interface managed by the marketplace. The power of these marketplaces comes from a few aspects (not all might be present in one marketplace): a) vetting of suppliers b) SaaS tools to work with these suppliers (before and after one has hired them) and c) guarantee when things go wrong.

BuildZoom is an evolving example of such a marketplace for home projects in the consumer space. Managed by Q is an evolving example for office projects in the B2B space for some of its services. It should be noted that the consumer experience marketplaces in this category need to create is very different from the experience that marketplaces in the Category 3 above create. Therefore, it’s very hard for a single transaction marketplace to effectively span across the Categories 3 and 4.

Note: As consumer expectations are evolving towards expecting lower and lower friction, marketplaces in Category 3 and 4 would pose a threat to lead generators (Category 1). That, in my view, is the reason Thumbtack went through all the pain to change its matching approach to be more instant and effective.

The Misfits (or Loose fits)

While it’s interesting to understand the categories of fits, to appreciate the nuances of service marketplaces, it’s also important to recognize the misfits. Below are 2:

Misfit Category A— Lead generators for low complexity (medium/low frequency) services

Prominent example of a marketplace in this category is TaskRabbit. With its positioning as “get affordable help”, TaskRabbit cornered itself into mostly being an option only for low complexity (medium frequency) services that one wouldn’t be able to find elsewhere at a better price e.g. home cleaning, or low complexity (low frequency) services that one wouldn’t be able to find elsewhere at all e.g. standing in a queue for a ticket. To be clear, TaskRabbit is not a failure in absolute sense, but it turned out to be much more of a niche player than it seemed at one point of time because it did not do what was needed to build trust in buying medium complexity services.

Misfit Category B— On-Demand transaction marketplace for low complexity (medium frequency) services

Prominent example of a marketplace in this category is Handy. Its mainstay is home cleaning, which not only is medium frequency, but also suffers from the same supply-side churn we had talked about in Fit Category 2. The medium frequency and low complexity aspects of home cleaning makes it really hard to retain supply, and unfortunately for Handy, there also isn’t any silver bullet to providing consumers a 10x experience when buying cleaning from Handy as opposed to buying it from a cheaper lead generator such as TaskRabbit. This is unlike other low complexity services such as food delivery or ride hailing, where the high frequency and on-demand nature of services at least creates an opportunity for the transaction marketplaces to offer a 10x consumer experience compared to what a lead generator could provide.


Obviously, service marketplaces are hard, and I have been wrecking my brain to understand what leads to the varied outcomes. Hope the categorization of fits and misfits above resonates with you, and it provides a framework for evaluating opportunities and avoiding pitfalls. Please share any feedback.

The increasing centrality of SaaS players in e-commerce

The increasing centrality of SaaS players in e-commerce
 

Marketplaces thrive when their supplier base is highly fragmented. This ensures that they have a higher negotiating power and can, therefore, command a higher take rate. E-commerce marketplaces such as eBay, Amazon and many others have lived in this fragmented supplier state since they were founded. However, the accelerating shift of commerce from offline to online is changing these dynamics.

E-commerce SaaS players are inserting themselves as powerful middlemen between the suppliers and the marketplaces and/ or the buyers (graphic below). Serving multitude of seller needs, these players have become de facto gateways to selling online. In the process, they have become owners of large parts of the supply. Marketplaces can view this as supplier consolidation, and it will, sooner or later, lead to some of the margins shifting from the marketplaces to these SaaS players.

SaaS as the gateway to e-commerce

Shopify, BigCommerce and Magento are a few notable SaaS players, serving all businesses except the really large ones. Thanks to the convergence of multiple trends highlighted below, they will become increasingly important in the still young world of e-commerce.

Brands will push direct-to-consumer in a significant way

A lot of brands have not yet fully embraced the online world. They still honor and depend on the relationships with distributors/ retailers that they had established to thrive in the offline world. There is an increasing need and an opportunity for brands to go direct-to-consumer. They will need some offline distribution but not at the scale of what exists today. Online first brands such as Warby Parker and Bonobos have proven that there does exist a fundamentally different approach to sales and marketing, outside the old distributor/ retailer relationships. This approach is not only more profitable, but it also allows the brands to understand and serve their customers better.

