SaaS and marketplaces have both been individually praised in the startup ecosystem for their attractiveness as business models that reach scalability and replicability of revenues in a very short amount of time compared to other approaches. However, a new wave of startups is emerging leveraging the advantages of both models making it possible for these online businesses not only to quickly attain customers, but also to retain them, taking into account that churn rate is the biggest challenge for the long-term growth of every tech venture out there.
Everybody loves SaaS for its simple, yet brilliant business model. SaaS uses pricing based on per user per month/year with free trial option that entices users into seeing the advantages of using the service and jump on board. As a result, this leads to quick initial traction and replicability of revenues, which makes this business model fairly predictable. Still, SaaS doesn’t rely on network effects to accelerate growth, thus it is very hard for so many SaaS startups to keep scaling beyond a certain point reaching saturation.
Marketplace business model is also very attractive. Yet, marketplaces rely on transaction fees, which generally range between 10% and 20%, hence they normally have lower margins compared to SaaS. In addition, because of the well-known chicken-and-egg problem that marketplaces face it is harder for this business model to scale initially. However, because of network effects marketplaces enjoy exponential growth in the long-term, while also creating lock-in effect for both demand and supply side, as they would naturally experience inferior results if they leave current network for a smaller one. Indeed, having great growth prospects and minimizing churn-rate proves to be an extremely successful model in the long-term for many startups such as Uber, Airbnb, Etsy etc.
SaaS + Marketplace = $
So what happens when you combine both models? Well, consider it as a hedging strategy where both models get better, while risk of failure is minimized. Just think about it – you offer a revenue-generating or cost-saving tool that many would like to try, while the marketplace brings your client an increasing number of leads over time. Essentially, you combine the quick initial traction and revenues of SaaS in the short-term with the lock-in effect of marketplaces. This approach has been reflected by Chris Dixon, Partner at Andreessen Horowitz, in his article:
Come for the tool, stay for the network.
This particularly holds true when you offer the SaaS for free and only charge a fee through the marketplace – something that Tomasz Tunguz, Partner at Redpoint Ventures, denotes as Free SaaS Enabled Marketplaces. A very good example of this is Wahanda. The company offers Wahanda Connect – a free, online software that lets salons and spas manage their appointments. In addition, these salons and spas can leverage this tool by joining Wahanda’s marketplace that boasts around 12,000 salons and spas where they get exposure to millions of potential customers.
Success Over Money
Although Free SaaS Enabled Marketplaces have a great go-to-market strategy and good long-term prospects, this approach does not offer same profit margins as SaaS alone. However, while this holds true for successful businesses that have reached a certain point of user acquisition and achieved considerable revenues, it is certainly not true for many instances where tackling competition or acquiring your initial user base is a lot harder and requires a more flexible approach. As a result, I believe that Free SaaS Enabled Marketplaces as a model ensures that your startup can easily reach this point of user acquisition in order to become profitable. So, you don’t get as much money as you would have with SaaS-only approach, but you will most likely be able to be cash-positive at some point.