The Evolution of Managed Marketplaces

Some of you may be too young to remember, but the physical Yellow Pages was one of the main ways you could find local businesses. Those meaty books were a mainstay and saw frequent usage in many many households around the world. But since the late 90s and early part of the 2000s, for good measure, the books have been disappearing. Google had a big part to play in that.

Google is the de facto search engine of choice. But there was space for better discovery of local services. So Angie’s List, HomeAdvisor, Yelp and others were born.

Going beyond discovery

To start, as an example, let’s take a look at all of Yelp’s local services categories in San Francisco:

Under each of these categories, you’ll find hundreds if not thousands of local businesses (well, except under the “Snuggle Services” category). This is the new Yellow Pages, and a sizable business opportunity, as $YELP has clearly shown.

However with shifting consumer demands where the focus is on convenience and trust, the trend is starting to emerge that goes beyond discovery (or lead-gen) based marketplaces to vertically focused online managed marketplaces.

There are some categories, like restaurants for example, where discovery will continue to dominate. But let’s take a look at that same categories chart from above now with startups that are now going deep into the vertical:

Principles of Online Managed Marketplaces

I have deliberately left out the local businesses (agencies) that can be found in each of these subcategories from the previous image, because software managed marketplaces offer scale (through software) and support (which boosts customer experience and confidence) in a fashion that local businesses most often cannot.

Here are some common characteristics I see with all if not most of the companies that I’ve highlighted above, which in turn I believe can be used as guiding principles for managed marketplaces:

1. Heavy Focus on Customer Experience — This almost has to be a primary differentiator and focus for a marketplace to succeed. And customers are not just limited to one side of the marketplace. Typically looking at Yelp to hear what users on existing marketplaces are saying, and Glassdoor, for example, to see what existing providers/suppliers are griping is a great starting point. For example, take a look at Delete’s Yelp page:

2. Software powered (full-stack) experiences — Where scale is limited in a lot of the local “agencies”, software can help in a multitude of ways. Everything from simplifying the onboarding process for the demand side and the supply side (using tools like OnboardIQ or Intuit’s Workforce and Checkr), to scheduling, to simplifying payments, to live geotracking, to payouts, to etc. can be done through software. As an example, Honor does a great job of providing features that let caregivers provide a “care summary” after a session is complete informing users of the service, how the session went. It’s a simple feature, but by digitizing the record users can stay informed.

Similarly, here’s a screenshot from Rover.com (an app to find and book dogwalkers, dogboarders, dogsitters etc.)

3. High Retention / Repeat Use Case — When the service and the software is able to provide capabilities that go beyond discovery, users find more value in using the service more. The examples I’ve provided above are good ones of how to provide high value beyond the initial discovery phase. High retention can have a very interesting play on network effects (and vice-versa):

4. Transactional Payment Model (vs Subscription Model) —This goes hand in hand with the High Retention section. Since many of the existing local services were focused heavily on discovery, monetizing the matchmaking was a fine way to start. As consumer expectations have started to grow, and combined with the fact that software enables “stickiness”, these new marketplaces can monetize each transaction more efficiently.

Provide More Value Through Software → Capture More Business

The transactional payment model isn’t an absolute by any means. There are:

5. Trust, Safety & Risk Management — In most marketplaces, this has now become table stakes. What draws consumers to a managed marketplace and what helps them overcome trust barriers is how the marketplace manages trust. I’ve got a whole post dedicated to this on First Round Review: How Modern Marketplaces Like Uber and Airbnb Build Trust to Achieve Liquidity

6. Pricing Management (or pricing guidance) — Depending on the nature of the marketplace, pricing can be set by the marketplace operator or guidance can be provided to providers on what pricing is best.

Where absolute pricing management makes most sense (i.e., where the marketplace operator sets prices) is where there isn’t a proper barometer for what the supply side should be charging and when the software can leverage systems should to optimize for liquidity. Great examples of these are Uber & Lyft — consumers most often do not know what what the mileage cost per mile should be (nor should they). They may have a rough sense of how much a ride from point A to point B should cost. There is also a contractual “employment” relationship that Uber & Lyft have with their drivers. For these reasons, it makes most sense for pricing to be set by Uber & Lyft.

With AirBnB on the other hand, there are some existing indicators that can help hosts determine pricing. And since there isn’t an employment related contractual engagement between AirBnB and it’s hosts, it makes most sense for hosts to manage pricing.

Ezra points out that at BloomNation the local florists were literally asking the company to set prices for them because they didn’t know what pricing would work best.

At Trusted, we set our provider’s salary based on a set of criteria. We then give them the right training, curriculum and tools to grow and make more money.

7. Leveraging data (and latent supply) to enable liquidity — With the right software tools in place, a marketplace operator can work the right levers to reach optimum liquidity. Operators can do this often times without compromising margins. Here is one such example from Instacart’s Jeremy Stanley:

Similarly at Trusted, we incentivize our providers to add availability during peak demand hours.

Opportunities abound for Managed Marketplaces

You’ll also see that I’ve also left out companies that offer many local services such as TaskRabbit and Handy from the chart above. But from that local services category list I believe there are many other such service offerings that are run by local establishments that can be scaled and managed better via software — as Keith Rabois points out, you can start by looking for poorly rated local businesses that meet most if not all of the criteria above.

Back in the day, using the Yellow Pages directory, we found a business and called them over the phone. While Yelp has helped discovery of local businesses tremendously, how you interact with these businesses is still evolving.

5 years from now, do we still expect to be interacting with a business over the phone like we did in the days of Yellow Pages?