strategy – MTsireud

When Managed Marketplaces Don’t Work And Why SaaS Enabled Ones Do

Sometimes a marketplace is flawed and headed for a tough time before it even begins. But it’s not unlikely that this does not become evident until £20m has been invested. So, it begs the question: how can you know if that is the case and what can you do about it?

Network effects, liquidity, TAM, are some of the many things that a marketplace needs to get right. All very aptly described by Bill Gurley here. The list in the post is informative, concise and certainly correct. But if we were to put these in a timeline, gap related to the execution in the middle emerges. For instance, you can know if you have a big market from the get-go and by the time you experience network effects it all gets easier however, everything in the middle is murky, complicated and multivariate.

In a 2018 post, Eli Chait published a very insightful piece where he correlates the fragmentation of buyers to marketplace success.

Effectively, his research reduces the complexity of the first list to one metric that’s a bit meta; he’s positing that for a marketplace to be successful there is an inherent characteristic the market needs to possess and that is a very large amount of buyers (1 million buyers for one business) and for those buyers to also be fragmented.

This is a useful point because it identifies the principal component of success amongst many other variables and thus simplifies the problem. Can you get a million buyers? If not, then the cards are stacked against you.

Once more, if you have 400,000 buyers already this is a meaningful insight. You can approximate the value per added buyer in the network and roughly calculate if you can escape velocity through network effects.

But what if you’re just starting? What if you have 100, 1000 or even 10,000 buyers? Are the above enough to ensure that a marketplace is the right model for a given industry? How can you tell if your unit economics can mature to reflect a £1bn marketplace?

Perhaps there is a way to know what will NOT work. And there if there’s one thing to steer clear from is services with inherent repeatability of transactions between the same supplier and buyer. If that is the case, then scaling a marketplace to the 1 million buyers, 1 billion GMV will be tough.

And there is both an intuitive and analytical approach to explain why. But first, why is the lack of repeatability a benefit? Uber is a good example.

From the perspective of the supplier (driver), Ubers works like this. A driver can reach clients previously unreachable and get access to a set of value-adding services to make the job easier. In exchange Uber takes a fee per ride. Every time a new rider connects with a driver, Uber has taken care of: finding the client, navigation, safety measures and, seamless payment in the end. But since the whole CLV is (most likely) equal to the value of the ride, the next time the driver picks up a new rider, (s)he will reap the same exact benefits from Uber and Uber will receive the same fee.

In other words, supply and demand see each other as a commodity. Therefore a platform facilitates the transaction. Uber is there to ensure that a code of conduct is enforced (safety, trust, politeness etc) and enables transactions that would not be possible before (eBay, AirBnB are also good examples). This is an example of Bill Gurley’s point on “technology expanding the addressable market”.

From the supplier’s perspective, Uber’s value per ride is the same.

However, there are industries where the above hold true and still have fundamental issues in their economics, because of the loyalty repeat transactions create. Take therapy for example. The more therapists, the better the matching. A marketplace can expand the market via remote therapy, matching and also by creating the necessary privacy and trust for clients to make the first step. It’d be closer to how eBay grows the market (remove friction) than how AirBnB, Fiver or Uber do it (without them it’d be impossible).

But still, in the UK alone there are at least 2,500,000 people that will receive privately funded therapy per year. Trust is necessary initially. Structural and attitudinal barriers can both be addressed by marketplaces and therapists have a constant need for new clients as some come and some go. Yet, a therapy marketplace won’t work. Why? Because of the repeatability of transactions. A therapist is not able to see more than 25 clients (max) per week (50-75 uniques per year) and a client will only see one therapist.

That would not be a problem if the marketplace could capture a chunk of the value across the lifetime of therapy. However, the value-add of a marketplace declines after the first session because the client forges a trust relationship with their therapist. By definition, therapy is about the trusted relationship.

From the perspective of a therapist, a therapy marketplace exists for referrals.

