The GFC is widely seen as the birth hour of the Sharing Economy. Now we have covid ... a far bigger downturn! Would anyone not agree that it will give the Sharing Economy an even greater boost?
And this time around, it comes at an even more interesting time for the Sharing Economy. After more than 10 years, startups and entrepreneurs are gaining insights into how to make Sharing Economy Apps and business models work.
How so? We have the first wave of mega-IPOs of respective companies. Uber has had its IPO in 2019 after 10 years, Airbnb has confidentially filed (as has DoorDash) and expected to go public after the US elections in November. WeWork thought they were there but they were not quite. (They are still valued as a multi-billion dollar company but not the valuation they were aiming for). Their competitor IWG is doing well in the co-working space and has been publicly listed for a long time. These are just a few of the largest examples.
There were probably many thousands of startups who developed a sharing economy business. Crunchbase lists 807 companies in that space (and over 1,072 founders). But the real number is far higher - I alone have been contacted by probably over 200 people through my blog on ideas just on the Sharing Economy. Many may have started developing an App (or the idea) but never got as far as to make a business (with revenues) out of it.
Here’s the good news!
It’s not great news that so many haven’t made it. But there is also good news:
- Firstly, the observation that it’s actually still early days in the field of the Sharing Economy which means that there are many opportunities out there for grabs.
- Secondly, we now have a few companies with multi-billion dollar valuations which shows that there is nothing fundamentally wrong with the ideas.
- And thirdly, we now have some success stories that we can learn (and borrow ideas) from. This can help other innovators more than anything else to be successful themselves without wasting years going down the wrong path.
What is the Sharing Economy?
Most widely the Sharing Economy is seen as sharing assets and/or services enabled by a digital platform. Oddly enough, you have to take the verb “sharing” not literally.
There are many other Apps and businesses out there across a wide range of industries far less known than the big players.
Examples are: Transportation platforms, Urban mobility platforms, Vehicle / ride sharing, Mobility-as-a-service, Food / goods delivery platforms, Service sharing platforms, Home sharing platforms, Things-on-the-go sharing, Goods sharing, Real estate co-use, Office sharing & services, Co-living, Space sharing, Storage space sharing, Parking space sharing, Remote working platforms - just to mention a few.
But that’s not all.
Within the same industry / asset class there are many different approaches competing directly and indirectly. We have a huge ecosystem of similar Apps and business models trying to get a share in the same or similar markets.
Let’s look at transport. There are (just to name a few examples):
- Urban micro-mobility platforms: Escooters, Ebikes, etc. (Jump, Lime, etc)
- Ride hailing: Uber, Lyft, Taxi-hailing Apps, etc
- Ride sharing: BlablaCar
- Vehicle sharing: Zipcar, Turo, Car Next Door
- Transport / Mobility-as-a-service: Uber Transit, Whim and others
- Food / goods delivery platforms: Deliveroo, DoorDash
- Soon to come: autonomous vehicles, e.g. Waymo
- This still excludes tons of other platforms within transport such as sharing of RVs, long distance bus travel (Flixbus) and many others yet
All of these are playing in the field of personal urban transportation space.
We can find similar endeavours and approaches for real estate / space (office / home / storage / etc), for goods and many other assets and services.
Why did so many end up on the wrong track?
At TedxSydney (2010) Rachel Botsman, the author of the book “The Rise Of Collaborative Consumption” famously asked, “How many of you own a power drill?” Nearly everyone raised their hand. “That power drill will be used around 12 to 15 minutes in its entire lifetime,” Botsman continued with mock exasperation. “It’s kind of ridiculous, isn’t it? Because what you need is the hole, not the drill.”
It then went on to argue that sharing underutilised items with people in the neighbourhood is a better approach. A strong argument for Sharing Economy platforms, it seemed.
The underutilised power drill became the meme cited frequently by entrepreneurs. But it contains over-simplifications. And some entrepreneurs may have jumped on the opportunity choosing the wrong approach (within which they may have experimented but without success).
What exactly is the Customer Value Proposition (CVP)?
There are a number of complexities involved. The first one is to try to understand what customers / users really want. Do they really want a hole when they use a drill?
I will argue that this is not the case.
Bear with me! This is not a smarty-pants kind of point that I am trying to drive home here. There will be important conclusions coming out of this discussion for Sharing Economy platforms.
