SaaS Enabled Marketplaces

SaaS is now a well understood business model – hosted software, made available on-demand on a subscription basis. Marketplaces are also a common business model – “exchanges” that connect buyers to seller, and take a percentage of the transaction as their fee. They have the ability to generate network effects, and get stronger over time. When you put these two together, you get an extremely compelling and hard to disrupt business model.

When you put the two together:

• The SaaS product brings liquidity to help you solve the chicken-egg problem for your marketplace. StyleSeat was able to offer online bookings for salon appointments because of  scheduling software they sold to salons.
• You can leverage data from both the SaaS product usage, and marketplace transactions to deliver unique insights, which helps differentiate against competition. This can lower CAC. It increases stickiness for customers, lowering churn.
• It allows you to control more of the consumer experience.
• Marketplace take rates are typically between 5% – 20% of the transaction fee. And monetizing the SaaS product gives you a second revenue stream, and helps improve economics overall.
• Having the ability to engage users with software, or the marketplace or both together allows you to reach different users segments with unique needs. This increases your TAM
• It creates a fantastic moat around your business. The software and marketplace capabilities work together and help reinforce each other’s value propositions. For example – the more diners OpenTable sends to a restaurant, the busier the restaurant gets, the higher the need to optimize their operations with OpenTable’s SaaS product.
• SaaS enabled marketplaces are also much more capital efficient to to scale (Eli Chait’s blog has great data on this. Turns out SaaS enabled marketplaces are 10x more capital efficient). OpenTable was able to generate revenue from day 1 by selling software, In contrast, Uber needed to first pay hundreds of drivers in each city,  create a compelling value proposition for riders, and then generate revenue.

This concept was made popular by Chris Dixon when he outlined the “come for the tool, stay for the network” approach to bootstrapping networks. And now there are lots of successful examples of SaaS enabled marketplaces – Zenefits, StyleSeat, OpenTable, Rover, and many more.