In fact, from the perspective of the therapist, the marketplace doesn’t only stop adding value but can detract value. After the first session, a therapist will start adding notes for a client, have constant communication with them via their preferred medium (e.g. WhatsApp), receive the payment in a centralized way (e.g. PayPal) and agree on a fixed schedule which on a per-client basis at least, is simple.

Consequently, after the referral is done, the marketplace introduces a cognitive cost to use its add-on services (e.g. automated payment collection). If the therapist wants to use the marketplace they have to do extra admin on another space to keep their operations centralized.

Therefore, taking the client away from the platform is natural. Disintermediation is inevitable and thus, CLV real < CLV expected, which leads to unsustainable economics and does not allow the marketplace to scale.

Enter SaaS enabled marketplaces, or SEM

So, repeat transactions present a structural barrier for the marketplace to achieve strong unit economics and scale. Still, suppliers do need services to grow and manage a practice.

This is where a SaaS-enabled marketplace can provide a solution for a few reasons.

The positioning of the product is not necessarily around lead generation
Consequently, pricing is not pegged on “getting more clients”
Finally, the supplier might bring the clients onto the platform voluntarily which alleviates the platform from the burden of CAC but also positions it to capture value across the lifetime of the client.

From a cash flow perspective, this allows for a direct reinvestment of revenue per supplier to acquire new suppliers. Eventually, when there is a critical mass, then the platform can aggregate them and introduce a new service on lead generation but without the pressure of that being a promise. Shopify’s Shop app is a good example of that.

So, are repeat transactions intrinsic between supply and demand in a market? If so, it will erode the marketplace unit economics and pose challenges in scaling to network effects. Looking at the “come for the tool, stay for the network” approach is the more appropriate strategy for these kinds of markets and can still take to the same end point but in a more sustainable way.

Things Netflix taught me about how people buy products

Reading how the coronavirus lockdown has led to a 60% increase of content consumption, the usual culprits were popping (Netflix, Amazon Prime etc).

Of course there was not mention of the free streaming solution: piracy and its enabling technology, BitTorrent.

In 2020, you might think: but of course, it’s illegal. Then again, more than 10% of the UK population has pirated a movie in 2018.

Combine that with the fact that Netflix alone, not to mention any other of the streaming players, has overpowered its free competitor by 2.5X in the UK (Netflix UK subscribers, UK piracy participants) and an interesting question arises.

Netflix: Paid service, allows users to see some movies.
Torrent: Free service, allows users to see any movie that has ever existed. Before Netflix. In good quality.

What did Netflix do so well to have people buying a subscription in swarms?

People don’t buy the price tag, they buy product value

“FREE” is a very misunderstood pricing tool. FREE can actually be dangerous. Perhaps a good hook you’re selling a commodity amongst commodities. My electricity company can make me switch for a FREE month or so – but then hope I don’t set a reminder to got to the next one and the next one.

But a FREE month of the newest great email client won’t make me drop my Gmail. If anything, it’s more likely to drop my gmail if I have to pay for email, making me wonder how good can it really be!

This is also the reason why closely matching the price of a competitor is a good tactic whilst avoiding competition based on price which can erode long-term shareholder value.

For instance, take the streaming wars that have escalated in the past year. Netflix, Hulu, HBO, Disney, Apple, Amazon.

I am signed up to Netflix and Amazon Prime video. I don’t know how much I pay at this point for Netflix ( premium account, up-sells, multiple devices) and I think* that for Amazon I only pay via my general Amazon Prime subscription i.e. that I have not purchased extra content.

A couple of things:

I have never thought: “Amazon prime comes for FREE. Why am I paying for Netflix?”
I also have no idea what the competition (Hulu, HBO, Apple) costs.

I was not buying a “streaming service for shows”. I was buying Netflix.

And what this meant was that as long as the price didn’t give me the chills, it was not part of the consideration.

Product value is beyond the feature set

Think of enterprise software. Hubspot. Salesforce. How many features can you recall? 3? 5? there are x,000s. Literally. This only makes sense because on the enterprise level you’re not buying features, you’re buying a solution.