I think that the premise that “people want a hole” is incorrect in a way that actually gives important clues about the business model.
They want the hole to perform a function. That might be to hold the screws to hang a picture on, a lamp, a TV mounting bracket, curtains or something else.
Let’s say you want to drill holes to hang up curtains. You need more than the drill. You will need all sorts of other equipment and materials, maybe an extension cord, a ladder, potentially a stud finder and more.
You will also need consumable materials, such as plug anchors, screws and the right drill bits. Then you need to make sure that all these come in the right diameter matching to the item that you want to mount to the wall (isn’t this one of the biggest problems?). You also need the drill bit for the right type of material (ever used a wood drill bit to drill into concrete?).
Ok, this is not a DIY course.
But even this simple example highlights an important set of questions:
- Who is “responsible” for providing the complementary tools and materials required to make use of the drill?
- While the drill can be reused, the materials involved (screws, plugs, etc) are consumables. So, who will pay for these?
- If the owner of the drill is supposed to provide these - how much choice does s/he need to provide? What if s/he does not have the matching consumables?
Does anyone think of Airbnb or WeWork right now? Because they have been facing the exact same type of questions:
- Airbnb has requirements that hosts provide at least the basic amenities (and I have to inform you that “toilet paper” is topping the list. And you thought that my drill bit example was too profane for entrepreneurs like us, didn’t you? It’s not too profane for Airbnb).
- Be sure that if as an entrepreneur you want participants to sort these kinds of things out themselves, you’re setting yourself up for failure.
- Airbnb has gone over to list all amenities for each listing. Some have several dozen amenities, from coffee machines to hair dryers (the equivalent to the ladder, the screw, drill bits, etc required to make a drilling job work).
- But that’s just about the tip of the iceberg. Airbnb has several layers of requirements & recommendations for hosts, e.g. basic behavioural requirements, hospitality standards with over a hundred resources for hosts, responsible hosting requirements and more.
This brief discussion highlights some of the most basic questions that every single sharing economy platform needs to answer.
Coming back to our hero, the drill, let’s say we have sorted out all the problems around the “amenities” (or the complementary “amenities” required) in one way or the other.
Another challenge that Sharing Economy business models face is that of the “logistics” (it’s more than “logistics” but let’s keep it simple for now).
How do you get the drill from the owner to the user? I guess you can't ask the owner to deliver it to the user (at least that would be our first thought, right?).
So, we could ask the user to pick it up from the owner. That works perfectly, right? Well, that is until it’s time to return it. When the prospective user wants to get a job done, they may have just enough motivation to find an owner (this is not even certain), drive there to pick it up. But when the job’s done, … there is basically no motivation for returning the item (unless there are some consequences).
Is anyone thinking of Uber right now?
Well, there are different types of car sharing platforms, e.g.:
- Turo connects car owners with car renters. Turo initially had the renter pick up the car from the owner and return it after the agreed rental duration. Replace “car” with “drill” and you may have just “solved” our problem - except you haven’t. Because in recent years, Turo is offering to deliver the car(!), e.g. to the airport, etc.
- Zipcar: Well, here the firm usually owns the cars and has fixed parking spots in areas of anticipated high demand. The analogy would be that the tool platform company has a tool shed/crib (or maybe a postal locker?) in high-demand areas from which people can pick up the drill and the other bits.
- Car Next Door combines both ideas in that they have participant-owned cars in dedicated parking spots for rental. This would be like owners putting their drill into defined postal lockers, say, for others to pick it up and drop it back there.
- Then there are micro-mobility platforms (bikes, scooters) where you pickup and drop-off the item wherever you like (within reason). The equivalent would be for the drill to be picked up somewhere and dropped off elsewhere. It would need to have a secure box with non removable GPS tracking (this would obviously exclude all the additional parts being provided which is a problem).
- Then there is Uber: Here the owner brings the car to the user but not to drop the car off. They even take the user onboard, drive them to their desired destination, drop them off and take the car back home. No efforts involved for the user … Um, you may have never thought about Uber in this way, right? We will come to the drill analogy in a moment.
We have just discussed two aspects:
- The ownership model and
- the distribution model of the shared asset (which are linked to each other).
- We have skipped things like servicing, maintenance, etc of the asset.
