Owning The Transaction – Why Marketplaces Need To Think Like SAAS Businesses.

| November 12, 2013 | 13 Comments

Marketplaces are difficult businesses to get off the ground. A marketplace without buyers cannot attract sellers and vice versa. In fact, the infamy of this proverbial chicken and egg problem detracts entrepreneurs from the challenges that a marketplace presents after it has successfully gained adoption and is successfully matching buyers with sellers. After all, marketplaces for products, like Ebay and Etsy seem to have it all working for them once they gain adoption.

Why the eBay of remote services behaves differently

Services marketplaces, however, present a unique challenge. Most services marketplaces cannot facilitate a transaction before the buyer and seller agree on the terms of the service. Also, actual exchange of money often follows the delivery of the service and the delivery of the service requires the buyer and seller to directly interact with each other. Connecting buyers and sellers directly before facilitating the transaction cut weakens a marketplace’s ability to capture value. The party that is charged is naturally motivated to abandon the platform and conduct the transaction off-platform.

Marketplaces that fail to capture the transaction often resort to a lead generation, paid placement or subscription-based revenue model. The classifieds model has traditionally worked on paid placement. Dating websites and B2B marketplaces work on a subscription-based model while several financial comparison engines work on a lead generation model. However, lead generation models are attractive only at very high levels of activity and subscription-based revenue models make the chicken and egg problem worse than it already is. If your monetization model involves extracting a cut from the buyer-seller transaction, you need to figure out a way to own the transaction.

Solving the buyer decision-making problem

Services marketplaces like Fiverr, Groupon and Airbnb try to solve this problem by preventing the users from directly connecting before the actual transaction. These marketplaces typically try to provide all the information that a buyer needs to make a transaction decision. Groupon features services from sellers that are largely standardized. While less standardized, Airbnb and Fiverr try to provide enough information for the buyers to make a decision without having to contact the seller.

Additionally, some marketplaces charge the buyer ahead of the transaction and remit money to the service provider after the provision of services, thus providing some insurance to the buyer, encouraging her to transact.

The two-pronged challenge of professional services marketplaces

Unfortunately, the above strategies fail with professional services marketplaces for two reasons.

First, it is much easier to take the transaction off-platform in the case of marketplaces connecting professionals. Freelancer marketplaces like Elance or expert marketplaces like Clarity are particularly prone to off-platform transactions for two reasons:

a) Clients need to know information about service providers before making a transaction decision

b) Once the end users know each other, they can potentially connect directly on LinkedIn or other networks, thus avoiding the platform cut

Second, professional services marketplaces require discussions, exchanges and workflow management during the provision of services before the actual charge can be levied. As a result, charging the buyer ahead of the transaction is all the more complicated.

So how do professional services marketplaces own and retain the transaction?

To own the transaction, professional services marketplaces need to think like SAAS businesses!

This may sound counter-intuitive. After all, a marketplace’s goal is to connect the two sides, complete the transaction and get out of the way, isn’t it?

Clarity’s early success illustrates that a marketplace’s role may be a lot more than just connecting buyers to sellers. Clarity connects advice seekers with experts. Traditionally, such marketplaces would connect the two sides, charge a lead generation fee and allow them to transact off-platform. Clarity provides additional call management and invoicing capabilities that serve to capture the transaction on the platform. Since the call management software manages per-minute billing, advice seekers have the option to opt out of a call that isn’t proving too useful. For the experts, the integrated payments and invoicing provides additional value. There is enough value for both sides to prevent them from leaving the platform to avoid the cut.

Clarity is one of many examples of platforms which are using workflow management solutions to capture the transaction. Services marketplaces like Elance focus on providing work-tracking and billing solutions that provide value to both sides and capture the transaction on-platform.

When marketplaces behave like SAAS businesses, the following design principles are commonly observed:

1. The SAAS workflow tools should create additional value for both sides, not just for one. This prevents either side from abandoning the platform for the transaction.