As brands make this transition, they will look up to SaaS solutions to help them build scale online. They will invest in a stronger online presence, outside the marketplaces, to earn higher margins. SaaS players will help them build all the shipping, payments and merchandising solutions, and promise to keep them at the cutting edge. This will allow the brands to focus on what they know the best, brand building and delivering physical products that customers love.

Brands that rely on BigCommerce for their online presence

Offline and online integration will accelerate

As brands become more serious about online, they will stop treating it as an experiment and finally push to merge offline + online. This will mean that they will need a centralized view of their inventory, irrespective of where it is selling. They will demand that their point-of-sale (POS) solutions evolve to give them all the benefits that online has such as rich data analytics, seamless transactions and returns, etc. Again, they will look up to e-commerce SaaS players to make this happen. There is already an intense battle underway to own the shop counter and it is only going to get more fierce.

Shopify POS solution

SMB sellers will want to have a multi-channel presence

Small & Medium Business (SMB) sellers have historically picked their preferred marketplace, focusing first on building expertise on how to sell online. However, as the process of selling online becomes standard and more and more sellers come online, SMB sellers increasingly want to have a presence on multiple marketplaces to maintain their growth rates. Add to this the fact that marketplace policies/ algorithms can change arbitrarily leading to volatile sales, there is all the reason for sellers to want to smoothen out their cash flow by selling on multiple channels. A lot of sellers I have talked to sell on both eBay and Amazon. SaaS solutions are the best best for any seller who wants to do this. They offer a centralized administration across marketplaces much like Hootsuite does for social media.

Barriers to entry for new marketplaces will reduce

By owning the supply side, e-commerce SaaS players have solved the chicken and egg problem of starting marketplaces to some extent. Getting supply on-board is now a lot about partnerships. An example of this is Facebook’s partnership with Shopify that allows Shopify sellers to sell products using Facebook Shop. Shopify has similar partnerships with Pinterest and Twitter. The interesting thing about these partnerships is that they not only give the sellers using the SaaS solution (here Shopify) an additional way to sell, but also increase the bargaining power of the SaaS player by ensuring that the e-commerce ecosystem has more than a few dominant marketplaces.

Best seller products will come from the SaaS players

Even if we don’t consider the points above, there is a strong likelihood that many sellers will gravitate towards these SaaS players as their business matures and their needs evolve. This is solely because these SaaS players offer better seller facing products. They have the benefit of focus that comes from having a more narrowly defined job. For example SaaS Inventory UX solutions will always be better than that of Amazon and Walmart because Amazon and Walmart have limited bandwidth to keep on iterating on their Inventory UX. They need to invest on many more products including the ones on the buyer side.

In addition, SaaS players also have the advantage of being in an ecosystem of software developers who don’t feel the compulsion to make it big. SaaS ecosystem is full of apps that fulfill tactical needs such as drop-shipping, email marketing, SEO, etc. These apps just want to hook into the bigger SaaS platforms such as BigCommerce and make enough money to spin a profit. Marketplaces can never build the exhaustive set of such solutions. These solutions will help the bigger SaaS players capture a boarder seller base with niche needs. In addition, it will give them a chance to become deeply ingrained in the business processes of these sellers which always is the key to higher profits.

BigCommerce app store

Watching e-commerce SaaS players build a moat around themselves could offer interesting lessons for a lot of other industries that SaaS is trying to penetrate. It will be worthwhile paying careful attention to what happens next.

American local buying & selling startups will soon hit the monetization wall

American local buying & selling startups will soon hit the monetization wall
 

There has been a lot of buzz lately about a new breed of Craigslist killers. OfferUp and letgo are the leaders in that pack and are into the business of facilitating local buying & selling. They have collectively raised more than $300 million in VC funding. The thesis is that with the emergence of mobile, there is finally a clear gap in Craigslist’s product strategy and that gap is good enough for these startups to exploit and build their own network effects.

