Come for the Network, Stay for the Tool

A couple of years ago, Chris Dixon, Partner at a16z, coined the saying ‘come for the tool, stay for the network.’ This came to define a new go-to-market strategy for many marketplaces or, as they came to be known, SaaS-enabled marketplaces. The idea was to acquire one side of the marketplace by offering them a SaaS tool and, once significant scale had been achieved, attracting the other side by building out a marketplace (solving the infamous chicken and egg problem). This approach was popularised by OpenTable, Zenefits, and StyleSeat*, amongst others. In some cases, the SaaS was even given away free in the hope of driving adoption before monetizing on the marketplace.

Bootstrapping your marketplace with a SaaS tool, however, is easier said than done and I predict it will get much harder over time. To begin with, it requires a deep understanding of your customers and their workflow, not to mention a significant amount of resources to build out the product. So much for moving fast and breaking things. The SaaS component should also be able to operate as a standalone tool, which is becoming increasingly tricky as the number of SaaS tools available continues to rise and customer acquisition costs skyrocket. Unless you are selling into a relatively old-school industry where the adoption of workflow tools is still low, it is likely that the use of SaaS as a go-to-market strategy will only get tougher. In fact, I suspect that the ever-competitive SaaS landscape will result in this approach falling out of favour.

That being said, entrepreneurs should not discount SaaS from their roadmap when building a marketplace. As a go-to-market mechanism, it may no longer be as effective as it once was, however, it can add significant value if introduced once the marketplace is up and running. For instance, it can be used to help your customers manage or optimise their transactions and workflow or provide them with insights on their users, amongst other things. This, in turn, can help reduce churn and increase customer loyalty and lifetime value. What’s more, a SaaS tool can bring predictable and recurring revenue to a business model which tends to rely on transactional and generally unconstant revenue. In certain cases, it can even become a core revenue driver of your business with the marketplace acting as the hook to acquire users. In other words, we may see users coming for the network and staying for the tool.

This was the case for Docplanner*, which started off as a marketplace to help patients find and book doctors. It then rolled out a tool to help doctors manage their bookings more effectively, which is now the main revenue driver for the business. Likewise, Xeneta* began as a marketplace for pricing data for the shipping industry. Shippers and forwarders would contribute their own pricing data in return for free access to a stream of aggregated pricing data. As soon as a certain amount of data had been collected, they started rolling out paid SaaS subscription to help users segment and filter the data, comparing their prices to the market, amongst other things.

In certain cases, such as Xeneta, the SaaS tool is actually dependent on the data the marketplace generates and would be impossible to build from day one. This is the case for many different marketplaces including Hired, a leading recruitment site, which introduced an intelligent job matching and benchmarking tool based on the data it acquired via its marketplace. Upwork has implemented something comparable. Similarly, Metalshub*, a marketplace for trading metals is introducing a dashboard to analyse trade data and indices more effectively. This would have been unachievable without the breadth of data they had collected over time. Other examples of SaaS tools which could be added to a marketplace include project management and contract management tools, pricing or capacity optimization tools, marketing or invoicing features as well as next-generation CRMs or ERPs.

Arguably, introducing a SaaS tool once the marketplace has some scale and liquidity rather than prior to its launch can be a more effective approach in many cases. For one, it allows entrepreneurs to build tools that leverage the data from the marketplace and are, therefore, uniquely defensible. Secondly, it gives entrepreneurs time to truly understand the needs and workflows of their customer and, in particular, to build trust with them. Once a marketplace has proven its value and becomes a key source of revenue for a supplier it becomes much easier to upsell additional tools and services, which in some cases could become the main revenue driver for your marketplace. I look forward to seeing more entrepreneurs taking on this strategy and challenging the now established ‘come for the tool, stay for the network.’ If you are one of those individuals, please get in touch. :)

Thanks Mehul Patel HIRED and Pawel Chudzinski for the insightful convos that led to this post. And Chris Dixon for the original post, which inspired this one. Stay tuned for the next one on marketplace monetization!

*Point Nine portfolio company.