How to Succeed with a Services Marketplace: Choose the Model that fits you right!
A services marketplace (SM) is one where discovery of services/skills forms the basis of its offering to clients/customers and opportunities for paid work form the basis of its offering to freelancers/professionals. It has made an existing marketplace more liquid, better managed, and more transparent.
There is no doubt that SMs are becoming the usual way to find help. The ease of use is a major consideration. For example, consider trying to get a number of quotes from house painters. Without an online tool, you’d have to find and contact some painters, extract quotes, send them specifications. Using an online marketplace, you can fill in your specifications online and let them contact you with quotes. Infact, the example I have taken is from Thumbtack, an online platform based on a lead generation model, that lets customers receive up to 5 quotes from professionals/enterprises for a service required.
While there are home service startups like Handy, Zaarly, TaskRabbit, Alfred that let you hire a person to do home chores and run your errands, there are professional service startups like Elance, ODesk, Freelancer where you can find everyone from freelance designers and marketers to web developers. Additionally, UpCounsel for attorneys, VouchedFor for accountants and financial advisers, RecruitLoop for recruiters and Skillbridge for consulting are a handful of startups offering specialised on demand services online. All of them work by matching clients with high-quality independent professionals/enterprises/freelancers with the skills, pricing and availability needed. It’s being labelled the “on demand talent economy” or the “Uber-fication of services”. If you can hit the Uber app to get a ride when you need it, why wouldn’t you do the same to find a person to help you assemble furniture at the push of a button?
Related Reading : How Freelancer became the biggest marketplace for Freelancers in 6 years
Challenge of Running a Services Marketplace
Services marketplaces 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.
To own the transaction, provisioning workflow management solutions to facilitate this exchange is a great way to create engagement and stickiness for users. The following things need to be taken care of:
- Value for both Stakeholders: The workflow tools should create additional value for both sides, not just for one. This prevents either side from abandoning the platform for the transaction. For example, on Elance (Upwork), before making a hiring decision, clients have the opportunity to speak live with freelancers using built-in messaging tools. Freelancers can evaluate prospective clients based on data such as a client’s track record for awarding posted jobs, history of job feedback, and how much a client has spent hiring on Elance.
- On Platform Reputation: 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. Over time, the rating increases discoverability of an expert on the platform and acts as social proof for further clients. For example, taskers on TaskRabbit are not only vetted before they register but are also community reviewed. Their rating is visible to all potential task posters and they can justify prices by the rating they get online.
Business Models in the Service Industry
The different business models in the services industry are based on how they are charging the users on the platform:
Transaction Based Model
In a Transaction Based Model, the marketplace takes a cut of each transaction generated through the platform. A transaction fee model also scales well: the more sales your platform generates, the more revenue you bring in. For Eg. TaskRabbit works on this model (Related Reading: How Task Rabbit Works? Insights into its Revenue Model )
Customers & Suppliers: They only pay a fee if and when they sell or buy something. By taking away the upfront costs of listing and the risk of not making a sale, this model encourages more suppliers to join the platform, thus increasing a marketplace’s supply.
Lead Based Model
In a lead based model, professionals (suppliers) pay to send quotes to customers. The platform makes introductions between customers and professionals based on the specific needs of a project. Professionals who confirm they are interested and available make bids for customers to choose from. The actual cost of this pay-per-quote model depends on the type of service the customer is looking for.
For example, Thumbtack has found success with such a model. It used to work on a transaction fee based model, but failed because the degree of commoditization was low for the services it provided and they found it hard to remain in the loop when a task was completed. (Related Reading – Marco Zappacosta on Thumbtack’s evolving business model)
Platform Owners: As you are not asking your user base any money, it is easy to get a larger user-base fast. After getting them on the platform, you can easily get suppliers to participate in the marketplace with a simple up-sell.
Suppliers: A lead based model gives a low-commitment way of getting on the platform to suppliers — their own web presence.
Customers: This model of having suppliers pay to bid on a project results in more qualified options and is an easier way for customers to find the right supplier.
Subscription Based Model
In a subscription based model, customers are billed on a recurring basis and receive their services at the same time every month or as per their convenience. For eg. home services startup, Alfred, lets you hire your house help starting from $22 a week, billed monthly. (Related Reading –
Service Provider : The benefit with subscription services is that once a customer signs up, there are high chances that they will stick around. It’s much easier to predict revenue and robust customer insight for cross-selling or marketing.
Customer: This model eliminates the inconvenience of buying things/services again and again, and customers prefer to pay a low upfront expense than paying expensive fees for every purchase, Furthermore, the monthly or other periodic payments are often offered at a discount, enhancing overall satisfaction.
VERDICT : As seen above, a start-up can decide to attack the market with a full-stack approach and manage the marketplace or even become the provider of the service. By standardizing the offline service, you can get closer to the simplicity of an online transaction. However, the downside is you need to take on the added operational complexities and risk of managing, guaranteeing, and/or providing the service. So, generally speaking, you should try to move your business model as close to monetizing the transaction as possible in order to minimize the friction for onboarding supply. But if the underlying service or product doesn’t lend itself to this model, then you could try and adopt the lead-generation model.
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