7 Challenges with Building a Service Marketplace

The service marketplace opportunity

The service economy is a behemoth, with trillions of dollars in value exchanged annually. At 64% of global gross domestic product, this presents a golden opportunity for online marketplaces to connect service providers with consumers more efficiently. 

Canny digital entrepreneurs have taken notice, leveraging the marketplace model to revolutionise some service sectors. This has led to the rise of gig economy platforms like Uber and Lyft that have disrupted traditional transportation industries. Similarly, job platforms like Upwork and Fiverr have transformed the freelance market. 

But that’s only the tip of the services iceberg. The potential for new service marketplaces to emerge and disrupt other industries is immense; and not only in pure-play scenarios. Many established retail marketplaces are supplementing their existing product offerings with services that offer additional value to users. Home decor giant Wayfair, for instance, now also showcases installation and assembly providers. This trend has found its way to startups as well; COCOLI, a German marketplace for second-hand furniture, has morphed into a three-sided marketplace with third-party logistics service providers (packing, shipment, etc.) supporting its existing product merchants.

The emergence of managed marketplaces like Opendoor (real estate) and Wonderschool (child care) that control ever more aspects of the user experience has also made service marketplaces more viable. Advanced procurement tools, guarantees, fintech integration and the use of new technology like blockchain, AI and machine learning to automate and secure matchmaking are opening doors that were previously closed.

However, there are some distinct issues that can bedevil service marketplace startups. In this article we look at seven of the most common challenges and how successful service marketplaces solved them.

Finding the right revenue model for your service marketplace

Figuring out how to monetise a service marketplace can be tricky. Various aspects of your business model, especially target audience, service categories and value proposition, have to align with the right revenue streams. There’s a real danger that an untested revenue model can lead your startup down a dead-end from which it can’t recover.

One such cautionary tale comes from defunct event services marketplace, Eventerprise. Despite huge potential to disrupt a previously underserved market, the platform blindly targeted the whole world with a subscription model that was based on financial projections for investors. When they realised that service providers were not prepared to pay a recurring fee for an unproven solution, it was too late. The platform had run out of runway and had to close down.

The lesson? Use an MVP to test your revenue model. It should be designed to answer the million dollar question: are sufficient numbers of users prepared to pay for your solution in a format and at a price point that can sustain and grow your business? Testing revenue model assumptions at an early stage should also provide clues to the chicken-or-egg conundrum – do you charge buyers, service providers, or both?

As we’ve written before, marketplace revenue models consist of seven main types, with flat (standardised) fees, subscription fees, transaction fees, lead fees, and listing fees most commonly used in service marketplaces.

Here are some notable examples of how well-known service marketplaces implemented various revenue models that supported their business growth successfully:

A flat fee structure provides predictable and transparent pricing, simplifies billing, and minimises disputes, all of which improve liquidity and decrease disintermediation (platform leakage). It also supports near-instantaneous transactions, which eliminates lengthy quotation and negotiation processes. This is ideal for commodotised marketplaces like Uber that charge a fixed fee for each transaction. The caveats for this revenue model are high volumes, a standardised service, and ultra-efficient match-making. 

In a transaction fee or commission-based model the marketplace operator charges a percentage of the transaction value. This offers more flexibility, especially for marketplaces that offer a wide range of services, but can deter users if fees are too high. It’s therefore essential to find the right balance between profit margins and user retention.

MobyPark, a fast-growing parking marketplace in Europe, took the transaction fee model one step further by implementing a yield algorithm, similar to what airlines and hotels use. Their pricing model is linked to a search engine that calculates fees in real time based on a priority list of variables: location, number of parking bays booked, the duration and dates of the booking, availability, and discounts. They boosted flexibility and price competitiveness even further by allowing parking bay owners to set pricing tiers AND pricing rules.

Often seen as the holy grail of revenue models, the subscription model supports recurring revenue streams, but requires a substantial value offering to justify the additional overhead expense. LinkedIn is a prime example, offering job boards, networking tools, and premium content. The subscription model works particularly well with SaaS platforms and services that require quote/RFP mechanisms.

Many successful marketplaces adopt hybrid models to target both sides of the platform as well as different user types. For instance, Upwork charges both freelancers and their clients a service fee per project, but also offers subscription plans (Freelancer Plus) and standalone additional services (Featured Jobs).

Segmentation can play a valuable role in diversifying your revenue model. Houzz, a home improvement marketplace, has developed several revenue streams based on different user profiles. Service providers can choose from different subscription packages and standalone advertising services such as sponsored content and display ads.

Preventing platform leakage in your service marketplace

Platform leakage is probably the biggest killer of service marketplace startups. Unlike physical products, services can easily be transacted outside the platform. To mitigate this service platforms must get a few things right.

Enforce strict terms of service: Clearly outline the consequences of bypassing the platform. Upwork prohibits any off-platform communication until a contract is signed, not only to protect their revenue, but also to prevent scams. Circumvention can lead to the suspension or even closure of user accounts.