Do you know exactly how many titles your streaming service offers at any given time? What about movie quality? Is it set at 720p or Blu-Ray? I doubt you do. What about about rich metadata, trailers and extra content? You know why? Because that is not what was important.

In consumer, and I would argue in SMB SaaS, no one buys a product as a result of a deliberate comparative analysis.

This is something business schools got really wrong. “Benchmarking” on features is wrong.

It assumes that people make purchasing decisions following an analytical, logical approach in a sterile, static environment. Which is not the case.

People buy product value and that is inseparable from the context the user buys a service. Timing is context. The political environment is context. What their friend bought is context.

Positioning is Product value

Social representations and connotations that come with the product are also part of the context.

People don’t sign up to Netflix because it has more movies or it’s faster than Amazon Prime video. They do because there’s became inextricably related to cultural standards of millennial audiences. We think of unwinding and we think of Netflix. We think of cool shows and we think of Netflix (original content). We even think of dating in relation to Netflix aka “Netflix and Chill”.

People buy product value and that is related to the brand, the context, the features, the price and every other connotation linking the company entity to our entire social fabric.

And engagement.. which is very much a habit.

And there’s a final element which follows but also solidifies all the previous. Habits. It’s what keeps a user from switching. To be clear I am talking about dopamine inducing, visually stimulating, thoughtfully designed.. habits. The ones you just can’t help but do all the time.

For a long time I have been getting surprised how streaming services became such a huge industry when there’s piracy: an obvious, free, relatively low risk alternative.

The argument is strong: If you were told that you can go to the movies and watch a movie for free, or you can pay, it’s reasonable to assume you’d take the FREE version.

And so, for a very long time I was thinking the same analogy applies to streaming services vs piracy: Why would people a) wait way longer b) for something to maybe arrive on their streaming service c) only for then to have to pay to watch it?

And it turns out the answer is very simple:

Because Netflix did a great marketing job to create a solid brand (positioning)
and later because people don’t want to think – Netflix became a habit i.e. no cognitive tax for the action.

Piracy has two main disadvantages.

It relies on one form of peer to peer sharing or another – therefore it’s prone to lagging while streaming or requires upfront time to download.
It requires a set up to transfer the movie from a computer to another device e.g. a Home cinema station.

In other words, you need to think 10’ minutes in advance to download the show (Any show you can think of!) and you need to port it on your TV either with cable, Bluetooth, usb.

Yet the numbers are telling; people prefer to open their media streaming kit on their Smart TV (e.g. Fire TV, Apple TV etc), compromise on what movie they’re going to watch AND pay (if it’s a paid one on Amazon prime) to watch it. From an economic stand point it’s interesting because initially it looks that the rational agent theory goes out of the window. But I think it’s simply a matter of what “rational” means and what is the currency we are trading.

People are using their emotional, short-term reward seeking, hacky side, what Thinking Fast and Slow baptized “System 1”. We don’t want to think. We want rewards to be quick. We want no inconsistencies and disruptions. Under that light, it’s obvious why people will choose Netflix again and again. No bugs, no lags and above all, it’s convenient. No Extra work.

So there’s a few reason altogether that lead Netflix to be easier to find out about, sign up and keep using.

First, people by definition are deterred from being vocal about their online piracy related excursions. On the contrary, people are very vocal about what they watch on Netflix:

It’s easy, safe and “common” to subscribe.

Strong recommendations and autoplay like features activate users immediately and teach that you can get a reward (watch a nice movie) without lifting a finger.

And so even if the movie is not on Netflix, it might be the case that money-wise paying Amazon for the movie you’re searching costs £2.99 ( random number) but carries the cognitive cost of 1 thing to think or, in technical terms, 1 Elementary information process: choosing a movie.

Measured in terms of EIPs BitTorrent is much more expensive:

Select the movie.
Find the right torrent to download.
Turn a VPN on (ideally if you don’t want to be tracked)
Port the movie in a usb / find and connect a cable.
Sync subs if necessary
Play from the computer and standup to pause OR add an app to control your PC from your phone

This is 6 EIPs and TIME associated.

