Successful marketplaces evolve away from transaction revenue

Hand crafted goods marketplace Etsy recently filed for IPO and Techcrunch has a great analysis of it’s S1. As you can see from the chart below much of the recent growth has come from seller services.

etsy9

The post also looks at Homeaway, Grubhub, and Shutterstock, three other marketplaces that have similarly diversified away from transaction revenues to drive growth and profitability.

You have probably guessed where I’m going with this by now. Startup marketplaces should take note and think about how they can build non-transactional revenues in the future. There are two main reasons:

  • Non-transactional revenues enables more aggressive pricing for transactions which will grow the market and make it more difficult for competitors
  • Seller and buyer services increase switching costs making it more difficult for new entrants (again) and increasing life time value

In the early days – at least the first year or two – the focus should be on driving transactions, which are the lifeblood of any marketplace. After that non-transactional revenues should become part of the focus, particularly if there are any questions over the size of the opportunity.

  • Madhuban Kumar

    This is very interesting indeed, any thoughts on services market places using this approach?

  • http://www.theequitykicker.com brisbourne

    I think we can apply the same logic to services marketplaces. Think of the core service as the transaction – e.g. a cleaner on Hassle, and the non-transaction revenues as everything else – e.g. insurance, provision of cleaning equipment etc.

  • Pol Gomà Deàs

    Rakuten is also following it. Check out this answer on Quora from 2010: http://qr.ae/Q6hY5

  • Madhuban Kumar

    Agreed on both instances, however, what about where the service is a value add from new patterns or specific monetization strategies which keep shifting as underlined user dynamics come into play. Isn’t it then that the real estate moves from a buyer-seller to buyer-monetisation access-seller?

  • http://www.theequitykicker.com brisbourne

    Interesting. Thank you.

  • http://fishfishme.com/ Abdullah Alshalabi

    Very interesting topic. I believe added value services will come organically and sellers will ask for them. We just starting to get sellers asking us to pay to be featured in the top and others want us to handle all of their customer support, we just need to package it and sell it to them. But, I never realized that could overcome the transactional model as a source of revenue!

  • http://iklaniklane.com/ Olivia

    I’ve been expecting an article series such as this one for a while now that depicts the difficulties of building an online marketplace.