Marketplaces part 2

This article was initially published in Viktor Kyosev’s (COO of Greenhouse) weekly newsletter, where he shares his views on the topic of startups, growth and fast-growth markets: viktor.substack.com

In my previous post, I discussed why marketplaces are attractive businesses. Today, I want to focus on “what is next for marketplaces?

It is clear that marketplace startups have done very well in the past 20 – 30 years as such models reinvented the way we all shop for goods. The first phase of the internet was mainly about creating marketplaces focused on products, to name a few, Amazon, eBay, JD.com, Alibaba, Lazada, Tokopedia, and other e-commerce success cases that resulted in trillions of dollars in market capitalization.

But less so for services.

Services have withstood digital transformation for decades. At the same time, services make up 69% of national consumer spending. According to the Bureau of Economic Analysis, just 7% of services were primarily digital, aka utilize the internet to conduct transactions.

Why the service economy lags behind?

It’s common for all of us when searching for a great service provider to ask friends for recommendations, whether it is a great doctor, dentist, lawyer, accountant, or even hairstylist. It’s rare to go online, search, and pay for a service from your laptop/smartphone. Here you go a few reasons of why entrepreneurs struggle when attempting to digitalize the service economy:

  • Services are complex and diverse – unlike goods which are designed and produced to a certain spec, services vary when it comes to their name and description. The lack of standardization makes it really difficult for a service marketplace to capture and organize the relevant information. To illustrate this point, we at Greenhouse have experienced a lot of challenges in classifying and standardizing services like nominee director, company formation, tax filing, and other professional services across different countries and professional service providers.
  • Success and quality are subjective – my definition of a good service is often different from that of some of my friends. Whereas I may value the speed of delivery, other people would prefer responsiveness, and we have even seen cases where the client assesses the way emails are written, fonts being used, the way service providers address the client, etc. etc.
  • Fragmentation – when selling a product, the more you manufacture the better economies of scale you will experience. In contrast, if you are a small service provider that’s not the case. Small service providers lack the resources and tools to come online, the outcome of that is industry fragmentation. In the case of eCommerce, there are plenty of platforms that serve the function of digitalizing products and distributing them across various geographies. But service providers don’t have many options for plugging their services so that they reach more customers.
  • Real-world interaction is often at the very heart of service delivery – once again, in the case of products you don’t really need to see and experience a product in order to purchase it. But when you are selling accounting or legal services, your industry, specific requirements, and past experience, may result in a variety of different outcomes. Hence, service providers prefer to have an in-depth discussion with customers before committing to delivering a service.

Despite all those challenges, there are reasons that make me believe the time for service marketplaces has come. After all, we are looking at a $9.7 trillion US consumer service economy, and as marketplaces are evolving through continuous innovation in AI, automation, smartphones, and consumer behavior that’s getting people more and more comfortable in purchasing expensive and complex products and services online.

The evolution of marketplaces

Sometime back a16z published an article where they traced the evolution of marketplaces all the way from Craigslist to today. The image above takes it a step ahead as it maps how marketplaces started in a pre-internet world, offline format, and evolved all the way to professional and regulated services such as Greenhouse.

With the rise of the internet, horizontal platforms emerged such as Craigslist where buyers and sellers could interact online. eBay and Amazon started working towards establishing trust, standardization, protections, and guarantees but the very first iterations had very little of that. Especially Craigslist as they were simply a digital version of the Yellow Pages.

The success of the iPhone (and smartphones in general), enabled the next wave of iterations where companies like Uber, Lyft, Taskrabbit came to life. There is no way for a marketplace like Uber to exist without access to devices that enables dynamic geo-location of both supply and demand.

Over time more and more skills-focused marketplaces launched where independent workers are able to monetize their skills e.g. UpWork, Freelancer.com, Thumbtack, etc.

With each new phase, consumers become more and more comfortable procuring and purchasing products/services online. The more comfortable we are in purchasing a whole variety of services online, the more our price tolerance and trust grows. For example, discovering your new house on the internet and purchasing it online would be unthinkable 30 years ago, yet today, marketplaces like Opendoor have created an online frictionless experience when buying a new home.

The final phase is managed marketplaces. Platforms where the marketplaces take on additional operational value-add in terms of intermediating the service delivery. Let me give an example of using Greenhouse. We have built a marketplace for professional services with a focus on expansion related corporate services such as company formation, work permits, tax filing, accounting, bank account set up, payroll, and other similar services. Such services are complex, higher-priced, and require greater trust. We take on additional work of actually managing the service experience instead of simply enabling customers to discover professional service providers. We develop qualification features on the platform suggesting relevant service providers while dedicating a customer success team to ensure both parties (supply and demand) are satisfied with the experience. At the same time, we are assessing potential service providers in order to onboard only high-quality supply.

The first phase of the internet facilitated a boom of services coming online, transportation, food deliveries, home services, news, etc. The next phase will be about the harder opportunities that software hasn’t solved yet. Opportunities where standardization is lacking and operational hurdles are present. Managed marketplaces have the opportunity to have a huge impact on the quality and convenience of consumers, and that’s why I am so excited about Greenhouse.