We always hear that Uber is a capex-light company and that’s why they scaled so fast. Not so fast with such conclusions, I dare say. That’s not the only explanation. Turo also has no capex involved. Zipcar also has long gone over to using leased cars (i.e., low capex), Car Next Door is also capex light.
The asset ownership model is very important but it’s not the only explanation why some sharing platforms work better and have scaled faster than others.
Yes, I need you to hold this thought because it brings us to our next important concept before we close the thought.
Search, transaction and post-transaction costs
What we called “logistics” is part of wider considerations.
Economically speaking, the real-world problems that we just discussed fall into what falls under “search, transaction and post-transaction costs”. Typically, we are not talking about real costs, rather some sort of efforts or other barriers to joining or using the platform.
There are all sorts of barriers that could deter the user from joining or using the sharing platforms. Just a couple of thoughts:
- Search costs: When you want to borrow someone’s drill, you need to first find the person on the platform; make sure it's the right type of drill (and the related parts).
- Transaction costs: On the agreed day, you need to drive there and pick it up. There are lots of barriers involved in the picking up: e.g. do you ring their door? Will they be there? Or do you pick it up from a locked place on their property? Which place, how do you locate it? Is it safe? Would you really pick it up from their backyard? Lot’s of minor barriers that add up.
- There are also barriers for the owner. Some are similar, others differ. Will they get their stuff back? When? In which condition? You name it.
Uber has solved many of these problems: All the user needs to do is to enter their destinations. They will immediately see the estimated price, a duration, know when the driver will be there, pay automatically, etc. It solves many search, transaction cost considerations. There’s more involved which is covered in the Uber premium resources. I find search / transaction costs so significant that I have covered them in all my premium resources on platform businesses.
At this point, I am skipping the entire discussion around post-transaction costs, which includes things like damages, accidents, safety/security issues, etc.
But good news: We are inching towards a solution (despite or maybe because we are adding more and more challenges)!
The solution: Asset + Service sharing platforms?
From my very first coverings of the Sharing Economy, I have pointed out that companies like Uber and Airbnb are not just asset sharing platforms. They are asset + service sharing platforms.
This small difference makes a big difference - at least if you want to succeed.
The “right” solution for our problem of sharing a drill, it turns out, is to provide not the drill but the service of the owner bringing the drill to the user, drilling the hole, inserting the plug/screw, hanging up the curtain, cleaning up the mess and taking the drill back home.
Well, as you know, it’s also called a service “sharing” platform. See below from TaskRabbit. There are many DIY (and other services) sharing platforms.
This approach solves a lot of problems, related to search / transaction / post-transaction costs, asset ownership, asset distribution and management, etc.
It does not mean this is the only solution but - at least for now - it is one that has scaled faster than sharing tools or other durable goods. It comes at a higher cost than borrowing a drill which means the opportunity is still up there for someone to solve.
Who would have thought 10 years ago that the solution to our problem is so different from the premise based on which we embarked on our journey
One way to solve many challenges of Sharing Economy platforms is to add a service component - but don’t jump to conclusions right now! There are still many other considerations. For starters, you are adding a lot of costs and that means that competitors who solve the same problem with a lesser (or no) service component will have better chances to succeed.
All that we are assuming is wrong
And that brings me to the next observation which is that even some of the most basic premises may not be as clear as many think.
"The sharing economy is an IT-facilitated peer-to-peer model for commercial or non-commercial sharing of underutilized goods and service capacity through an intermediary without transfer of ownership" Wikipedia
One of the most important premises to identify something is suitable for the Sharing Economy was that it was “underutilised”. There are many definitions but most include this criterium.
It was thought that underutilisation is a necessary but not a sufficient condition.
I will say that it’s not even a necessary condition.
Would you vacate your primary residence for a stranger?
No? That’s not kind of you! What if I pay you double of what it will cost you to stay in a reasonable hotel room not too far away?
Well, look at Airbnb - for the right price, hosts are willing to either sub-let a room in their primary residence or even rent out their entire primary residence and re-accommodate themselves elsewhere. This is not as uncommon as you think, especially in popular tourist places in the high-season.
Here, we are clearly not talking about sharing an underutilised asset!
The underlying economic reason that enables this is the fact Airbnb arbitrages two markets: the long-term rental real estate market and the lodging industry. You can learn about the economic details and the other important elements that enable this in my premium Airbnb resources.