So it turns out that it’s not FREE. It is costing you time and effort.

So choosing the movie from Amazon video comes at a lower cost altogether.

And sticking to it? Well, that’s easy right? You choose the movie, click play and 99% of the times you simply have a great experience with metadata, subs synced and the movie in HD quality.

But here’s the most interesting thing streaming services and the king of the hill, Netflix act like they know all too well: People get used to the cue, not even the reward itself.

In other words? Even when the pirated movie comes conveniently at the ease of one click within your streaming service (see Cinema V2, popcorntime for Amazon video) we are still more likely to click the Netflix thumbnail and spend our time looking for a movie there first. Why? Seeing Netflix’s thumbnail is already flooding our brain with chemicals, as if the reward that comes after having watched an enjoyable movie, has already occurred.

And thus, even though we have a free alternative we are “hooked” on clicking on the paid version.

Build value and they will buy it

This logic applies to other costs. Sharing data. Spending time.

So next time your company or investment is up against fierce feature, price or marketing budget competition, ask yourself: How are they delivering value beyond features and price?

Why is there no dominant marketplace in therapy yet?

Lately there’s a business fascination with Mental Health. The majority of people who want to get involved with mental health and specifically therapy, think that it is about to break out; become the next gym; the next yoga; and every time we talk about that, it never happens.

While there is a lot of room for innovation on the client side, the current landscape does not accommodate the needs of the most important player: the therapist. And that seems to be overlooked. What is it that therapists really want after all?

The therapist journey

Therapists, like every other professional, go through their own journey of professional maturity. Besides honing their therapy related skills they also have to deal with figuring out how to run a business. And whilst therapy might be quite an esoteric profession, like any other business, there’s a traditional path in the life of a therapist. So, what does a therapist trajectory look like from a business point of view?

First, a therapist needs to find their first clients.
Once the first few clients are there, the need for operationalization kicks in: Find clients who are a good fit, deal with practice admin and start building a brand.
Once that’s done now it’s time to optimize. Process and revenue improvement.
If they get above all three, then the therapists start thinking about consulting, writing books, opening up a clinic or of course stay happy with a full practice.

And it is very important to see the industry through this lens because these are the use cases that have shaped the industry.

As you can imagine, the first big players were formed to tackle what was top of mind for therapists in the beginning: getting clients.

And so the first successful business model that was born was “directories”.

Directories aka traffic uber-alles

From a business perspective these companies were the first matchmakers and put therapists who didn’t have the resources to create a personal website on the map and are currently thriving due to a mixture of things: domain authority, brand, dominance in search, network effects, and as discussed later, the inability of platforms to innovate effectively. These platforms work as marketing services providing referrals and auxiliary marketing services such as profile statistics and other branding opportunities such as content publishing (which works in a self serving way for the platform).

For that, therapists pay a base subscription which essentially lists a profile but does not guarantee any traffic to it; following the typical classified model of the 2000’s, therapists can upgrade to get additional traffic.

However, the economics underpinning this subscription model are flawed for a few reasons.

The first and foremost being that incentives between the directory and the therapist are misaligned and consequently lead to negative aggregate marginal benefit.

What does this mean?

The no.1 priority of the directories is to list more therapists given that this is how they make money. Their no.2 priority is to up-sell said therapists. Everything else is an add-on and that is evident simply from the fact that there has been no attempt towards innovation whatsoever beyond the first two.

And here is why incentive misalignment is bound to create inequality and therefore a negative sum game.

First, the existing premises of the game. Directories in the UK have xx,000 of therapists subscribed. Therapists see that and of course this is attractive. If it was not working, why are so many others paying for it? It’s social proof. So here is what happens.

Step 1. Action: A therapist lists their profile and start paying.
Step 1. Result: Competing for views with more than 1.000 other therapists in any given area, there is a high chance that the therapist won’t receive a client. This happens for two reasons: the directory cannot ensure demand increases proportionally with supply and don’t collect enough data to tailor search results for each user (matching).

