Winning Strategies for Service Marketplaces

A strategic analysis after evaluating multiple service marketplaces

Over the past few years, I’ve come across a huge number of service (or labor) marketplaces: the countless Uber for X companies, the marketplaces for lawyers, therapists, cleaners, architects, construction workers; you name it. I’ve always been sceptical about this space due to the risk of disintermediation and low retention but the success of some of these platforms (eg. Upwork) sparked my interest so I decided to dig a little deeper.

So what makes a successful service marketplace? Has the opportunity in this space been played out or is there still scope to build outliers in this category? I believe that there is. But, only in the following circumstances: repeated discovery marketplaces, online-first marketplaces (ie. where the service is delivered online) or SaaS-enabled marketplaces. Sounds complicated? Let me try and simplify it in the post below.

Intro: Discovery, Trust and Convenience

Besides providing the service itself, marketplaces provide value (to the demand side) in three main ways: via discovery, trust and convenience. They help users identify the right supplier (discovery), they give them the assurance that the service provider is legitimate (trust) and they remove the friction which arises when connecting directly with a supplier (convenience). To succeed, a marketplace must continuously fulfil at least one out of these three functions.

The problem with most service marketplaces is that the value they provide decreases after the first transaction. Once a buyer identifies a supplier they trust, they will most likely stick with him or her. From that point onwards, the value of the marketplace is reduced to convenience: trust has been established between the buyer and the supplier and there is no longer a need for discovery. For the marketplace to succeed, the value of convenience it provides must, therefore, continuously outweigh the monetary gain of moving off-platform (ie. not having to pay the commission the marketplace charges).

Based on this fact, I believe that service marketplaces can only prevail if they fit into at least one of the following categories: repeated discovery, online-first marketplaces and SaaS-enabled marketplaces. On top of that, they must operate in a category where the service provided is a temporary rather than full-time need for the demand side. If it is a full-time need, then the demand side will hire a permanent employee reducing the need for a transaction-based marketplace.

Here are some examples of successful service marketplaces that fit into at least one of the categories:

In the next part, I’ll try to analyse the key success factors of these three categories of marketplaces.

Part 1: Repeated Discovery Marketplaces

Repeated discovery marketplaces occur when there is a recurring need to discover new suppliers. In many cases, this is due to the fact that the demand side values convenience over trust. Uber is a good example of this. Their service is highly standardized and time to pick up matters more to the user than a pre-existing relationship (or trust established with a specific driver). A user would rather find a new driver for every ride, than wait for their favourite driver to pick them up. Uber fulfils the discovery function every time users interact with the platform. Its seamless experience (compared to ordering a taxi on the street) and its rating system ensure that convenience and trust are provided.

Repeated discovery marketplaces are rare and generally only happen in cases where the service offered is highly standardised. For the most part, their supply base tends to be relatively low-skilled and homogenous. In theory, repeated discovery marketplaces are best placed for success since they provide discovery, trust and convenience at every interaction. In practice, however, they are less defensible and more prone to competition due to their low skilled and undifferentiated supply base. As a result, they tend to have thin margins and, as demonstrated by Uber and Lyft, they struggle to hit profitability. In line with this, repeated discovery marketplaces will most likely need to be highly capitalised to help fuel growth and fend off competition.

Most marketplaces are not well suited for repeated discovery. To keep their customers engaged they, therefore, need to continuously provide convenience. They can do this by acting as the platform over which the service is delivered (online-first marketplaces) or by building workflow tools to facilitate the delivery of the service (SaaS-enabled marketplaces).

Let’s dive into these two categories.

Part 2: Online-First Marketplaces

Similar to repeated-discovery marketplaces, online-first marketplaces seem to be less susceptible to disintermediation. This is because the marketplace itself plays a vital role in facilitating online service. For instance, the marketplace might provide the video calling solution, collaboration, invoicing or marketing tools and the platform to enable the service to be delivered. These marketplaces are (or at least should be) SaaS-enabled by default. They need to build a minimum set of tools for service delivery to happen in a seamless way. At every interaction, the marketplace should continuously provide value in the form of convenience and this keeps users on the platform. Tutoring, coaching or doctor marketplaces such as VIPKid, BetterUp, Preply Thinkific, Podia, Teladoc and Kry, are all examples of online-first marketplaces. With the rise of the freelance economy and the advent of remote work, I suspect we will see an increasing amount of these online first services pop up. The proliferation of these platforms will make it hard for any single marketplace to lock in the supply base. The challenge will, therefore, be to build the best tool-set so as to monopolise the supply side or at least ensure that they have a high utilization rate.