While I agree with this thesis, I believe there are some market truths because of which these local buying & selling startups will never be big businesses. They surely will be relevant and will be used by millions of users but they will never make the kind of money that will guarantee their rapid growth once the VC money is gone.

In the matrix below, I have plotted local buying & selling startups in the broader e-commerce landscape. Ads and listing fees are the two prominent ways of monetization for companies in each of the quadrants.

Matrix showing the position of local buying & selling startups in the broader spectrum of e-commerce firms

My argument in that local buying & selling startups won’t be able to monetize enough if they were to stay in their current quadrant (1) and that it will be extremely hard for them to move into the other quadrants (2, 3 and 4) which are better suited for monetization.

Quadrant 1 is difficult to monetize

History and future of depressed prices

This year, OfferUp is likely to facilitate $14 billion in e-commerce transactions but it will make almost no revenue because it has not started to monetize yet. Craigslist facilitates a significantly higher $ value of transactions and earns only about $400 million in revenue. One reason for this low revenue is the nature of local buying & selling as a business. Given that most of the transactions happen offline, it is hard for Craigslist or anyone else to make money on transaction fees because of significant leakage. Another reason is that Craigslist doesn’t want to make more money than required to meet its costs and it has been open about that. Because of both these reasons, the market for local buying & selling has had artificially depressed prices with consumers assuming that listing should be free.

One might argue that if provided with a better product experience, customers will pay. That could have been true had it not been for the emergence of the unique phenomenon called Facebook. Facebook groups for local buying & selling have been pretty active and are free. The problem for the startups is that Facebook makes money from ads and ad platforms swear by one principle: ensuring a high level of engagement on the platform. By allowing consumers to buy & sell on Facebook, it is giving them another reason to come back to its increasingly utility oriented platform. It will never charge them for buying & selling because ads will allow it to monetize their presence much better. Sure, selling on Facebook might be a bit harder but it already has a highly liquid marketplace which works on mobile. So, it is good enough and sometimes that is all you need.

Limited value proposition for advertises

Local buying & selling startups in their current avatar are not attractive for advertisers. Users come to these platforms only for one narrow use case of buying & selling of used goods and given that this need doesn’t arise as often, the engagement levels on the platforms are low. This is a structural problem and is unlike any other major ad platform (Google, Facebook, Snapchat, Pinterest, LinkedIn, etc.). Successful ad platforms mean different things to different people and even different things to the same person at different times.

Moving into Quadrants 2, 3 and 4 is hard

Attractive local categories are now taken

Given the leakage we talked about earlier, the safest monetization bet for local buying & selling startups is to charge upfront listings fees i.e. fees for putting a listing on the platform irrespective of whether it sells or not. Only a certain type of seller putting a certain type of listing would see the ROI in paying that fee. Majority of Craigslist’s revenue comes from listing fees in three categories: employment listings, real estate listings and car listings. People get that and therefore, there are already startups that are targeted specifically towards these categories (example: Upwork, Zillow, Beepi, etc.). Like local buying & selling startups, these startups are designed to take advantage of the gap in Craigslist’s mobile strategy. They have already built a sizeable user base and offer a user experience that eases the friction in the specific category they are in.

Even if local buying & selling startups were to diversify into these categories, they would not be able to offer the desired user experience. The result would be an inventory with a selection bias. A quick look at cars on OfferUp vs. Beepi would tell you the difference. OfferUp has cheap old cars that few would want to buy whereas Beepi has real good cars. There is a direct correlation between the amount of effort one is willing to put in and the value of her item. Even if Beepi is more work, one would be willing to go through that if it means she can earn more for her valuable car. However, when one knows that her car is crappy, she would rather limit her agony, put it up on OfferUp in 10 seconds and make whatever she can. Sooner or later, buyers would realize this selection bias in the inventory of these startups, resulting in these startups capturing only a small part of these more monetizable categories.

Traditional e-commerce is a different ball game

eBay has been trying a transition from a P2P marketplace to a more traditional e-commerce business and it has been incredibly hard. Even if we assume that local buying & selling startups won’t make the same mistakes as eBay, some real problems will remain, making the transition extremely hard.