Step 2. Action: The therapist now decides to upgrade (50% extra cost) their subscription.
Step 2: Result: Now the therapist ranks highly in the location search and therefore starts getting clients, disproportionately to the price increase they have paid. They’re happy and decide to stick.

At this point it’s important to note a couple of things:

Users searching therapy result sets act similarly to as if they’re searching on Google. The implications is that the top 10 results get 99% of the clicks.
There are more therapists in each given area than top positions.

Result? For every therapist that pays a premium listing, another therapist loses.

Predictably, there is a clear threshold for when the curve of value / fee starts declining. And that is the time when more than 10 therapists are paying a premium listing to appear in a given area. Then they are all collectively eroding their ROI. At least one will not benefit by not being in the top ten even though they’re paying extra.

But this realisation has a lagging effect. By the time people are realizing their listing performance is going down, we don’t have 11 contenders, we have more like 30.

Result? Initially they stall, but eventually they churn from being up sold.

What you might be thinking is: But aren’t the clients using the network increasing? Why is there a problem?

This is a good question and traditional logic has it that the more therapists on one platform the more demand comes. But then again:

The site itself does not have as a priority to market to clients; rather it has its eyes on more therapists. Additionally, since these organizations started as marketing organizations, it’s not in their core skillset to be thinking of market equilibria and distribution optimization (liquidity). It’s in their mind to sign and upsell.
The no.1 obvious marketing benefit resulting from more therapists in an existing network is that of unique content and thus, organic traffic. But again, not the case for a couple of reasons:
- Legacy platforms are already receiving most of their traffic from SEO/ organic search which indicates that a new therapist’s profile listing is not going to provide a novel and previously lacking answer to a user’s search engine query (imagine that queries on google are “therapist in London”).
- Therapists profiles are actually duplicate content! Because no one platform can guarantee an influx of clients, therapists end up being on multiple platforms all of which are trying to do the same. Thus, they copy paste their profile pages and the case for unique content becomes null.

So we conclude that subscriptions to provide marketing facilities is not an optimal model to create, deliver and capture the value of the therapy industry. To summarize:

Your happy clients don’t pay more then your unhappy necessarily,
value in upsells goes down the more participants in the network get sold and acquisition of new clients is organic (search)
but there is no lock-down which leads to churn.

But what if we could go deeper, provide more services that better the recurrent relationship between the therapist and the client which is likely to reach >£1,000 in several cases?

Marketplace 2.0, the serviced marketplace.

Psychotherapy as an industry, and especially through the lens of a marketplace model looks very attractive at first sight for a few reasons:

There is a lot of talk about it: government, mainstream media and social media create the expectation of continuous growth in demand.
The service itself is costly (average price of therapy according to our own data is £58 in the UK) and there is a decent market size (~£3bn).
At least 89% of therapists operate at least partly under a private practice which means there is a lot of fragmentation in the market.

And the space has become interesting to tech entrepreneurs who understand how to build marketplaces. The story goes something like this: Aggregate the therapists (supply) under a full stack service proposition, charge fees that persist for the duration of the therapeutic relationship and reinvest said fees to get more clients in and keep the loop going. By providing a better service and a performance model (i.e. no subscription costs) these services lower the barrier to sign up. More traffic, better experience, lower CAC. This is marketplace 2.0 approach, or “let’s make the Uber of therapy”.

“We will give you clients, booking facilities, online payments and all that for ~10% each time. How does that sound?”

Initially it sounds great to the marketplace and good to the therapist. But then issues arise. A deeper look reveals the inflection point: incentive misalignment.