Part 3: SaaS-Enabled Service Marketplaces

Offline services are at greatest risk of disintermediation. This is because face-to-face interaction significantly increases the likelihood that users will move off-platform. In order to reduce this risk, successful offline service marketplaces must be SaaS-enabled. To survive, they have to build workflow tools for either the demand or supply side to keep them on the platform. We’ve written a lot about this phenomenon, you can check out some of our blogs on the topic here and here.

Opentable, Docplanner, Doctolib, StyleSeat and Fresha are prime examples of SaaS-enabled marketplaces, they all built booking management systems in an attempt to lock in their suppliers and, in some cases, gave it away for free as an acquisition tool. By doing so, they made it more convenient for users to book the service, whilst increasing stickiness of the supply side.

Some marketplaces go one step further, taking a more active role in delivering the service by identifying (and sometimes training) high-quality suppliers, standardising prices and automating the matching of the demand and supply side. In doing so, they provide an additional layer of trust for the consumers. These are what we call managed marketplaces. I’ve classified them under SaaS-enabled because in many cases elements of the ‘managed’ part are done via software. Managed marketplaces like Honor, for instance, thoroughly vet their suppliers and provide them with the tools to manage their schedules and follow up with their clients. By combining SaaS with a managed service experience, these marketplaces are able to continuously provide convenience and trust thereby keeping users on the platform. In some cases, they even attempt to homogenize the supply so that users no longer differentiate between each supplier, thereby allowing for repeated discovery.

Increasingly, we are seeing more B2B marketplaces enter the SaaS-enabled marketplace category. B2B transactions are by nature more complex, they often involve multiple parties, larger order values, negotiation and complicated workflows. Because of this, B2B service marketplaces must generally focus more on providing value in terms of convenience and trust and, as a result, will need to be more SaaS-heavy than your traditional B2C marketplace. Whilst, B2C marketplaces usually build SaaS just for the supply side (the B in the B2C), B2B marketplaces will most likely build workflow tools that cater to both sides of the platform. RigUp, a marketplace for oil and gas contractors, is a prime example of this. On the demand side, Rig Up provides oil and gas companies with tools to source, onboard and pay contractors as well as a platform for compliance and risk management. On the supply side, they help contractors get paid faster, ensure they have the right insurance, manage their certifications and build their online reputation. Incredible Health, Cargo One and Pickr are other examples of this. Due to this emphasis on SaaS, I suspect that successful B2B marketplaces will have a much stronger lock-in effect than B2C marketplaces.

Conclusion:

In summary, in order to succeed, service marketplaces must continuously provide value in terms of either discovery, convenience or trust. In line with this, successful service marketplaces tend to be either repeated-discovery, online-first or SaaS-enabled.

I summarized each of my findings in the table below:

To date, most of these marketplaces have been consumer-focused. However, I believe the market for consumer services is reaching saturation: drivers, cleaners, doctors, dog walkers on-demand, what more do we really need? The window of opportunity has largely closed, however, this is far from being the case for B2B marketplaces. Whilst consumers are able to order just about anything online, most businesses have not even started transacting online. As alluded to above, B2B marketplaces will most likely be much more complex to build and may take more time than consumer marketplaces. That being said, I suspect that this category is where the next generation of outliers will be built. Stay tuned for my next post to find out why B2B marketplaces have the potential to unlock the holy grail of marketplaces (high AOV, high frequency).

If you’re building a service marketplace that falls into one of these categories and is, ideally, B2B, please don’t hesitate to reach out!

Thanks to my colleagues Robin Dechant and Louis Coppey for the feedback on this post.