Two-sided marketplaces (i.e., platforms that connect buyers and sellers) have been the darlings of the investment community for the past decade. Their business model aligns perfectly with the VC approach to investing: difficult to get started, but with nearly unlimited upside potential if successful.
A few specific qualities make marketplaces so attractive:
- Network effects: the bigger they get, the faster they grow; more options bring more customers and more customers bring more vendors
- Zero variable cost: while marketplaces require high upfront investment in tech and process, each new vendor or customer takes next to no additional effort
- Data & personalization: as you get to know what customers want, you can make better suggestions for what else they can buy
Pair this with the fact that between Amazon, eBay, and Alibaba, the marketplace model has led to many of tech’s largest success stories, and it’s no surprise product marketplaces have only grown in popularity.
Within this world, most of the early investment and successes have come from marketplaces focused on selling products, typically physical goods. By comparison, marketplaces for services - ones that connect customers to humans to perform tasks - have lagged behind.
Several factors have given product marketplaces an easier path to success:
- Simple & consistent buying process: you can put anything into a cart, pay with a credit card, and get a box shipped to you. This lends itself to superstores like Amazon that can sell you everything at once. Services on the other hand are highly variable in how you fulfill (e.g., a consultation, document with edits, fixed faucet).
- Trust and quality are easy: you generally recognize the products you’re looking for (e.g., a book) and can be confident you’ll be satisfied. This reduces pressure on selecting the right product through a digital interface. Services often require recommendations, resume reviews, and weighing complex factors to find the right person.
- Shipping solves the in-person problem: you can have a product sent to you so you can enjoy it physically. This is harder for a human, where one side or the other often has to visit.
- Consolidated brick-and-mortar vendors: We already bought much of what we needed through stores like Best Buy, Target, and grocery stores, who stocked products from different vendors. So recognizing those products in an online store is easier. Services are often sold directly (e.g., a law firm selling their own people’s time), making roll ups more challenging.
As a result, it has proven much harder to create the “Amazon for services”. The difference between delivering a computer mouse and a vacuum is the size of the box the product is shipped in. Meanwhile, the differences between delivering legal services and transportation services couldn’t be more different.
Services require difficult-to-create, custom marketplace solutions. In the past, this has translated to high upfront investments. This meant that only services with truly massive potential markets could be funded.
The two service marketplace models we’re familiar with are:
- One-trick ponies (Uber for X): Taking a single task that is widespread and commoditized (e.g., rides, cleaning, dog walking), and servicing it through a task-specific interface.
- Freelance connectors (Upwork for Y): Connecting customers with supply to coordinate projects in a very open-ended process.
However, in the coming decade, we are poised to see an explosion in a third service marketplace model: the niche service marketplace.
Long-tail service marketplace platforms are characterized by their niche focus, high complexity, and transaction sizes. Under the VC scale model, smaller services were difficult to justify lending support to. The increased complexity that came from their lengthened sales pipelines and delivery mechanisms has not been enough to justify investments, even though ticket sales for services on individual transactions are generally larger than individual product transaction sizes.
However, there are several key forces that will drive change, and result in an array of new, online service marketplaces.
The dramatic lowering of cost to create bespoke tech. The rise of services like AWS, technical frameworks, and no code platforms will make creating very technical systems worthwhile for even the most niche of industries. This has opened up entirely new opportunities for markets that simply couldn’t be served under the previous technology funding model.
Tech is now ubiquitous. Product marketplaces in particular have paved the way for consumers to be ready to buy and receive services online. Until now, sellers have been resistant. But the pandemic has forced their hands. Many service providers have had no choice, but to find, qualify, and serve clients online, accelerating trends that were already underway.
We are seeing this movement pick up speed across a wide range of industries from legal services, to industrial services, and healthcare services. When the dust has settled, we will see a world where existing networks of buyer/seller relationships will move to a platform-based approach (particularly in B2B), and first movers will force change in their industries.
This will happen to blue and white collar work alike. As a result, individual companies that ignore the need to adapt will find themselves disrupted by online incumbents, servicing a market nearly inaccessible to those that choose not to play.
We believe the service revolution will be a huge source of value for everyone the industry impacts. As such, we're investing in helping businesses and entrepreneurs create the tools that will serve the needs of the services marketplace revolution.
Our rapid build process allows us to create bespoke flows in a short amount of time. We’re currently bringing this expertise to those building marketplaces across nearly every industry.
Consumer relationships are changing, and right now, businesses have the opportunity to redefine what we are willing to buy, sell, and receive online. The companies that move the quickest are the ones that get to write these rules, but niche service marketplaces are here to stay.
If you have your own idea that takes advantage of this growing demand for services marketplaces, we’d love to help make it a reality. Learn more by clicking here.