By Lauren Lee and Luke Skertich
SaaS has been paired with marketplaces for the better part of a decade [1] and has supported massive exits like OpenTable ($2.6B) [2]. And yet, when we reached out to investors & founders to get their thoughts on SaaS-Enabled marketplace models we were often met with the question: “so this isn’t just vertical SaaS…?”
Before asking more questions …grab your popcorn and let’s clarify the model.
We mean that the solution offers SaaS AND facilitates a transaction. In the most basic sense, the model is predicated on some — typically free to start — SaaS tooling for one side of the marketplace. Think: Slice (pizzerias), Fresha (beauty salons), Odeko (coffee shops), ResQ (restaurants), Alma (mental health care practices).
We reviewed hundreds of companies and identified factors that best contributed to success or failure e.g. GTM strategy, and identified the core tenets that were most impactful. Next, we conducted secondary research (with findings shown in Figure 1) to compare our learnings with what investors and founders have found to lead to success.
Unsurprisingly, we found investors wanted to see a team with depth in industry and economics that can scale. Both founders and investors were less concerned about customer exclusivity and SKU concentration early on. Use the above figure as a framing for the rest of Part I. Notice that CAC Payback accounts for margin / cost structure!
Finally, we discussed the most critical elements we identified to give a SaaS-enabled marketplace the best chance for success with investors who focus on the model and founders that have built them.
Note: We are operating under the assumption that core tenets of marketplaces hold true e.g. trust, legibility, matching, logistics, financing, etc. etc.
In short, make sure you consider the following…
In an ideal world, before you build the marketplace, you should answer the question: “Who is your customer and what does each stakeholder care about?” Every decision for how you create value, every KPI you measure and ultimately what you build starts here!
Our portfolio company, Leland, came to the conclusion that their demand side — students & job seekers — was their customer. Yes, coaches want more revenue & need basic tools to schedule & get paid, but once they realized who the customer was, it became clear that they should think of the coaches like inventory in a traditional marketplace. This meant gearing content (acquisition), courses (customer discovery), ratings (trust), and payments (security) towards the demand side.
We think about this in the context of platforms creating buying power for either supply or demand, acting as an agent on their behalf. Specifically, how much of the process do you think should be handled for there to be enough value accrued to ensure customer loyalty?
This might start simply as enough tooling to create listings and facilitate a purchase and later evolve into creating an operating system for the supply side to run their business. The key here is getting inventory on the platform, so that the marketplace can start to step in.
The most successful use cases we witnessed began with what was ‘good enough’, layered on traditional components of marketplaces through iterative design, leading to the stickiest products e.g price discovery, customer vetting & acquisition, and a clear feedback mechanism to product trust in the ecosystem.
The beauty of marketplaces is that they are less capital intensive once the flywheel starts churning. Without that, you need a lot of capital to scale, leading to higher fundraising risk, more pricing risk, etc.
Typically, we recommend starting with a small subset of SKUs in a specific vertical.
Why?
This enables you to get depth of product, better pricing, and it is much easier to manage logistics for similarly sized/shaped products. However, there is an elephant in the room. We have seen variability of SKUs as a moat e.g. after-market car parts have TONS of SKUs and that creates complexity for procurement of parts.
Take our portfolio company, Ovoko (used car parts) as an example. Fundamentally, they realized that there was no problem with demand because parts were not digitized and were hard to find. So, they had to have the SaaS if they were going to get the listings to translate from offline to online. Without it, no marketplace could ever be built!
And here is the key: the more supply side SKUs that they put on, the more the sellers could sell and the more they could attract additional demand. This is why retention is a smile curve and why CAC actually goes down for them as they saturate new markets.
The Takeaway: You need to decide for yourself where to start and why. The idea is you gain depth and breadth over time but your starting point is case by case.
Oftentimes, we see marketplaces begin with a single geo. This creates a first atomic network where you can experiment with fitting supply and demand together & creating enough value to consistently reach liquidity. Density is key to create depth of supply & ensure reasonable logistics costs (bear in mind coordination of routes). Think: Cardino (C2B used EVs), Alerzo (FMCG).