Build a strong community: Foster a sense of belonging among users, making it less likely they’ll leave. Thumbtack has done this brilliantly via a number of community building strategies, such as regular events and meetups, multilingual support forums, and the showcasing of service providers’ projects.

Offer exclusive benefits: Provide incentives like loyalty programs, discounts, or access to premium features for platform users. Useful procurement tools such as the inventory calculator offered by removal services marketplace, Remoovaz, can attract and retain users.

Nestify, a property management platform, charges landlords a percentage off each rental. In exchange landlords receive a full-stack service offering, which includes a dynamic pricing tool that updates rental rates daily based on real-time data. By maximising their clients’ revenue Nestify can easily justify its fee. 

Banking-as-a-Service platform, SoShop, used a customisable cashback loyalty program to grow its revenue thirty-fold within one year. Uptake of the loyalty program was boosted by allowing merchants, which include well-known brands like Nike, Samsung and Pizza Hut, to manage cashback offers at point-of-sale level based on time and volume limits.

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Another technique is to offer a guarantee or safety mechanism. Freelance sites like Upwork typically hold deposits in escrow until a milestone is reached. Service providers on time-based contracts receive payment for work logged even if a client absconds.

Invest in customer support: Resolving issues promptly and effectively can improve user satisfaction and loyalty. FanPass has invested heavily in their customer service department, which has played a big role in the platform’s popularity and trust levels.

Building trust in service marketplaces

Trust is the bedrock of any service marketplace. Platforms must create a secure environment where buyers and sellers can confidently interact. Key strategies include:

Robust security protocols should start with rigorous identity verification processes for both users. This is an ongoing challenge for P2P marketplaces like Uber and Lyft. Uber’s most recent security features include pin verification, an in-app emergency button, and audio recording. Security should not only cover identity verification, but also anti-fraud and compliance mechanisms. Third-party tools like Stripe Radar can be combined with appropriate internal processes to flag suspicious transactions and minimise payment fraud.

Quality control is a double-edged sword. On the hand it can prevent your service marketplace turning into the Wild West of a Craigslist that has been flooded with counterfeit goods and payment fraud. On the other it can create unnecessary friction if it’s not carefully managed. It may therefore be a good idea to emulate Airbnb and manually vet service providers until you have found product-market fit. You can learn more about vetting service providers in our article: Marketplace curation: boost trust and growth with seller quality control

Detailed profiles build credibility with clients. Service providers should be coaxed into completing comprehensive profiles that include social proof such as work history, cases studies or awards using a low-friction onboarding flow. Parking marketplace, MobyPark, expedited a lengthy registration process by using dynamic and multi-step forms. This includes pre-filled fields like country, language and location and conditional logic that shortens forms by displaying questions based on previous answers.

Healthcare platform, IHSS Connect, provides care professionals with feature-rich profiles that showcase their experience, expertise and certifications in a highly searchable and comparative manner. To make this possible, profile sections include highly granular provider details: personal details (gender, languages, location), experience (treatments, care recipient age group), training (education, certifications, medical conditions), transportation, and availability (short or long term, overnight, on-call, split shifts).

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Secure payment systems are a core function of any service marketplace that facilitates transactions between service providers and clients. In addition to the seamless transfer of funds, they should protect transaction data and offer buyer protection where appropriate. Most marketplaces like Upwork therefore only release funds to service providers once projects or milestones have been sign off by the client. This requires a payment service provider like Stripe Connect with a hold or escrow function. Other common requirements for seller payouts include split payments (e.g. food delivery apps like Deliveroo that need to pay the driver and the restaurant), refunds, chargebacks and tax compliance.

Review and rating systems allow users to share feedback, but require measures to prevent fraudulent reviews. Airbnb’s verified review system does not use human moderators, but rely on conditions (registered users, booked and paid stays), time limits, and an AI detection feature to police feedback. Despite these measures the platform has been the subject of numerous news articles documenting its battle with fake reviews, which illustrates how difficult it is to fight such a scourge at scale.

Collecting reviews can also be a challenge. Accommodation aggregators like Airbnb and Bookings.com send a series of review requests and reminders once a guest has checked out. IHSS Connect uses a low-friction curation tool on its healthcare platform to make it quick and easy to rate healthcare providers.

Connecting service marketplace buyers & sellers efficiently

Matching buyers and sellers efficiently is crucial for liquidity and a thriving marketplace. To optimise this process:

Create clear service categories: Organise services into easily understandable categories. The best way to do this is to follow a discovery, validation and optimisation sequence.

Implement a suitable navigation structure: Is a search feature necessary? Should you invest in an advanced navigation feature that uses custom search algorithms, geolocation or user history for faster, more accurate, results? Or would faceted navigation that allows users to filter and sort for more granular results be a better option? Which service attributes should be used as filtering and sorting criteria?

Intelligent matching algorithms: Use data to suggest suitable matches between buyers and sellers. Freelance marketplace, Fiverr, has introduced Neo, an AI chatbot that interrogates each customer’s project requirements in order to provide them with faster and more accurate results.

