SaaS #1 | Marketplaces as a way of monetizing Network Effects
A few days ago, I pointed you, my dear reader to a wonderful breakdown of Network effects by James Currier.
Over the last few days, I have had some interesting conversations on this topic. Here is a point of view:
There was a time when great execution and software were half the battle won. Not anymore.
Today, the Software itself has become a commodity. There are enough off the shelf APIs and services that even with barely competent people, you can actually put together a pretty decent system up quickly.
So, now, we see the differentiators increasingly be - 1) Funnel (and its width or depth), 2) Conversions (or new users added), 3) Stickiness of Revenues (e.g. long term contracts), 4) Growth in ARPU.
Creating great platforms is no longer enough. Its the ecosystem and being the solution of least inertia to your users that will differentiate winners from also-rans.
Network effects are the sources of moat around your business. However, the challenge today is not to not have competitors, it is to be making money.
Marketplaces seem to be the most effective monetization tool for network effects.
Now, you may want to ask wtf am I talking about. Am I confusing Slack with Amazon? Not really. Read on.
Let’s take the example of Zendesk1.
It has multiple marketplaces (integrations and apps, system integrators, design, education)
You can buy apps and integrations to run on top of your Zendesk instances.
You can hire SIs to put it together for you.
You can buy design templates and creative assets to personalize the solution.
You can hire partners who will help on-board and train your company in using Zendesk effectively
Revenue split is 85/15 ( I think, could be wrong).
So, whatever you may need to do, Zendesk has made it very easy for you to find people who can help you with it.
It will be insane for Zendesk to try and provide all of these solutions in-house and others can make a buck providing these add ons. Why not?
And a lot of these services are free or subsidized by Zendesk.
So, Zendesk has created a great platform, built an ecosystem around it, and has built a marketplace where people who are spending time an effort as buyers or suppliers can get more for their investments (time, effort, money, skill, opportunity).
This is the moat, this is what takes time to build. This is what makes or breaks a SaaS story today. They effectively have 4 meshed marketplaces that are like rings of fortifications around their core business. Sure I can copy Zendesk. But I can’t shorten the time needed to build the ecosystem2.
In the meanwhile, these marketplaces are functioning as black holes, absorbing apps, SIs and talent in the ecosystem - and each creating value.
Remember Metcalfe’s Law? Value of network of n nodes is proportional to n*log(n).
Now bring that insight to the case of Zendesk. How do you not succeed?
Another great example of such a company is Adobe. Maybe another time though.
Actually I can - by throwing enough money at it. Thankfully, the cost of brute forcing an ecosystem has remained and continues to remain well above the crazy sizes of rounds of the day. It is safe to assume a low probability for a VC funding someone with this strategy IMO. I could be wrong.