2. The SAAS tools should remove frictions in the interaction.

3. The interaction management tools should feedback into some form of on-platform reputation. Reputation is an added source of value that ensures stickiness to the platform. Clarity calls are followed by a request for rating the other side. Over time, the rating increases discoverability of an expert on the platform and acts as social proof for further callers.

The added benefit of engagement and stickiness

Workflow and interaction management tools also help make the platform more sticky. The traditional marketplace model has a very transactional use case. There is no need for a user to return often to such a marketplace. Users turn up only when they’re looking for something specific. With workflow management tools, the post-matching interactions are also captured on the platform, which encourages users to return often and to actively use the platform.

Secondly, a marketplace is only as good as the liquidity of available suppliers. As a result, there is no real need for a buyer to stick to a particular marketplace, transaction after transaction, especially if two or more competing marketplaces have similar liquidity and choice. Workflow management solutions help create stickiness because the requirement of on boarding on and learning new workflow management tools acts as a greater barrier to switch and can potentially keep users loyal to a particular marketplace.

The SAAS-first marketplace

In recent times, we have been seeing the model flipped. Businesses are now building SAAS workflow solutions first to get entrenched among the demand side and then opening out the marketplace, to get suppliers in. An invoicing service spreads out to become a B2B order management platform. A payroll software provider expands to append a marketplace that can bring in freelancers which are then managed using the same payroll software. This also solves the chicken and egg problem by staging the launch of the marketplace.

Summary

In general, if you run a marketplace that requires services to be exchanged remotely, provisioning workflow management solutions to facilitate this exchange is a great way to own the transaction and create greater engagement and stickiness for users.

 

Tweetable Takeaways

Owning the transaction is the key success factor for a marketplace. Tweet

SAAS tools for workflow management help retain the transaction on a marketplace. Tweet

The new durable marketplace model: Start with a SAAS business, open up one side to create a marketplace. Tweet
Image Credits:  Flickr/antwerpenR

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  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Yeh! This is one of the best comments I’ve seen on the blog in recent times. :)

    This is actually a very interesting example. In general, insurance seems to be an important enough service for the transaction to be retained/preserved on the platform.

    I see the problem of transaction retention at two ends:
    1) Small value repeat transactions with the same provider, e.g. Zaarly or TaskRabbit.
    2) Large value remote transactions where the marketplace’s main value is connecting the two sides.

    The first one can’t easily be solved through better services. I know both the companies I mentioned do a lot to save the transaction but I’m not sure how effective those measures are.

    In the second case, discovery is the main reason the user comes on the marketplace. All of these have the ‘dating’ mechanic: show me the girl and your job is done. In these cases, whether the rake is high or not, I often see the tendency of users to take the transaction off-platform. Hence, if you provide and infrastructure for work management, in addition to a marketplace for service provider discovery, it helps to own the work exchange further.

    But you are absolutely right that in most cases, doing a good job of providing these ancillary services should help to retain the transaction.

  • yehdiab

    Great post as usual Sangeet, and I strongly agree with this.

    Do you think however fear of the transaction taking place offline has become somewhat exaggerated? (Or maybe it’s just that more service platforms are already doing some of the sticky things you mention.)

    This is an edge case the “other way,” but happened to us (plowme.com — “Uber for snowplows”). It turned out many of the (older) consumers weren’t comfortable or couldn’t perform online payments (duh). Our quick and dirty solution mid-winter? We told providers to bill offline work that came in.

    Now, this has serious consequences with g.l. insurance, as any providers who didn’t provide insurance docs. were covered under our business policy (and a ~50% larger rake collected). In such cases, this meant not only did we transfer the offline transactional onus to providers, but the merchant of record status too, and thus liability.

    Add to this the snail mail overhead, and in a somewhat comical skit, both sides were practically begging the other to own the offline transaction. (By default, we won, and you’re darn right we’re moving to a SaaS core, which has tremendous benefits I might add.)

