#08 9 Ways for Marketplace Startups to Extend Runway
A not-so dirty secret in building marketplaces is that once you’ve established yourself as creating value for buyers and sellers there are many additional revenue streams you can create from your captive audience. Some of these revenue-driving tactics can also be effective at the earliest stages, and even more helpful given running out of cash is an existential risk. I’m a fan of all of Paul Graham’s essays on building startups, and particularly love this one: How Not to Die. TLDR: if you “can just avoid dying, you get rich” and one of the most common causes of startup death is running out of money. That’s easier said than done. Marketplaces at the seed stage can take a little longer to inflect because you need to build both supply and demand, so extending runway and giving your startup more time to hit critical mass can be even more important. Experimenting with some of these ideas may help you generate short term cash and help your startup live to fight another day. Here are a few examples from companies we’ve invested in:
Increase your take rate from sellers: In the early days of building a marketplace you are often begging customers and sellers to come on board. As a result, your initial take rate may be artificially low. While a 1-2% increase may not seem like a lot when you’re small, those dollars add up over time and as you grow
Add a surcharge for buyers: This isn’t that different from point 1, it’s just presented in a different way. If you’ve ever looked closely at your Uber or Instacart receipt you will see a bunch of surcharges that are a significant % of your order value. This is effectively increasing your take rate, but potentially a more palatable way to introduce this fee to buyers and sellers.
Shipping: Even Amazon has pulled away from shipping always being free. If your order doesn’t meet a certain threshold and you want something delivered super fast / same day, that will cost you $2.99. There are some categories (bulky goods) where customers expect to pay for shipping, so don’t be afraid to charge them. We have examples in our portfolio of companies that have priced shipping for customers so that it not only covers their costs, but is actually a profit center.
Advertising: Can you charge sellers for getting priority placement in search results or advertising their listings in your emails? Amazon’s product ads business is now $56B and Instacart’s is approaching $1B.
Marketing: In B2B marketplaces, sometimes the seller does not have their own eCommerce presence and you can get marketing $$s from them to spend on paid search to sell their inventory on your site. We’ve seen some scrappy founders outsource this service and add a management fee on top to turn this into a revenue stream.
Membership: In spaces where distributors and trade agents still are playing a significant role, buyers are used to paying a “membership” fee of sorts to get access to a catalog of goods. Your digital catalog is likely a much better experience and you may be able to charge a membership fee akin to the distributors you are displacing.
Financing: We’ve written before about the importance of embedded fintech in B2B marketplaces. Even if you don’t build the embedded fintech software yourself, you can negotiate partnerships so that you either get a recurring % of revenues or a lead gen fee for bringing new business to partners.
SaaS: This is the holy grail. Ideally you find ways to embed software into your vendors’ processes to become their “operating system”. Examples of business processes we’ve seen turn into SaaS worthy products include inventory management, invoice management, and quality control software. While you might start off giving away this software for free, at some point, when you’ve built enough features a nice SaaS revenue stream is a good way to smooth out revenues, especially for marketplaces with seasonality.
Data as a Service: Many of the categories we’re investing in previously have had no online incumbent. As a result, capturing transactions online creates a new proprietary dataset that can either be sold as a service to players in the marketplace (e.g., pricing recommendations for sellers) or to other parties that are looking for data advantages to help them gain insight into a space (e.g., hedge funds).
If you’re a marketplace founder that’s figured out other smart ways to extend runway beyond transactional revenue, let us know in the comments! Or reach out to us at contact@snak.vc - perhaps we can feature you in a subsequent blog post.
Let’s Meet in Person
We’re on the move. Here are a few events we will be at in the coming weeks.
Feb 26 | Austin: We will be at the Everything Marketplaces Meetup today in Austin and would love to connect with founders there: https://lu.ma/6c2xfd91
March 4 | Chicago: We are speaking at an Executives Club of Chicago event on investing in women entrepreneurs - you can register here
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