Effective communication tools: Facilitate smooth interactions between users with features such as request for proposal mechanisms and auto-generated notifications.

IHSS Connect uses a custom asynchronous messaging system to support detailed conversations between caregivers and care recipients. Tons of features such as group chats, Salesforce integration, customisable alerts, embedded multi-media , and support for a wide range of file attachments (spreadsheets, PDFs, images, PSD files, DWG files for AutoCAD) make the messaging system as accessible and inclusive as possible.

Job platforms like TaskRabbit have excelled at streamlining the matching process by allowing users to easily describe their needs and receive multiple quotes. TaskRabbit’s homepage quickly guides the user through the category structure via the clever use of buttons. Within two button clicks the user arrives at a personalised quote form that has been chopped up into bite-sized sections to promote a sense of accomplishment, which minimises drop-off rates.

Designing a seamless user experience for service marketplaces

A great user experience is essential for retaining customers on a service marketplace. Unlike buying relatively cheap and impersonal fast-moving consumer goods on a retail marketplace, a bad experience on a service marketplace can leave a lasting bad taste. Imagine booking light classical music for a funeral and punk rock band pitches up!

Platforms like Uber have set the bar high with their minimalist and user-friendly app. This includes spending lots of effort on the driver experience, because happy driver = happy rider. Uber’s latest driver app was built with extensive feedback from drivers to help them find fares, get directions, and track their earnings in a more user-friendly manner. From an engineering point of view, Uber’s modular cross-platform architecture framework – RIBs – makes it easier to ensure consistent functionality regardless of platform or feature updates.

Nestify‘s cleaner app uses an intuitive interface and IoT integrations to increase the productivity and management of cleaners for their property management platform. The cleaner app algorithm uses cleaner availability, cleaner location and the type of cleaning requested, to notify qualifying cleaners via their mobile phones of available shifts. Cleaners can then accept or decline shifts and if a cleaner cancels a shift, it is automatically reallocated to another cleaner. Work is tracked via geo-location on the mobile app while property access is automated with one-time codes to key lock-boxes.

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Key considerations include:

• Intuitive navigation: Make it easy for users to find what they need.
• Mobile optimization: Ensure a seamless experience on mobile devices.
• Clear and concise information: Provide essential details about services and providers.
• Smooth payment process: Simplify the payment process to minimise friction and use payment solution like Stripe Connect that can support a wide variety of use cases.
• Database requirements: Services often require more specialised databases compared to most product-based marketplaces due to a number of differentiating factors as we explain in our post: Are you using the right database solution for your online marketplace project?

Prioritising features in service marketplaces

With countless potential features, it can be challenging to select the rights ones for your specific service marketplace startup. We’ve previously discussed how blindly adding features can obscure your core value proposition and make it difficult to establish product-market fit.

Upwork started as a simple platform for freelancers and clients to connect, but has expanded its features significantly over time based on user demand. Although it can now be considered a highly-managed marketplace, it needed to first establish product-market fit with a feature-light MVP.

Houzz‘s first version in 2009 was laser-focused on driving engagement with the platform in the form of clear calls-to-action to its basic features – simple profiles with photo galleries for service providers and category browsing for home owners. Once they had sufficient feedback from users, they added additional features such as project management tools and 3D floor plans.

A data-driven approach is therefore non-negotiable:

• Focus on core user needs: Identify the most critical functionalities for both buyers and sellers.
• Iterative development: Launch with a minimum viable product (MVP) and continuously refine based on user feedback.
• A/B testing: Experiment with different features to measure their impact.

Custom or off-the-shelf solution for your service marketplace?

It can be tempting to build your service marketplace with an off-the-shelf solution, but there are numerous pitfalls. While off-the-shelf templates offer speed and cost savings, they often lack the extensibility and customisation options that are indispensable to the unique user flows of many service marketplaces.

A property management platform like Nestify would obviously require different onboarding steps, project management tools, and contract features compared to a marketplace for legal services such as UpCounsel. This is even more true for G2B service marketplaces that have to adhere to sector and country specific legislation. The below project management dashboard, for example, had to be custom built to manage and track various projects in a coherent and transparent manner across a sprawling public sector organisation.

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Houzz is another prime example of a successful service marketplace built with custom code, allowing them to tailor the platform to the specific needs of the target audience. The MVP site was coded by the founders themselves (one of whom was a lead software engineer at eBay) based on feedback from home renovation professionals and their customers. This played a big role in the platform’s rapid uptake: 350,000 organic users within the first year.

In retrospect, we didn’t realize that what we were doing was bootstrapping but it enabled us to take our time and build the company from the ground up the right way.

Adi Tatarko, co-founder of Houzz

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Service marketplaces may have additional challenges compared to most product-centred marketplaces, but the rewards are there for the plucking. The trick is to learn from the success stories, but still keep your own user flows and user needs front and centre. As we always say, it all starts with a solid discovery process.