Kaodim and its marketplace flaw - what we can learn from it

By now, most would know Kaodim, the home services marketplace startup announced it will close its doors from 1 Jul 2022 in a blog post. Founded in 2014, the company has raised USD17.6 mil and has presence in 4 countries (Malaysia, Singapore, Indonesia, Philippines). The company attributed its decision to close its doors due to the prolonged pandemic and inflation. There could be other various reasons for startups and businesses to call it a day - funding could have dried up, founders burned out or fell apart, outcompeted by competitors etc. Macro factors definitely impacted its business, but fundamentally, its business model from the very beginning had flaws.

External funding gives a company the runway to test out and validate its business model and scale rapidly its acquisition of customers. Funding also gives them the buffer to take a beating from these flaws, until it can be resolved. However, the inadvertent consequence of fundraising is it could artificially prolong an idea that might not have been viable at the outset. Nothing against fundraising btw.

This post zooms into the fundamental issue with its marketplace model and a framework to address it.

The micro problem

Done right, a successful marketplace is highly lucrative with strong economic moat. To begin, let’s define a marketplace - a platform that matches buyers and sellers and typically consists of these 3 parties. The main function of a marketplace is for the purpose of product/service discovery and price clearing (pre-transaction value) - a buyer seeking for suppliers/sellers to complete their demand at the right price. The platform will then monetise by capturing some of the value created through a commission.

In the case of Kaodim and players in the similar space, the inherent problem with their marketplace model, which is frequently pointed out is that participants could take their transactions off the platform easily, depriving the platform of monetising the transactions. That said, Kaodim’s revenue in Malaysia seemed decent even during the pandemic 2020 year with growth recorded so they might have been able to crack this problem or found alternative monetisation methods (whether it was a sustainable approach or not, it’s altogether another topic).

Marketplace challenges - capturing value creation

The downside with a marketplace is there’s always an incentive for buyers and sellers to circumvent the platform and take the transaction offline once the matching/discovery is done. No one likes the idea of paying a middleman. This is even more prevalent for relationship-driven services and products/services with high price points. A simple monetisation method to capture value creation from platform participants is through charging a listing fee, but there is only so much revenue one can make from it.

Platform monetisation by capturing post-transaction value creation

Arguably, the success of most marketplaces occurs when the platforms are able to design most of the value creation at the post-transaction stage and subsequently capture value for themselves and monetising at this stage. These platforms engineered the post-transaction experience such that it is deemed valuable to the participants to complete their transactions on the platform so much so that they are willing to pay the transaction fee/commission. That said, there are marketplaces that thrive purely from mostly providing pre-transaction (ie. Craigslist), but they are more of a directory than a marketplace.

In the context of home services marketplace, it’s difficult to capture post-transaction value creation after the matching is done - too often we hear stories of the service providers offering discounts and incentives to customers to complete the transaction off the platform. A service provider shared that Kaodim was helpful for their business in generating new leads but at the disadvantage of Kaodim - the recurring revenue from subsequent transactions could not be captured by the platform.

What are the value-adds at the post-transaction stage that helps with monetisation? For one, trust and safety. Sellers are able to build their reputation and profile through customer reviews which further enhance their business on the platform. Background checks, insurance etc. give buyers and sellers peace of mind or recourse in case a transaction goes wrong. For large ticket items, an escrow is a big value-add knowing that the funds are safely held by a third party for the buyers, and for the sellers, knowing that the payment will be made when products/services are delivered. Workflow tools for example on freelance sites that track the service progress and billing purposes make it a lot easier for both the service providers and customers to manage the tasks on the platform transparently.

The above is a general framework to evaluate a marketplace idea. Granted, each marketplace and its corresponding industry is unique (eg. ride-hailing with a 4-sided marketplace). However, by observing how successful marketplaces built their services and value creation ‘traps’, it will help with reducing gray market transactions (ie. off-platform transactions), increase the value creation on the platform and ultimately extracting the highest economic returns (high commission!) from the transactions on the marketplace.

If you are building a marketplace or planning to build one, do read up writings from Sangeet Paul Choudary (Medium here, personal site here), a thought leader in platform building strategies.

Have you seen other marketplaces fail? What were the causes?