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