Another example is Uber’s surge pricing: Some of the most popular times for Uber rides are Friday and Saturday nights. Rest assured that drivers on these shifts have better things to do than to transport drunk people in their personal cars on a weekend night. But they can make several times the hourly rate that they make at other times.
Conclusion: overutilisation of competing offers (taxis and hotels in our examples) can also show opportunities for the sharing economy without the shared asset being underutilised.
Bang a screwdriver through the wall
We have seen how just wanting to share a drill put us on a journey that in the beginning appeared so simple.
As the founder of one of the early startups, Neighborrow said : “Everything made sense except that nobody gives a shit. They go buy [a drill]. Or they just bang a screwdriver through the wall.”
Developing an App is easy in comparison to solving all the business model challenges involved in making a Sharing Economy App & business work.
If you can secure funding, you can hire professionals to develop the App for you. But who will get to make the right business model decisions for you?
Venture Capitalists know of the successes and failures in the Sharing Economy too. They will respond to your pitch deck with a lot of questions and these will not revolve around details of the App. They will focus on the business model and moreover on the underlying economics.
Your Innovation Journey & Experimentation
If you thought that some of what we just learned sounded a bit overwhelming, I will encourage you to look at it differently. Only as we mounted challenges on top of each other, we noticed what the right answer was for our hero, the drill. I will repeat that current solutions are temporary and that new solutions can emerge.
What should have become blatantly obvious is that many things we “knew” about the Sharing Economy were not as clear cut as we thought. And that is good!
Innovation is an almost endless space to play in with no easy rules or paint-by-the-numbers instructions. That's why we are innovators or shall I say pioneers!
You can’t experiment your way from Turo or Zipcar to Uber
What we have seen is that entrepreneurs need to make tough decisions.
And the early decisions are the most important ones.
There is a notion out there that you can experiment your way from nothing to a multi-billion dollar company.
Being polite, I will say: it depends!
If you make early decisions that set you up on a trajectory like Turo or Zipcar, you will never be able to experiment your way to Uber.
Once we have an App and a business model, we experiment within these certain boundaries.
- If you decide that your platform provides only the car but not the service of driving (irrespective of ownership model), you can experiment as much as you want but you will not end up at a ride-hailing platform. Based on the initial decision of providing the car only, you will be on the trajectory of Turo or Zipcar but not Uber. Your next decisions will decide if you are Turo or Zipcar.
- Equally, if you decide that you move the drill from one user to the other - irrespectively of the logistical details - you will not experiment with a service sharing platform.
That’s just reality!
You simply can’t be Turo, Zipcar, Car Next Door and Uber at the same time (especially not in the beginning). Add to it that pivoting is costly. And someone may already be there far ahead of us because we have wasted years moving in the wrong direction.
Whether you want it or not, your early decisions play a huge role. And that's great news because it means it'sin your hands and you can do something about it. So, take appropriate action!
Great knowledge = great decisions
I value knowledge highly and believe that it will help you to make the right early decision. And not only that: it will also help you to design the best experiments (experimenting randomly can work but that’s far less likely and it can be frustrating to the point of resignation).
But how to acquire this knowledge?
You can make an MBA! In just a few years time, you can start on your idea (provided the MBA has not consumed the funds you could have used for your idea). Pity!
Another way is to learn from the success stories of companies that have made it. That’s my approach & what our premium resources are about!
You have seen throughout this article how Uber and Airbnb had to solve the same problems that a drill-sharing or durable goods sharing platform was facing.
Why then would you think you can't borrow any ideas from Uber, Airbnb and WeWork?
I wish you all the best on your endeavours!
You have seen throughout this article how Uber and Airbnb had to solve the same problems that a drill-sharing or durable goods sharing platform was facing.
But there are also many ideas that could be transferred to other Sharing Economy areas: Transportation platforms, Urban mobility platforms, Vehicle / ride sharing, Mobility-as-a-service, Food / goods delivery platforms, Service sharing platforms, Home sharing platforms, Things-on-the-go sharing, Goods sharing, Real estate co-use, Office sharing & services, Co-living, Space sharing, Storage space sharing, Parking space sharing, Remote working platforms and many more.
I don’t know which area you are thinking of but I am certain you can learn a lot from the case studies in our Sharing Economy Super Bundle. Learn more here...