A Potential Formula For The Next Unicorn Marketplace
There aren’t many of them, but I’m a big believer in B2B2C companies. Some favorite examples might be OpenTable and Benefits. The flipside to the B2B2C model deals with having to build products for two distinct user bases with different yet related needs. It’s incredibly difficult and a tricky balancing act. We did this at Onswipe and it wasn’t easy, resulting in many lessons learned. Building a product that’s B2B for the publishers is a different set of needs than building a product that’s B2C for delivering the best experience for the end user. I still think there’s tremendous value to be had in the B2B2C space, but there’s a better way to think about it. Josh Breinlinger put out a post a bit ago that opened my eyes to the SaaS+Marketplace opportunity and how a B2B2C success could spring from here . I think the next great marketplace will start out as a software company that evolves into a hybrid SaaS+marketplace to bring businesses more consumer demand.
The next great marketplace will start as a software company
I have a hunch that the next great marketplace isn’t going to start out looking like a traditional marketplace with listings akin to a Craigslist or even connecting people together like Uber. I think it’s going to start out looking like a pure software company. Through its first couple of rounds of financing, many are going to look at it as a software company. Think of the software only vision as some sort of “single player mode”.
Software brings in Supply aka the B2B
If you look at Uber, which is the new hot “marketplace” company of the moment, it’s biggest fight right now is on the supply side. There’s a war brewing over attracting and retaining drivers. Many smart people have shared their belief that if you have the supply, the demand will follow. If you start out as a software company, you can start to build up a base of supply. In many of these cases the supply will be businesses (Reminder: a business of one aka a driver can be a business).
Software is incredibly sticky
Why software? Software is incredibly sticky. Software often brings habit about to a business and once they’re locked into your system, they usually don’t want to leave. Look at Salesfroce or Dropbox – switching isn’t easy once your entire workflow is around it. Take a look at OpenTable as well. Most restaurants won’t want to switch, unless there’s some 10x improvement. By building your supply base up with software, you start to build a sticky moat that others can’t get around.
Software brings in a high margin business
Marketplaces vary in rakes across the board. Software businesses are recurring and often high margin businesses. Investors and markets value software businesses over % rake or rev share businesses in most cases. By building a high margin software business that attracts sticky supply you now have the revenue and market share to start building out the marketplace.
Why not give the software away for free though?
Good question and maybe you should in order to build a land grab, but there’s no reason not to. Putting a “free price” on something starts to make the customer expect everything for free. IF you’re developing software that’s truly sticky, you should be able to charge something for it.
Start building a marketplace that’s tightly integrated with you software
At this point, you’re now going for something big. You’re not only a software company like Salesforce, you’re looking to build a marketplace out that harvests consumer demand. The revenue you’ve been generating from your software will likely allow you the freedom to start to pursue this. It also starts to make the funnel for your software more attractive.
Software with network effects
Go read this from Fred Wilson. Network effects are what matter. Any and all software can be recreated. On the flipside, any and all sources of supply can churn. By building a marketplace in conjunction with your software, you start to leverage the benefit of your network. Many software companies have a highly undervalued asset with their customer base. They think of each customer as their own silo, instead of leveraging the network effects of having many customers that can be leveraged to create a marketplace. Each new software customer increases the value of all other software customers.
Demand+Network Effects = Escape velocity
This is where the magic happens. When you start to bring demand to your supply and think of it like a network, your growth will start to take off exponentially. Every source of supply wants more demand. They will start to see your software not as a cost center, but a potential revenue generator. They may be paying x dollars for your software a month, but using the software makes them a part of a network. That network alone can actually end up making them many more multiples of X in revenue. You will now start to see an increase in software customers and marketplace revenue expanding with network effects.
The software has to be frictionless
In closing, there’s one thing that I think can really fuck this up for a company. If the software is not frictionless and insanely easy, this will not work. Marketplaces are easy to join, yet software is difficult to adopt. If you are going to do this, you have to make the software easy to adopt. Think self serve, think repeatable, think scalable.
Any good examples out there? Any market where this won’t work?