Incentive misalignment

Therapist needs

Initially it might not be clear. Therapists are cryptic and don’t like working with people that “sell” them. Once one peels through the many layers of the conversation and assuming manage to separate business from therapy (not easy at all), what therapists really want is pretty simple:

First, they want a steady stream of clients. Depending on whether they’re running a full practice or not that number might be higher or lower but the value is the same. They don’t want to have to stay in the mode of survival.
Secondly they want the platforms to stay out of their business and let them manage the relationship with the client whom they view as their own client.
Third they want additional services to help them manage their practice efficiently but in a way that does not cost an arm and a leg and serves their existing workflow.

Platform incentives

Platforms on the other hand, have different incentives. Specifically:

Platforms need to control the relationship between client <> therapist because otherwise disintermediation becomes a real issue.
Platforms are incentivized to provide more tools and services to therapists so as to control the relationship and justify their recurrent margins. However standardizing the experience is imperative to build a model around costs and revenues. In other words, there are rules every therapist must adhere to. Platforms can’t create different user journeys for each therapist nor operate under an open architecture where therapists can plug in their tools because a) that’s not convenient to start with before you have serious cash coming in and b) it invalidates the case for control of the relationship.
And what is the control point of it all? The Calendar. Why? Because by having access to read & write in a therapist’s calendar massively increases client conversion rate and reduces CAC. So every marketplace app is vying for the ability to have access to read and write on a therapist’s calendar.

The deadlock

The problem boils down to something very simple. Platforms base their business on two premises: First, that broader servicing of therapists will result in higher Lifetime Value per therapist and secondly that returns increase drastically when the market gets effectively monopolized. Therapy in the UK however is worth £3bn so not that big of a market. Therefore the whole “when we get too big, winner takes all” pitch does not sit very well given the risk reward ratio and absolute magnitude of the two. And that implies that reliance to institutional money with negative unit economics is not an option.

So platforms *need* healthy economics from day one. Any friction between the client booking the therapist needs to be eliminated. Given the newly established paradigm of on-demand services where online booking & checking out happens seamlessly, clients come with increased expectations of therapy platforms. And thus, the lack of visibility into a therapist’s availability is up there in the product problems worth fighting for. Otherwise unit economics are unsustainable**. Result? Cash flow deficit and diminished interest of additional investment. Frictionless experience end-to-end is crucial and the ability to add bookings directly to the calendar key.

On the other hand, the only therapists willing to give (up) their calendar to be managed by a platform are those who don’t have enough clients and once they do, they’d stop updating their availability. Why? There are a couple of good reasons for that.

First, therapists want to see clients they can actually help. The fact that a client wants to book a therapist does not mean that’s the right choice for them. Therapists feel they have to do the triaging (and they don’t trust an automated alternative) and should they deem a client a bad fit they would find themselves in the difficult position of having to cancel the appointment the platform booked and disappoint the client.
Secondly, this process requires a lot of work from therapists. Every time they get a booking from one service, then invariably they’d need to update their availability in every other platform and that is quite cumbersome. Also, what if their schedule changes? Why would they need to report to anyone?

And so we have the calendar deadlock. Therapists want freedom and no more admin and platforms don’t have enough clients to impose terms.

But the deadlock extends on another dimension which is crucial to answer the titular question: That of competition between the incumbent(directories) and the new entrants (marketplaces).

Without the calendar, marketplaces can’t provide their seamless experience to customers nor service the therapists as they like. And by not doing so, there is no differentiation. They provide a subpar experience, become “yet another directory” and compete in a commoditized game they can’t win (referrals, seo, paid ads).

But if they push for the calendar they lose their therapists as there’s no supplier power and thus, can’t scale. And of course the more platforms created, the more the calendar is requested and the more the problem is exacerbated. For every new platform created the worse the unit economics for every other platform in the short term.

And so there you have it. Therapy in the consumer space remains locked between a model that is inefficient both in terms of economics and user experience and another that does not provide a good UX for the therapists.

And in this industry without the therapists, you can’t craft a great UX for the customer either.

A vicious cycle really.

Notes

*We have interviewed therapists that mentioned they hadn’t received a client from directories for over 18 months whilst paying of course.

** We have seen up to 200% higher CAC from paid ads when a therapist does not provide their calendar.