    We ended up referring all offline work that came in to providers, totally off the system; washed our hands from it.

    What surprised us is, after the fact, a few providers called to ask, “How do you want to do the cut?” (Gratis … no cut.) Mind you, these are 85% recurring jobs — the same provider services the same consumers each time it snowed.

    Unique example, I know, but I’m starting to think, particularly for low cost/unit platforms, the ‘mental’ to move the transaction offline is starting to diminish. Add to that, the stickiness you mention above, and I’m scratching my head thinking of a platform that has this problem. If we find one, it may mean their rake is ridiculously high. Saving the excess otherwise should be outweighed by soft (convenience, payments), hard/sticky (support, workflow and interaction tools) and in-domain (liability) concerns.

  • http://www.servicecentral.com.au/ Service

    This is what Odesk do pretty well, and what we’re planning to do with http://eaco.me/

  • traffikoo

    >>Businesses are now building SAAS workflow solutions first to get entrenched among the demand side and then opening out the marketplace

    Works on the supply side too. You can provide tools for sellers to help them in their business and officially launch a marketplace on top of that when sufficient sellers have signed up.

  • AnnieSlatts

    I really enjoyed the post! We are about to launch the MVP for a two-sided platform – we need to implement a business model that proves the platform can earn $$ so we can raise and grow, I’m considering transactional for now but can see it’s downfalls, however, adding any additional features at this stage would distract us from the “Core” feature and successfully achieving Product Market Fit – What would you advise in this instance? Thanks!

  • Tareasplus

    any chance we could get you interested in mentoring the largest educational marketplace in spanish tareasplus?

  • Anon

    Awesome post. Owning the transaction is one thing marketplace startups should take seriously.

    For the case of Airbnb, don’t you think users can still take transactions off the platform? because Airbnb enable buyers to connect with sellers by allowing buyers to send sellers messages on the platform.

    A user might just want to avoid Airbnb charges, and send his/her payment to the hosts via paypal or pay in person(physically).

    Would like to hear your say on this.

    BTW: Happy New Year!

  • http://platformed.info/ Sangeet Paul Choudary

    Great to hear that, Steve!

  • Steve Rumo

    Hey Sangeet, your post is spot-on! It has actually answered a few challenges we were facing regarding how to make transactions stay on platform.
    Regards

  • http://platformed.info/ Sangeet Paul Choudary

    Precisely! That is exactly why I’m pushing for creation of additional value (beyond simply matching supply and demand) to capture the rent. The rule of thunmb should be that you create so much additional value that the transaction becomes much more inefficient off-platform.

  • Aaron Wolf

    But capturing the exchange can be mere rent-seeking. If the parties don’t need a middle-man anymore, they shouldn’t have one. This is the fundamental issue of SaaS and platforms: most projects are primarily rent-seekers and so are actually leeches. We shouldn’t advocate for that.

  • http://platformed.info/ Sangeet Paul Choudary

    Thanks Nikhil!

    Good points but I’m suggesting something more deeply ingrained in the marketplace than ancillary services. The work-tracking solutions that Odesk and Elance offer are a great example of how services can add stickiness into the very structure of the marketplace. Clarity is another example I quote above which adds invoicing and call tracking to the actual matching service of the marketplace.

    Specifically, I’m talking about services that aid the exchange and enable you to capture the exchange on the marketplace, preventing transactions from being taken offline.

  • Nikhil Verma

    Nikhil Verma: Great post Sangeet. Simple analytics that can help the seller side to fine tune their offerings and consumer targeting are perfect tools for creating seller side stickiness..
    I may be missing the following – it is still not clear how stickiness will be created for the consumers/buyer of the services. Amazon has built in its own services (Prime and its superb customer care) that makes people come back to use it as a platform. Without those services, is it still possible to create stickiness for the buyers in a services platform?