One, to scale up, these startups need to be acceptable to more buyers and that is possible only if they provide them with a significantly more structured in-app product experience and also with a significantly better service in terms of delivery and return. Both of these can be accomplished only if these startups get small and large businesses and not consumer sellers to become the dominant part of their seller base. As they make this transition, they will need to change their feedback policies and products (e.g. listing tools) to suit these larger sellers. How do you think that will make the consumer sellers feel? Marginalized and unimportant. All the promises of these platforms being a free land where users can list anything in 10 seconds and sell immediately would fall apart, leading to an outflux of these sellers.

Two, as these startups scale, their brand will turn from an asset into a liability. The effort that their marketing departments are putting to position these platforms as go-to destinations for local buying & selling will come back to bite them. Perceptions are hard to break and play a big role when buyers are deciding which platform to do what kind of shopping from. eBay has had this perception problem; people still refer to it as an auctions website for used goods when only 15% of its GMV now is from auctions and more than 80% of the goods sold on it are new.

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There could be some monetization tricks that these local buying & selling startups might have up their sleeve. However, as things stand right now, I am skeptical of how the future will pan out for these startups. Monetization winter for these startups might be around the corner.

Build the “middle class” for your marketplace

Build the “middle class” for your marketplace
 

Thanks to a discussion with a friend one afternoon, I got thinking on the need for a marketplace to carefully breed a “middle class” among its supply side community. Middle class here refers to the group of supply side participants of the marketplace who are dependent on it for a significant part of their livelihood.

I argue here that not only is it beneficial for a marketplace to have this middle class, but it is critical that it proactively optimizes for the metric: speed at which a no-one on the marketplace can join its middle class. Let us look at why this is critical:

  1. At the point a marketplace becomes important enough that its suppliers depend on it for livelihood, they will go above and beyond to remain competitive on it. This gives the marketplace the power to drive fundamental changes without significant resistance as long as those changes are for the benefit of the marketplace long term. An example is eBay’s transition to selling more than 80% of its products on fixed price (“Buy It Now” in eBay lingo) from being completely auction based a decade back. Initially, sellers were not willing to give up the high margins that auctions got them but when some sellers were able to increase volumes substantially based on “Buy It Now”, others made the switch pretty swiftly.
  2. New suppliers will aspire to join the marketplace thereby allowing the marketplace to offer the buyers the choice and reliability they need. I have met a bunch of eBay sellers who have built a respectable business from scratch in less than one year. These sellers were not born experts at selling sports memorabilia, vintage dresses, etc. but they decided to experiment and learn through the process and the marketplace supported them. The first few sales made them realize that it is not that hard to sell and they never stopped.
  3. It will prevent the supply side of the marketplace from becoming consolidated which in turn will make sure that the bargaining power of suppliers is kept under check and the marketplace earns enough margin to reinvest into the business. Air travel marketplaces have been suffering margin contraction from the ill-effects of a consolidated supplier base (airlines).

Product and business can play a big role in helping build this middle class and accelerating the speed at which more suppliers can join the middle class. One great example is Fresh Finds by Spotify which allows new undiscovered artists to get discovered. It helps Spotify to be less dependent on that one Taylor Swift who won’t put her songs on the platform. Another good example is Uber giving a 5 star rating to all drivers when they start. This means that riders don’t freak out when they are assigned a new driver. They discover that the driver is a newbie only if they talk to him or her during the ride. This obviously requires Uber to have high confidence on their own driver onboarding process. A not so obvious example is Facebook which shows you articles from publishers that your friends share irrespective of how big or small those publishers are. This allows small publishers to make a mark as long as they are producing good content.

To get an idea of a marketplace where this process worked till it stopped working, think of YouTube. How often do you watch a video from an unknown artist on YouTube? Not very often. It is true that YouTube has created some YouTube stars but those are an exception. It has started to resemble the concept of upward mobility in the US, becoming harder and harder. The web is full of articles about artists not being able to make enough money on YouTube. All the recent initiatives from YouTube around YouTube Spaces, Fan Funding and even the most recent YouTube chat are primarily focused on solving this middle class artist problem.

