Just by tapping on a smartphone today you can summon a home cleaner via Handy, order groceries via Instacart, wash your clothes via Washio and get flowers via BloomThat. Fancy Hands will provide you with personal assistants. TaskRabbit will pick up a gift, Shyp will deliver it. You can even order chocolate chips cookies with Doughbies. There is a whole world of on-demand applications.
The obvious inspiration for all this is Uber, whose strategy was praised innovative and disruptive. Applying an “Uber for X” model has become remarkably popular during the last few years. Although the model may seem simple, it turned out not to be replicated so easy. The tech articles regularly report on startups that are struggling to grow with fair prices while satisfying customers and workers. Companies like Prim (laundry service), SpoonRocket (meal delivery), Homejoy (home cleaning) all shut down, with more or less headlines. Many on-demand companies have been plagued by lawsuits and competition.
So what if some industries just do not fit the Uber-like model? Or it’s all the fault of market unfamiliarity? The road is rocky and potentially fatal for any startup, but there are basic flaws in “Uber-like” model to consider before entering an on-demand market.
When Uber commenced their journey, taxi market in many cities was customer unfriendly with high, protected prices. This gave Uber an opportunity to compete for clients and become a leader. Transportation is a basic, high-frequency need, and many people take cars every day. So, as Uber hooked them once, it won a volume of repeated customers and benefited from the “network effect” – many customer and drivers brought better efficiency and allowed Uber to offset its costs.
How many other potential markets are the same? Not so many.
Let’s look at grocery shopping. Grocery for sure is a basic need, but is not something people purchase as frequently as they might require a ride. According to data from the Food Marketing Institute, in 2015 US consumers averaged just 1,5 trips to the supermarket per week.
The market for home cleaning service, as well as several other markets, differs from on-demand transportation in one crucial way. The exact same service is typically repeated, requiring develop trustful relationships between a customer and a worker. Moreover, customers invest time to communicate their preferences and home details to a cleaner, building so-called knowledge capital. Do both parties have a need in a platform to organize each individual cleanup and invest their time again and again?
Homejoy, an on-demand home cleaning app, wasn’t growing because clients and cleaners were taking their relationships off-platform: after an initial contact via the platform, they exchanged contact details and arranged further cleanups directly. According to Forbes, only 15-20 percent of customers came back to Homejoy within a month to arrange another cleanup.
Contrast this with on-demand transport where each transaction is unique and each time the counterparty is a stranger. Here the platform continues to provide security after the parties have been introduced.
A volume of Uber-like applications gave so many players in the arena that, naturally, the third- and fourth-place competitors have to struggle to be profitable. When Uber started conquering the market, its strategy was really disruptive and innovative comparing with the main competitor – a monopolistic taxi market.
Let’s now turn to the food delivery market which is predicted to be a consolidation of shutdowns in 2016.
According to CB Insights, on-demand food tech start-ups raised $5.7 billion globally in 2015, an increase of 152% from 2014, making the market one of the most competitive and overcrowded. This means that many food delivery startups offer the same things by the same workers for the same customers. No wonder, that some companies, such as SpoonRocket or Instacart, left the game or changed their strategies.
To make matters even worse for on-demand startups, the giants are moving in. There are two new entrants in food delivery market: UberEats and Amazon which both have established driver and logistics networks. The two can take a sizeable bite of the market.
There is also a threat from heavily founded competitors who can burn a lot of cash to cut their rivals out of the market. That was one of the reasons why Lavanda, an on-demand laundry service, began to falter and finally changed its business model.
What is doubtless when entering a competitive market is that a new startup should differ from existing players, and fairly evaluate its prospects to deliver a product different enough from the existing on the market.
The nature of on-demand model is based on convenience and low prices – as low as an average citizen can spend for this convenience, and as low as to stay more attractive than competitors. Moreover, on-demand startups argue that as they grow, they will offer high-quality service at even lower mass-market prices. But that not always happens: prices are rising, service weakens. From the first sight it’s logical – you need to pay for the convenience. But paying extra for convenience is not really innovative – it’s how the world usually works, doesn’t it?
So, employing an Uber-like model, companies automatically agree to work with low margins. Such strategy definitely tends to work in the short term. But for long-term success it’s better to build a safety net.
How Uber achieved mass-market prices and stayed profitable? Firstly, Uber began as a luxury service and even now usually starts acquiring new markets with its premium Uber Black. Only further the company rolls out its cheaper services (UberX and UberPOOl). So the magic of Uber is that it uses its growth to keep cutting its prices and expand its service. Secondly, although Uber margins are thin, it does so many rides in so many markets that the business ultimately looks viable. And finally, as a global leader, Uber receives global funding.
For a long-term success companies have to pay attention to 2 dimensions: either ensure repetitive and high-frequency use, or enrich their offering with high-margin services to cover all the low-margin and marketing costs.
For customer-oriented services, quality control can be a challenge when supervisor is a software. The efficiency of the Uber-like companies is typically based on the self-employed status of their workers, who classified as contractors rather than employees. This was called a 1099 economy.
The big advantage of the “1099 economy” is that startups do not need to bear insurance and other costs applicable for traditional employees that can save up to 30% on labor costs. But there is one pitfall: as workers are not classified as employees, companies are not legally allowed to provide trainings or guidelines of how to perform their work. As a result, near-perfect performance is hard to achieve.
That is another point that makes Uber’s model work for Uber but not necessarily for other companies. Uber doesn’t train its drivers as driving is one of the few skills that most people are taught in a relatively standardized way, automatically preparing them to work for Uber without any training.
By contrast, house-cleaning startups require a high level of trainings for cleaners to do their job properly. Customer dissatisfaction and followed worker misclassification lawsuits was a main reason why Homejoy, a house cleaning startup, shut down.
Instacart, a grocery delivery company, fell into the same trap – the average man hasn’t been taught how to identify a beefsteak tomato and when avocado is ripe. To stay the course, Instacart hired some of its in-store workers as employees.
Quality is not something that can be enabled by technology, people need to be trained and coached on a regular basis. If a company continuously receives bad reviews, it would probably be better to sacrifice labor cost, change an approach and hire employees to train them and control their quality.
From the mentioned above facts it may seem that on-demand market is fully-packed and, what is more, unpromising. But this is not exactly so. In the article I aimed to point out that an Uber-like model doesn’t fit any idea and business. And sticking a label “on-demand” doesn’t make an application an “Uber for X”. There are many other ways on-demand business can be configured, from how prices are set to whether independent contractors or official employees deliver the service. Each company should figure out what will work for its success.
Luxe, an on-demand valet parking service, started as an “Uber for parking” and in the beginning had plenty to recommend it. After struggling with some challenges, losing money and customers, the company decided to shift away from the classic on-demand model to scheduled parking. The application induces drivers to inform what time they want their car back, or request the car some time ahead. Scheduled service made a lot of business sense as Luxe can more easily predict demand and cut costs.
If you still aim to choose an Uber’s model as a base for the on-demand solution you can use a check-list below to briefly evaluate how your idea fit the Uber-like approach.