THE BLOG

2015 Will Be the Year of the Services Marketplace, But Only if the Price is Right

02/13/2015 10:24 pm ET | Updated Apr 15, 2015

"Everything in our lives is going to be available in the push of a button."- @Shervin

The service economy is going through uberification. Service marketplaces are aggregating consumer demand through mobile apps (and some websites) and fulfilling that demand through offline services. This phenomenon has left little in the services sector untouched. All of the industries below are booming with upstarts looking to be the next "Uber for X."

At the top of the ladder, 2015 is shaping up to be the year for service marketplace platforms as speculation intensifies around IPOs for Uber and Airbnb indicating that the so-called sharing economy is about to go mainstream. The halo effect of these IPOs will surely impact the future of the platforms listed above.

A potential pitfall for many of these platforms will be their pricing strategies. Pricing strategy is especially important for marketplaces, as pricing doesn't just effect revenue, but also the incentive structure for their ecosystems. Because these marketplaces need significant liquidity to succeed, small changes in pricing structure can have enormous impact on growth and profitability for these businesses. Over the last year, we've seen platforms that have set up the right pricing structure for their marketplaces pull ahead of those who haven't.

Two Types of Marketplaces

Marketplaces can be categorized as providing commoditized or un-commoditized services. The difference on this spectrum revolves around the degree to which the product or service can be standardized.

For example, Uber provides a commoditized service because the passenger doesn't care about much besides getting from point A to B in the car they selected. Therefore, they should be setting the price on behalf of their producers. However, Airbnb provides an un-commoditized service because its renters potentially care about location, number of bedrooms, WiFi, pool, pet policy, etc. The more factors that influence a purchasing decision, the less commoditized the service offering will be and the more likely producers should set their own prices for their services.

With all the investment in and press coverage of these service marketplaces, we decided to take a closer look to see which ones could have trouble growing due to a misalignment between pricing and the degree of standardization.

Commoditized service providers should set the prices for their users.
Un-commoditized service providers should allow their producers to set prices.

Commoditized service platforms that aren't price setters

Commoditized service platforms try to set their own prices so they can provide more value to consumers by setting standards for pricing. Here are a few which may want to reevaluate if they should control prices given the ecosystem they are playing in.

TaskRabbit is in the on-demand home services market and competes with the likes of Handy and Homejoy. They have been around for longer and, as a result, we assume their legacy has been preventing them from adopting a true commoditized positioning. Instead of standardizing price for home cleaning, they give you low, medium and high options. Instead of making it easy for the consumer to know they are getting a quality service by standardizing cost & quality, they leave it up to the consumer to choose if they are getting the right deal amongst their three different options.

If you're looking for a parking space, ParkMe and SpotHero provide a marketplace to rent one from owners with spare inventory. Owners are able to set their own prices, but the following scenario shows why this strategy is ill-advised. Imagine yourself searching for a parking space and one spot is $10/day whereas the one next to it is $20/day. The $10/day option is obviously a no brainer, which creates a disequilibrium in the ecosystem since the platform isn't able to optimize for supply and demand.

Finding a parking spot is a commoditized service. There are a limited number of variables to find the right place to park your car. Is it close to me, in a garage vs. on the street, valet or not, etc. Outside of these variables, price is the only other primary determining factor. For the parking platform that can figure out how to bring a level of standardization into the industry, huge success awaits them. The challenge is that there is an existing industry with existing prices and a lack of transparency. When a platform can assert itself as the technology middleman, it should be able to standardize pricing and ensure efficiency in the market.

Instacart is a grocery delivery service that formerly charged a markup on supermarket prices plus a delivery fee. This model was unsustainable and forced them to recently change their business model. Now, they want supermarkets to pay a fee to be a part of their ecosystem. What Instacart recently realized is that grocery shopping and delivery is a commoditized service.

Their former hybrid pricing strategy lacked transparency because there was no information on how the markup was calculated or what its true dollar amount was. This recent reset of their pricing strategy is a step in the right direction because it standardized prices. By subsidizing buyer participation one can expect more buyers to join their ecosystem, which will in turn increase supermarket participation.

Postmates is a delivery service with couriers who buy what you request at any store or restaurant and deliver it to you. They have a different pricing model where delivery fees start at $5 and are determined by the distance from pick-up to drop-off, and the capacity of the platform (surge pricing). Additionally, a 9% service fee is applied to the purchase price of items. While Postmates was more transparent about its pricing from the start compared to Instacart, the grocery delivery platform may soon have an advantage because of its ability to eliminate fees that users still have to absorb when using Postmates.

Price automation in an un-commoditized setting

On the other hand, what happens when an un-commoditized marketplace is a price setter?

YourMechanic is a platform that connects car owners with mechanics. Car owners enter information about their car's problems and the platform finds them help. Based on the information entered, YourMechanic automates a price. This price is guaranteed even if fixing the problem takes longer than calculated. This practice can upset producers who feel the platforms aren't pricing their service appropriately since there can be a high degree of customization involved. Price rigidity and the potential for customization in an un-commoditized setting don't go well together.

For the Winners, the Price is Right

Throughout the services sector, the marketplaces that have correctly aligned their pricing structure with the kinds of services they offer have consistently pulled ahead of those who haven't. The major winners like Airbnb and Uber have gotten it right, as has more recent up-and-comer Handy. Meanwhile, many potential "Uber for X" companies have simply tried to copy the on-demand nature of Uber without understanding how the business model works. These companies aren't likely to get very far, while their more astute competitors are poised to have a big 2015.

Let me know your thoughts in the comments below, and if you have any other examples.