Building marketplaces is tough and requires many optimizations at the same time. You can build a successful business even if you don’t actively optimize for building a middle class but that business might not end up being a marketplace and it will therefore lack the flywheel that makes marketplaces incredibly resilient.

Unraveling product prioritization for marketplaces

Unraveling product prioritization for marketplaces
 

Marketplaces are amazing businesses if you get them right. Getting traction both on demand and supply sides is incredibly tough and product has a big role to play. Having been customers on some of the well known marketplaces such as eBay, You Tube, Airbnb, Uber, etc., a lot of us have experienced the demand side products. However, the supply side product is a bit of a mystery and that is where marketplaces create a lot of their initial magic. To keep this magic going, there is a constant need to prioritize supply side product features and I hope this post can help with that.

Before we get into the details, it is important to realize that there is always one supreme skill or asset that is the biggest value add of a supplier to a marketplace. For example, for eBay sellers, this skill is sourcing — our sellers bring a lot of unique inventory on eBay based on their intuition of what sells. For You Tube, this skill is the art itself i.e. acting, tutoring, humor, etc. For Airbnb, it’s not the skill but the asset i.e. the property and for Uber it is both the skill i.e. driving and the asset i.e. the car. Now all supply side product features can be bucketed into three categories:

1) Features that give back time to the suppliers

2) Features that give back resources to the suppliers

3) Features that try to directly enhance the supreme skill or asset

Features in the first two categories allow suppliers to spend more time or resources on their supreme skill or asset by taking time or resources away from non-critical skill or asset. For example, for eBay, product features that reduce the shipping hassle and simplify the listing creation process fall in the first category, giving sellers more time on the weekends to do sourcing. Similarly, product features such as sponsored listing fall in the second category because they give sellers the cash flow that they can then invest into sourcing interesting products. Explicit guidance on what to source would fall in the third category because it attempts to help sellers improve their supreme skill skill (sourcing) itself. For most marketplaces, product features that expose more data/ metrics are the most obvious first step in the third category.

Now the decision of which category of features to focus on depends on multiple factors ranging from the value proposition of the marketplace, the industry it plays in, the state of maturity of the marketplace, etc. When a marketplace is young, it should ideally prioritize product features that fit the first and the second categories. If it does a good job with those, then additional investment into product features in these categories will only yield diminishing returns. For example if eBay’s shipping and listing flows are sub-optimal to the extent that an average seller gets only 2 hours a week for sourcing when they need 4 hours, then any product innovation on shipping and listing would have great returns. However, if eBay’s shipping and listing flows are optimized enough that sellers can spare the 4 hours they need, then any additional product innovation there won’t add significant value except for maybe some added goodwill.

The only marketplaces that need to spend significant product resources into the third category in their early days are the ones that are trying to achieve a high level of standardization from a skill or asset that can’t be easily standardized. For example Airbnb did put and has been putting a lot of effort into taking beautiful pictures of hosts’ properties. Uber on the other hand has a good degree of standardization but then driving is a pretty standardized skill to start with, so, it didn’t need to invest a lot into the third category of product features in the beginning. Now if in the future it wants to capture trip data and expose it to its drivers to show them when they braked too hard or took too sharp a turn at high speed, then it will be playing squarely in the third category of product features. The need for the third category of product features can become more obvious though as marketplaces mature and become complex and more competitive. This happens because suppliers become uncertain whether their skill or resource still adds as much value as it did before. This is happening with eBay and when that happens, product features in the third category can definitely help.

To summarize, while a lot of product features might seem like gems that can help your marketplace get to the next step of awesomeness, think carefully about your value prop, your industry and your maturity to decide what kind of product features you should focus on. Having a consistent framework definitely helps. Challenge your framework and adopt a new one if the old one doesn’t stand the test of time but don’t be all over the place. As I mentioned in the beginning, marketplaces are not easy to get right and your product is one of the most important levers you have.