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.