What is a service marketplace?

The definition of a service marketplace is pretty straightforward:

A service marketplace connects service providers with customers who can book services directly online. 

The purpose of this article is to highlight some of the subjects that distinguish service marketplaces from other platforms and to help identify the main challenges that lay ahead.

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Digital marketplaces in a nutshell

On the surface digital marketplaces do not differ from their brick & mortar predecessors: they serve to connect vendors (sellers) with customers (buyers) in a space that’s hosted by a third party (the operator).

Digital marketplaces however are not constrained in space nor time, and are capable of hosting an unlimited number of vendors and customers alike. Their business models are also more sophisticated; they either focus on taking commissions on sales volumes or on charging a subscription fee (or both if possible).

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Products vs Services

There is no generally established and empirical definition for a service in economy nor in law. As we see below, the delimitation between a product and a services isn’t binary but rather a sliding scale.

Although hotly debated, to facilitate the identification of a service we use a litmus test called the “5 i’s of services”.

5 I’d of services
  • Intangible

    Services cannot be touched although they may eventually result in a physical good.

  • Inseparable / Involvement

    Consumption and production of the service are inseparable, meaning the consumer and producer have an involvement.

  • Inventory

    Services cannot be stored and they cannot be shipped

  • Inconsistent

    Services cannot be reproduced identically as a cause of heterogeneous production or consumption (or both).

An interesting thought exercise is to compare a retail suit and a tailor made suit. One can be purchased and returned for a full refund, while the other one cannot. Although both are tangible, the tailor made suit is also a service which in this example was already rendered when the suit was tailored.

Products and services cannot be defined by saying that one is the opposite of the other (as the concept isn’t binary). As a result the requirements to sell services online are radically different from products, especially on a marketplace.

Requirements to sell services online

Possibly the greatest impact of selling services online is that you cannot dissociate the purchase and sale of a service from its execution. If a marketplace doesn’t know when a service starts, and when it is delivered, it cannot know when to debit funds from a customer, nor when to pay a vendor.

Furthermore, you cannot know what to offer if you don’t understand when it is available, and where. Inventory management is radically different. A service provider is not an object stored on a shelf waiting to be consumed, nor can a provider be shipped around the world in just 48 hours. Notions of stock count and delivery options are replaced by calendar availability and catchment area.

Impact of service execution on flow of funds:
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Lead time:
Period between customer request and service delivery
Response time:
Waiting for confirmation from provider
Pre-Buffer:
Time between confirmation and start of execution of service
Turnaround Time:
execution time of the service
Post-Buffer:
time available to customer to repudiate service
Cancellable:
customer can cancel order, refunds may vary
Repudiable:
customer can request a refund, requires admin validation
Preauth:
puts a hold of the amount of the purchase without actual debit
Escrow:
funds are debited and held on the marketplace escrow service
Payout:
funds are released to the vendor

The above helps understand why traditional e-commerce solutions don’t work for services; they are product-centric and incapable of catering to the needs of selling services.

B2B marketplace

Service providers vs product vendors

Amazon, the world’s largest product marketplace counts just under 2m vendors. Airbnb, a considerably younger company has double that number with 4m hosts. Usually midsized product marketplaces count less than 100 vendors while their service counterparts will count thousands. Many reasons explain this asymetry, but possibly the most telling of them is the way that products and services are added into a marketplace.

The information structure of products is mostly determined by international organizations such as GS1, and managed by specialized software called PIMs. Services have no international standardization organizations and they have no equivalent to the PIM. The result is that service providers generally cannot offer structured service catalogues which could in turn be imported into a marketplace. Vendors need to be able to constitute and then manage their service catalogue directly on each marketplace. The first mover advantage here is tremendous as vendors will not be entering their information in an infinite number of platforms. This also explains why service marketplaces are over-represented in Andreessen Horowitz’s top 100 marketplaces ranking. These are new monopolies in the making.

To reach similar GMVs, service marketplaces need a much bigger number of vendors.
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Business models

The business models of service and product marketplaces do not fundamentally diverge:
Service marketplaces, often because of the intangible characteristic of services, are much more capable of selling recurring services, and therefore of capturing fees on recurring income. Capturing fees on recurring income is one of the most sought after models in the platform economy as it lowers the barrier to entry of new customers and vendors while generating recurring revenues.

Service marketplaces, often because of the intangible characteristic of services, are much more capable of selling recurring services, and therefore of capturing fees on recurring income. Capturing fees on recurring income is one of the most sought after models in the platform economy as it lowers the barrier to entry of new customers and vendors while generating recurring revenues.

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Commission based models

Commission-based business models offer the advantage of having the fewest barriers to entry for users, as the service is free until the marketplace organizes a successful transaction.

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Lead generation fees

This model charges a flat fee for each lead generated to vendors (meaning a lead can be sold more than once). This aligns the interests of vendors with the marketplace without requiring transaction tracking.

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Subscription based models

Subscription models charge a recurring fee to vendors, customers, or both. They present challenges regarding the onboarding of the party that pays the subscription, since the service is charged irrespective of performance.

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Featured listing models

Featured listing models capture advertising revenue by allowing vendors to promote their products & services on a marketplace.

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Services are different from goods and cannot be sold the same way

Traditional service e-commerce solutions and their marketplace counterparts are incapable of catering to the needs and requirements of service e-commerce and service marketplaces. Furthermore, taking a “product” approach when launching a service marketplace also means completely missing out on a new category of opportunities that promise incredible scalability and higher margins, most often in uncontested markets.