Tag: marketplace

The service marketplace paradox

This came out of a conversation a few weeks back, and resurfaced in a conversation yesterday. There is a fundamental paradox in service marketplaces – the more useless the general quality of service is, the more useful the marketplace. Let me explain.

Let us take the market for plumbers, for example. There are several hyperlocal service marketplaces in India (like HouseJoy or LocalOye) which supply plumbers on demand. Their biggest challenge is offline transactions (as this article about US-based HomeJoy describes) – once two sides of the market are introduced to each other, they take further transactions online.

Thus, there is a huge amount of activity and value taken offline once the introduction has been made, as the long tail of the client/pro relationship takes hold. Clients are perpetually motivated to move their pro relationships off platform, because it’s one less intermediary to go through to directly access the pros they love.

In other words, once I’ve discovered a plumber through HouseJoy (for example), and find his work to be good, the next time I need a plumber I’ll simply call him rather than call HouseJoy (cutting out the middleman). If the plumber is reliable and produces reasonable service, HouseJoy has practically lost me as a customer for plumbing services for a long time.

On the other hand, if the plumber I used the first time is good but not reliable (doesn’t arrive on time the next time I call him), I’m likely to use HouseJoy (or a competitor)  the next time round. In other words, the worse the service providers are (in terms of reliability, not quality of work), the greater the likelihood of the platform getting business!

This is the fundamental paradox of service marketplaces. When services are reliable, you don’t need a marketplace. So if you need a marketplace only if services are unreliable, the server side of the marketplace is full of unreliable people. The hope, and the value that the marketplace adds, is that by aggregating a bunch of unreliable people, some level of reliability is guaranteed. The question is how sustainable this is.

Think of this another way – the level of reliability offered by a marketplace can be described as the sum of reliability of service providers and reliability of the marketplace itself. So for a given level of overall reliability, the marketplace adds more value if individual service providers are less reliable!

Extending this model to other marketplaces and services is left as an exercise to the reader. Feel free to use the comments section to write your analysis.

 

What sets Uber apart from other marketplaces

While at the gym this evening I was thinking of marketplaces.  To give some context, the reason I went there was that there were too many thoughts running around my head, so I needed to focus on something mindless or something that required so much concentration that I could only hold one other thought in my mind at that point in time. In fact, when you go “under the bar” (do a back squat),  even that one thought will vanish – you need all your physical and mental energy to complete the squat.

Anyway so I was thinking of marketplaces, and marvelling at the kind of impact companies like Uber and Ola have had. They have been an absolute gamechanger in their business in that it has completely changed the way that people and cabs get matched to each other. This was a matching that had been extremely inefficient in the past, but with these apps, they have become better by an order of magnitude. And it is this order of magnitude that sets apart Uber/Ola from other marketplace businesses.

And as I was moving between weights, I had another thought – the trick with Uber/Ola as a marketplace is that it is near impossible to do “side deals”. The ultimate nightmare for a platform/marketplace provider is to let the two sides “discover each other” and conduct further deals “offline”. This can be the bane of services such as dating services, where once you go on your first date (as recommended by OkCupid or Tinder), the dating service need not know anything about your relationship after that! They’ve “lost” you. In fact, talking to someone from the industry recently, I learnt that they do dating rather than marriage since in the former there is the hope of “repeat happy customers”.

It is similar with a service such as Airbnb, where once you’ve located a B&B you like, you can cut airbnb out of the deal from the next time on. Of course availability and stuff matter, but given how much in advance you book, a quick call to check availability is a small cost vis-a-vis the benefit of cutting out the middle man.

The beauty of Uber/Ola, however, is that it is impossible to do deals offline. Yes, after a ride, the driver and the passenger have each other’s numbers. But the next time the passenger wants a ride, the probability that the same driver is in the vicinity and free to give a ride is infinitesimal. So the passenger has to go to the app again. Moreover, it is the app that takes care of the pricing (using GPS, etc.) – something that is impossible to estimate if you try to cut out the app.

So when people say that they are building the “Uber for <some other service>”, in most cases it is not exactly the case – not all marketplace transactions are like Uber. For to be like Uber, you need to be an instant matching mechanism that changes the way the industry fundamentally operates; and you need a mechanism that keeps deals “online” by force.

Chew on it!