What Service Marketplaces Can Learn From Sephora
Marketplaces are fascinating. They serve a deceptively simple purposeâââthe transaction of goods or services from one hand to anotherâââbut are hard to scale due to geographical limitations. Nowadays, technology has enabled marketplaces to scale faster, unconstrained by space or time.
However, tech-enabled marketplaces still face many roadblocks, especially those allowing consumers to book services like cleaning, haircuts, and even dining. Some well-known companies come to mind: TaskRabbit, Handy, and OpenTable.
More examples of these types of service marketplaces, courtesy of Huffington Post:Â
Transportation: black cars, rideshares, buses, parking, private jets, bikesand rental cars
Home Services: veterinarians, cleaners, baby sitters, handymen, movers,auto mechanics, locksmiths, laundry, errands, dog walkers
Delivery & Logistics: package delivery, messengers
Hospitality: hotel rooms, bed and breakfasts, and quiet spaces
Food & Beverage: groceries, fast food, and booze
Dining & Drinks: reservations, payments
Health & Beauty: massages, beauty services
Goods & Services: creative goods and creative services
Platforms offering un-commoditized services face a unique challenge thatâs less of a concern for logistics companies like Uber or Doordash that are offering commoditized services. Un-commoditized services mean that quality is highly differentiated among providers. With Uber or DoorDash, drivers are not professionals; the service that you get is fairly standard. The platform sets the price on behalf of the provider. The priority then is on the speed and ease with which you can get a car or delivery, and thatâs what technology can optimize. Logistics and technology go hand in hand.
When you have a marketplace for professional services, however, the convenience of the service pales in comparison to quality. Suppliers of the service set their own prices on the platform because the quality of the service is highly differentiated. Itâs not a pure logistics play anymore.
How does Sephora come into the picture? A multi-channel beauty retailer, it bears little resemblance to a company like TaskRabbit at first glance. Upon further inspection, however, they are both marketplaces offering un-commiditized products at various price points. A specialty marketplace has much to learn from a successful enterprise like Sephora that holds a 20% stake in the ~$20B cosmetics retailing market.
The First Step: Owning Discovery
This is what technology-enabled marketplaces excel at. They can hold unlimited inventory in the form of listings for professional services. A customer using the marketplace can search for a cleaner, hairdresser, or handyman anywhere around the world, for any time of appointment.
It comes as no surprise that an important use case for such platforms, then, is discovery. Thatâs the easy part. Retention is much harder. Once a consumer has found her favorite yoga studio after making a reservation through MindBody, whatâs the incentive for her to make a future appointment through MindBody, instead of directly contacting the yoga studio?
Similarly, Sephora carries few exclusive products. It shares much of the same inventory as other retailers. Howâs Sephora preventing customers from buying the same product on Amazon or even the own product brandâs website?
There are 3 ways to increase platform stickiness and retain the first-time customer so they book through your platform again and again.
Some marketplaces lend themselves to network effects better than others, but with a core base of like-minded customers, itâd be foolish to not leverage the network of users to create more value.
Sephora, for example, has smartly leveraged the social aspects of the beauty community to create product reviews on its website. It has launched BeautyTalk, a place where customers can share product reviews, engage in Q&A, and offer advice to each other. Getting customers engaged with each other is the key.
This community makes the marketplace extremely sticky. Online marketplaces, especially those selling niche products, should take advantage of its customer base to create value from this critical mass of users.
Rewarding loyal users can minimize platform churn. Giving rewards for purchases, therefore, is a worthwhile investment. Sephora, for example, invests in customer rewards to keep purchases going. Consumers enrolled in the Beauty Insider Program rack up points with each dollar of purchase and unlock exclusive levels (âVIBâ by spending >$350/year and âVIB Rougeâ by spending >$1,000/year).
Although unlocking VIB status seems like a meaningless achievement placed on an arbitrary amount of spend, it serves to âgamifyâ the experience. Consumers are addicted to purchasing through the platform and racking up points. With loyalty rewards, the opportunity costs of abandoning the platform are higher.
Branding alone does not a good business make, but since a company directly monopolizes its brand, itâs important to take advantage of this opportunity.
Itâs no surprise to beauty fanatics that Sephora cultivates a strong brand not just through its highly selective inventory but also by investing in a refined in-store experience. The assortment of upscale brands and trendy store design give stores a more exclusive luster than drugstores. And yet Sephora feels more accessible than a department store counter because shoppers can test out every single product by themselves. Customers approach buying beauty products as a treasure hunt, and trips to Sephora fulfill their appetites.
Because a company has complete control over its own brand, itâs a powerful way to differentiate the platform or marketplace from competitors. A marketplace offering thousands of listings for professional services shouldnât get lost in thousands of distinct brands. Instead, as a unified platform, itâs responsible for creating a single image that will integrate and represent the providers listed.
Service marketplaces offering un-commoditized products have to be analyzed differently than logistics companies like Uber. In many ways, they are similar to a retailer like Sephora that offers highly-differentiated products. Sephora and its success offers valuable lessons for these marketplaces on cultivating a loyal customer base. For a technology-enabled marketplace looking to reduce churn, a key part of growth will be looking outside of Silicon Valley for models to learn from.