How classifieds businesses can compete in the era of marketplaces?

In recent years Yelp, a crowd-sourced review forum for local businesses that started with restaurant reviews has experienced both rises and falls. Its story provides a great view of the classifieds’ industry in general.

Yelp started in the early 2000s and dominated their business by helping customers discover restaurants and adding value to customers in the form of reviews. At some points Google offered to acquire their company, however, Yelp refused.

Google offensive

In a few years, Google has scraped Yelp’s data, which actually led to a lawsuit. The legal battle lasts for 6 years and it did not stop Google to build its own local review offering service.

Infused with data from its other services like search (google reviews are displayed first during the search), maps (you can navigate to the location as well as use google street to see the place) and location data (you can see occupancy of the venue on a weekday) Google easily surpassed Yelp.

Currently, Google is rolling out ads on maps which could be the next big money maker.

Facebook Following

Facebook soon followed with its pages that allow restaurants to target their clientele with extreme precision.  You can see which of your friends have visited a particular restaurant. It also allows booking from the app as well as messaging the venue.

What is fascinating, Facebook is not using Google maps. At some point, they used Bing maps however currently, they seem to be using OpenStreetMap. Yelp, on the other hand, is using Google maps, its main competitor.

The results of the competition for discovery can be seen on the graph below:

Source: BrightLocal

One of the largest issues of Yelp was its reliance on the ad revenue. Today no classified platform can safely rely on ads revenue because Google and Facebook have more than 50% market share of the digital ads spend with Amazon playing catchup, and they are doing this globally.

This reliance on ads and listing revenue is a general issue of the whole classifieds’ industry. Majority of them launched in the 2000s when Google was just starting. In terms of goods value chain classifieds business covers only the discovery stage.

The major value adds to the users of these businesses were the discovery of goods and services. However, at this stage, they are directly competing with masters of discovery which are again Google and Facebook.

Other stages like communication, transaction, matching, distribution were left to happen either offline or are being covered by marketplaces like Airbnb or DoorDash (these marketplaces cover the majority of stages).

Source: a16z

Classifieds industry is being squeezed from two sides. This is not a new discovery as they have been battling this situation for many years. A report by Mitula Group indicates that 35% of online classifieds executives expect a change in 3-5 years to transaction based model with only 0,9% believing that CPC (cost-per-click) will still be relevant in the future.

Change to transactions is not easy as these companies have their whole operations, management and sales structured around ads and listings. Change is difficult because of the size of these companies (many of them a multimillion businesses) and it is easier to keep doing the same then to completely overhaul of the business model.

Yelp recognized that it has problems and started rolling out new features to cover more value stages like:

– Requesting a Quote – users can directly send bulk messages to businesses with questions about pricing availability etc.
– Reservations – Reservations can be made from the website itself
– Advance order – users can order food before they visit the venue

One of the largest moves for Yelp was a partnership with GrubHub, which is the largest food delivery service. In short, it allows users to order food directly to their homes. Interestingly, it turned out to be a great partnership. While Yelp has the reviews and user trust, GrubHub has the operational capabilities to deliver the food.

If these two companies would merge they would become a huge and significant marketplace – where all value stages would be covered: discovery, transaction and order fulfillment.

We are yet to see what comes out of this as new players like Booksy are already chipping off pieces from Yelps pie. It is a marketplace focused solely on hair salons which is a small section on Yelps platform.

Booksy’s value add is not only the discovery and reviews but also transactions as well as a software solution for hair salon management. This covers all value stages.

Classifieds 2.0

Transforming traditional ads based business model to transaction based might be challenging however it is not impossible. There are a couple of approaches that classifieds may use in order to compete with marketplaces and bring more value to users.

Partnerships

A low hanging fruit is partnerships with other companies that can fulfill other value stages that a traditional classified is lacking. This is a case of Yelp partnering with GrubHub to enable food ordering from their website. In the same way, OLX is partnering with local logistics companies on some markets (e.g. Philippines and Ukraine) to deliver the products to buyers. Transactions, in this case, are COD (cash on delivery) and are managed by a logistics company. Some classifieds partner with financing companies (in case of home and cars verticals).

Covering more value stages

Businesses can also build new functionalities to enhance the user experience. For instance, horizontal classifieds draw large audiences, however, they lack specialized product offering for specific categories. Building new features, services or adding data for particular categories like housing (e.g. average price in the neighborhood), automotive (financing options) or jobs (sending CVs, salary calculators) will strengthen the position of a classified.

Frauds are also a big problem with horizontal classifieds. Escrow services will reduce fraud and can be an additional revenue stream for the business. eBay offers escrow by partnering with Escrow.com.

Vertical classifieds already have their respective categories so their choice is to strengthen relationships with their audience by offering aftercare services. In the automobile category, after you buy a car, you need tires and a place to service the car (Mobile.de is already partnering with eBay parts). If you rent a flat, you probably need someone to move your stuff or fix things.

Going offline

A more difficult option is going offline. Airbnb is buying hotels, Opendoor is buying, fixing and reselling houses and flats in the US. Although Going offline is a very big investment and a change in a business model some semi-offline services may be offered. By using it’s brand and trust vertical classifieds can offer verified by classified listings.

Classified representatives may perform the inspection of cars or real estate (Airbnb did this by hiring photographers) depending on the vertical. Such listings can be sold at higher prices because of trust while a classified receives a transaction fee instead of a listing fee.

Reverse Classifieds

Traditionally classifieds start with a listing supply that is offered to its users to go through. However, users needs are changing they are more educated now and want to spend less time searching and analyzing the offerings.
This is a good opportunity to start with customers needs first and this is what Carwow in the UK does brilliantly. On the website, you can choose a type of car you would like to buy with some basic configuration. This data is sent to dealerships in the area that can bid with the best car offers and lowest prices. You do not need to spend time driving around dealerships, talking to salesmen and configuring your car each time.
Dealerships, on the other hand, get real leads and spend time on creating offers rather than chasing undecided customers. Carwow is charging a lead fee and although they do not disclose the exact amount.

This model can be replicated in many other categories and it is also what Yelp implemented with its Request a Quote feature so it can be built both as a standalone platform or integrated into existing platform giving users more options.

One last thing, Amazon

Although Amazon is in e-commerce space, its business reach is regularly expanding and someday it may present itself as a classifieds business. With operating margins of 60% and Amazons’ unlimited supply of cash just by announcing that they will move into space may cause some of the market giants stocks to go down.

Actually, they are already slowly moving into space. Recently they announced Home Services where you can order various home services (home repairs, cleaning, gardening) performed by professionals. Amazon is the one charging the end customer. Amazon does not show the fees they charge openly but service providers say that these are between 20 % for custom services and 10 % for recurring services. They can expand this to other fields as well.

We also should not forget about Alexa voice search. Although currently it’s focused on the products listed on Amazon it may also be able to find you a new home, car or a job.

Classifieds business is by no means in a bad shape but market changes happen swiftly and new entrants can arise from unexpected places. In order to stay on top, they need to constantly test new ideas and approach not to be caught off guard.