Service Marketplaces: The “Mother of Decacorns?”
We believe there is a massive opportunity for startups building the next generation of service marketplaces, bringing quality and consistency to low frequency, high complexity consumer service categories.
Published July 24, 2019
India’s fragmented service sector is made up of countless small, unbranded service providers who often fall short on service quality and customer expectation because they are stuck in a vicious loop.
Think of all those mom-and-pop hotels, car repair shops or standalone private hospitals dotted across India: lack of brand salience throttles the demand funnel, leading to lower asset utilization that, in turn, limits their ability to invest in customer experience. Meanwhile, tech-savvy millennial consumers are earning more, spending more and demanding more, causing the ‘service gap’ to stretch wider still.
Services account for 54% of India’s GDP and provide employment to 34% of the employed workforce. It is a large sector that has seen some disruption but has wide scope for much more. In the last decade, several tech-led marketplaces for high frequency, low complexity services, such as transportation and food delivery, have emerged, offering a reliable, consistent and delightful customer experience. We believe there is a multi-billion dollar opportunity for start-ups that build the next generation of services marketplaces, bringing quality and consistency to low frequency, high complexity consumer service categories.
The shift toward quality
In Western markets, the consolidation of the service supply ecosystem, spanning many decades, gave rise to large, professionally-run companies across categories, ranging from hotels to logistics, with a focus on quality and consistency. India is way behind on that curve. For example, only 30% hotel rooms in India are branded vs. 70% in the US.
While there is a secular shift towards organizing supply, we believe that technology-led marketplaces will catalyse a “virtual consolidation” of India’s services ecosystem much faster – which will help SMBs break out of that vicious loop. Service providers will remain fragmented for several years to come, but a marketplace layer will help standardize quality and consistency to meet customer expectations.
In the last five years, we have already seen a glimpse of how meaningfully marketplaces can transform the underlying service product. Today, you could get into any Ola car, or walk into any OYO hotel, or order handyman services from UrbanClap blindfolded and still expect a baseline consistency in service.
Evolution of India’s Service Marketplaces (SM)
To identify the next set of opportunities, let us examine the underpinnings of India’s service marketplace evolution. There are two factors that have influenced the sequence of services marketplace maturity across categories: a) frequency of use case and b) complexity of service being offered.
High frequency and low complexity service categories, such as transportation and food delivery services, were most ripe for disruption. High frequency engenders habit formation, translating into user stickiness and lower customer acquisition cost. Low complexity of service allows for easier standardization and faster onboarding of supply. Scaling both demand and supply was rather frictionless. Companies like Ola and Zomato benefited from these characteristics of their respective categories. The sharp rise in mobile internet users in the post Jio era provided additional tailwinds.
These early SMs played a crucial role in shaping both consumer behaviour and preference by serving up a hassle-free service experience, through an app, to a growing wave of digitally-savvy customers. As India’s consumers got hooked to the convenience of high frequency SMs, they started craving for similar offerings in other categories that were either low frequency or high complexity or both.
Higher complexity use cases necessitated tighter control over supply, giving rise to the “managed marketplace” model. Such marketplaces spruce up existing supply without too much operational control. OYO was the pioneer of this phenomenon. OYO started off as a booking platform that enabled unbranded ‘no star’ hotels to sell spare rooms. Lack of quality and consistency led OYO to morph into a model that brought many small hotels under the OYO brand and required some investment in renovations, training and property management.
In hindsight, the journey towards more complex services was the most precarious phase of SM evolution. Absence of large global comparables made it harder for start-ups to mobilize capital and resources early on. Thankfully, OYO’s shining success enabled the ecosystem to cross this chasm.
The next iteration: low frequency + high complexity
We believe India is now entering the next phase of SM evolution as technology rapidly permeates into the hardest use cases – low frequency and high complexity. Historically, such categories have presented two key challenges for SMs – high customer acquisition cost due to low frequency and poor scalability of supply due to service complexity.
We think the next generation of SMs will go a step deeper into supply, and in some instances even take over operational control, akin to a professional services company. Audacious moves such as OYO Townhouse or student housing marketplace Stanza Living to take either full ownership or full control over supply, may become the norm. Imagine a marketplace that could organize a wedding, end-to-end, or one that could buy you a home/car or pick your car for an overdue service. Such SMs will need to invest in supply, technology-led operations and staff training more than their predecessors. HomeLane, for example, has invested in the technology stack that connects consumers, designers, installers and manufacturers to provide a high quality consumer experience in a highly unorganized interiors industry. Teams that combine technology talent with industry experience could be a winning formula given the operational intensity involved.
To avoid the user acquisition treadmill, SMs could harness wholesale demand channels and focus on building a strong brand, similar to consumer product companies, through traditional / non-digital channels. GoMechanic, for example, has tied up with insurance companies to help drive customers to repair shops across their platform. Cars24, a used car marketplace for consumers and dealers, is harnessing ATL channels, including TV, to build consumer recall. SMs may even consider piggybacking on large distribution platforms such as Flipkart, Ola and OYO vs. building proprietary channels.
Moving deeper into the supply chain is a higher cost, higher-friction approach. That said, the first generation of SMs have helped pave the way for more complex models that will follow. They’ve not only helped shape consumer behaviour and raised the bar on service standards, they’ve also cultivated a new talent pool that is raring to take on new challenges (some of the next-gen SM start-ups have either been founded by, or have core team members from India’s marketplace ‘mafia’). Private capital markets, meanwhile, are now far more open minded to fund such ideas, thanks to the value created by SMs in India, and globally, in the last decade.
We believe that the stars are aligning for the next generation of service marketplaces. We know the ‘why now’. We’re looking for what’s next.
Sequoia India will be hosting a discussion with industry experts to talk about the future of Service Marketplaces. Some of the questions we will cover include:
- How do you identify a category that is ripe for a marketplace disruption? What are some of the characteristics that make a category conducive for a marketplace play?
- What are the business model choices for a company embarking on a marketplace journey e.g., channels to use for supply and customer acquisition, pricing strategy, impact of frequency of use case on business strategy?
- What are the early challenges of scaling a services marketplace – cold start problem, single vs. multi-city, hiring etc.?
- For people who are looking to start, what next? What is the next sector where we would see a multibillion dollar value creation?