As you build your first network, keep track of what works and your hypothesis for why. This feedback loop creates the bones of your geo playbook for launching the next atomic network. Maintain this log to hone each successive launch.
Moreover, geo-specificity matters when you think about competition. Simply put, go where there is less competition + where you can grow the share of wallet. For example, Ovoko has found success by enabling their supply to effectively liquidate inventory. More supplier stock per single dismantled car (+ best ROAS) to get suppliers engaged gets them more parts per supplier. In the future, this allows them to grow supply penetration in any selected country quickly. By extension, in reaching supply depth, they become the best place to buy locally and demand becomes really cheap.
Similarly, Hummingbirds (hyper-local content) began by seeding a single city in Iowa with only 50–100 ‘birds’ — folks with ~1500 or so followers on social media that also follow local brands themselves.
How do they do it?
Acquisition is cheap for the long-tail and they found that at just 250 people, virality kicks in. Over the course of seven months, they honed their playbook and launched an additional 12 cities.
When does geo-specificity not matter?
Typically with vertical marketplaces selling goods rather than services across a fairly homogeneous geography with established supply chains e.g. Top Drwr curating luxury items and personal collections from high profile talent across the United States.
Similar buying behavior matters. You begin with a baseline of SKUs and geos that are available to your user base. Now, you must parse through your data to identify users that have similar pain points and continuously hone the tools you provide to manage the transaction!
Consider the following…
Engagement: It isn’t about a raw number like MAUs; what matters is how customers are interacting with the product.
Cohort Analysis: Based on engagement, consider retention on a logo basis e.g. 1-month, 3-month, 6-month cohorts. Look for the characteristics that lead to groupings of users that find enough value to stay or go (think back to similar buying behavior). Reference numbers are model dependent and widely published.
GMV Retention / NDR: Logos matter but dollar retention might tell you more e.g. the types of customers that are likely to spend more and more (or earn more and more) by using your product. With GMV retention, you might see as much as 300% retention on a cohort basis over the first 6 months before leveling out. When monetizing with SaaS it is a sliding scale (90% = bad, 100% = fine, 110% = good, 150%+ = elite).
Share of Wallet: This boils down to how much of a customers’ business or spend are you driving. A rule of thumb for most marketplaces is that 25%+ correlates with good retention. However, the number can vary widely by model e.g. 75%+ in a typical vertical labor marketplace.
[Paid] CAC: At the end of the day, marketplaces experience frequent buyer/seller churn. If you are spending a lot to acquire a new customer, despite a high share of wallet, growth will not be sustainable as you scale the business. Paid CAC gives a better idea of what marketing dollars will return (and typically this degrades over time). How long will it take to recoup the money spent on acquiring the customer? Generally, we find that sub 3 months is fantastic, sub 6 is good, and sub 12 is okay [4]. Low payback period is critical in laying the groundwork for an efficient GTM.
We don’t want to be prescriptive here given the variability of model and customer that we’ve discussed thus far. We’ll provide some strategies that best apply to B2B, given the majority of SaaS-enabled marketplaces follow this interaction.
The best thing you can do as you scale is find really efficient channel partnerships! They become your sales force vs. going customer by customer unless the customers are BIG. It is great when you have one side getting so much value that they are pushing it. Otherwise, you just add bodies to the sales force, which can have diminishing returns (and isn’t an option early on).
Tune in for PART II where we will dive into the results of following the above playbook!
[1] https://acrowdedspace.com/post/95924183537/saas-marketplace
[2] https://www.eater.com/2014/6/13/6207641/opentable-by-the-numbers-from-launch-to-2-6-billion
[3] Taking this a step further, what we really mean here is that the more supply that you have on platform and the greater share of wallet that you accrue, the better your pricing power. In effect, you can automate price discovery and pass on the benefits to the demand side e.g. lower pricing, better selection of goods/services, and higher degree of trust (because you can boot any supply that proves to be a bad actor).
[4] There are caveats here. Where AOV is super high and low frequency (a home purchase) you MUST have CAC payback on the first transaction or your business will never scale.
