Over the last few weeks, I have written about the sharing economy based business models. Here is a summary of 14 vital elements of sharing economy based business models that differentiate them to traditional business models:
- Economic benefits
- Economic benefits are the starting point. They will indicate if the idea has potential. Economic benefits for consumers is what drives sharing economy business model. It requires though a close look to understand where those economic benefit originate from.
- Traditional business models can control the customer experience much better. Therefore, they can (generally) provide a better controlled customer value proposition than sharing economy businesses offering the same (or very similar) product/service. However, sharing platforms can offer more variety/choice thus potentially a more personalised experience. Airbnb homes come in all shapes and sizes for any taste and at reasonable price. The customer value proposition is controlled via the feedback/rating process.
- Asset ownership model
- The sharing economy business model utilises already existing assets. They generally do not have to purchase (or produce) these assets. This is a major benefit in terms of capex.
- It can help to scale up the business extremely fast. But it can also limit this. If potential drivers were not willing to join Uber, it would fail. And this critical mass problem (or chicken and egg problem) has haunted some sharing economy start-ups.
- Traditional business models own the assets they use to provide services. But this limits them in the pace they can scale up. Our business model comparison (Zipcar vs Uber) makes this point very clear (Zipcar: 12,000 cars; Uber 1,500,000 summonable cars, despite being a younger company than Zipcar).
- Demand-supply matching / management
- This is crucial and where the benefits are delivered (or not) and where the profit is made (or not). The algorithms and smarts to manage demand vs supply are crucial. Beyond the already clever matching of supply and demand side, which often is more sophisticated than many know they have advanced algorithms for various purposes. Uber e.g. has surge pricing. They also have UberPool to combine several passengers into one ride. Airbnb uses clever algorithms to cater for hosts preferences, etc.
- Intermediated audiences
- Who you connect to each other draws important consequences to the other elements of the business model.
- Peer-to-peer: Most sharing economy business connect peers with each other. Uber connects normal citizens to each other but needs to make sure they interact with each other in an appropriate manner, ensure the safety of both, urge tolerance and respect and so on. But this is only one example. Who you connect to each other effects all elements listed here.
- Business-to-crowd: Things like sharing economy lenders or crowdfunding.
- Business-to-business: I would not consider these as sharing economy businesses. E.g. Hilti for me is an innovative on-demand rental model.
- Self-regulated elements
- It is very significant which elements you decide to get self-regulated by the peers. Since sharing economy businesses do not own the assets that they provide access to, they have some but limited control over the condition of the asset.
- Uber e.g. requires driver’s to pass certain background checks and their cars to be inspected by Uber nominated partners according to the checklist Uber provides But this at best ensures safety and little control over the experience.
- The elements of the experience, quality and potentially other elements need to be self-regulated. The customer experience is controlled via the feedback/rating system. The rating systems are being seen by some experts (e.g. prof Sundarajan) as one of the most important innovations brought by sharing economy business models.
- Predominantly mission or profit-driven
- The origins of the sharing economy were supported by a movement based on certain ideals. If you are a profit-seeking business, don’t try to pretend you are not. Align with the benefits for the users.
- Uber, e.g. points out that their business model also provides community benefits but they never say that this is their predominant mission. They have always made clear they are a for-profit business.
- Governance model
- How is the overall direction of the business governed? Is it governed bottom up or with strong inputs from the users (e.g. collaborative creation)? Or is it a corporate style governance. Mission-driven businesses are more likely to be collaboratively governed. Sure, Uber and Airbnb are corporate governed.
- Asset management model
- Who is owning the assets that are being shared? How are they distributed to the demand side? Who maintains and operates them? These are important questions that make a big difference. Zipcar owns their assets but lets the demand side operate them and even do the minor maintenance (but they reimburse these costs). Uber does not own the shared asset and it is operated by the supply side. Turo, on the other hand, does also not own the asset (also cars) but in this case it is operated by the demand side.
- On the flip side, they have less control over the condition of the asset, so they need to think how to solve this. E.g., mandated inspections and passenger ratings (wouldn’t drivers with an unsafe looking car not stack up many bad reviews?).
- Product/service distribution model
- Traditional businesses have their supply and distribution channels. And they optimise every bit of it. Apple has extreme control over their supply chain. And they have their stores where they control every aspect of. They have the logistics sorted out to the last detail from sourcing to sales
- Sharing economy businesses have less control over this. Uber does, because they track the cars and the ride-hailing passengers via GPS. It is important to find the right distribution model.
- Some of the early entrepreneurs think that platforms sharing things like tools, leisure equipment, etc didn’t work because it was too inconvenient to pick-up and drop back off the shared items. With GPS equipped smartphones things are changing. Further opportunities may come from the emergence of near-range transportation services.
- Transaction costs
- Sharing economy businesses live from large amounts of transactions. And they need to make these, simple, safe, cheap. I have shown how Zipcar has done well in this regard and Uber even better.
- Customer experience & quality management
- As mentioned above, sharing economy businesses have less control over this. Quality can vary much more between the peers offering their assets or services. You need to think how to cover this. Uber has minimum requirements on the safety and leaves the rest mainly to the rating system.
- Local aspects are important. In the sharing economy, the interacting participants are close to each other when we talk about tangible goods. Also, scaling up a business model globally, as did Uber and Airbnb, requires local aspects to be taken into account, such as preferences. But it includes also local regulations and impact on communities etc.
- Footprint/impact on existing businesses, workforces, environmental impacts, legal risks
- This is a big one. Uber is getting a lot of pushback. And they bulldozed a lot of it down. They mobilised their own supporters, drivers and passengers and battled with politicians.
- This may not be the best way to do it, but the bigger point is to expect pushback and have plans ready to be enacted (as a reactive approach) or manage proactively to avoid strong pushback. A lot can be learned from Uber and Airbnb how to do and not do things. And this is an evolving front. So keep an eye on this one.
- Growth, funding and critical mass
- The chicken and egg problem has most likely caused many of the early sharing economy companies to fail. You need to scale up supply and demand at a minimum pace so that more people keep joining.
- Uber sends their teams into new cities a short time before they start the city up and start “hiring” the first cohorts of drivers and then start large (local) customer acquisition campaigns, such as discounts, freebies and referral bonuses.
In more depth
This article is a short version a more recent article on the sharing platform business model value chain:
I have covered the sharing economy in great detail over many articles. The figure gives an overview. Here is a quick link collection:
- Business models:
- The platform business model is the business model used by practically all sharing platforms. But not all who use a platform business model are considered a sharing platform (e.g. Expedia, TripAdvisor, Google, Facebook, etc). This is a comprehensive guide to this business model
- Sharing economy based business models: this is an article on the specifics of the platform business model applied onto sharing platforms
- The impacts:
- Can sharing platforms self-regulate? An important question that will have significant impact on the trajectory of sharing platforms (especially the major ones): if they can’t participate in the discussion constructively chances are they will be hit with heavy-handed regulations
- Utopia or Dystopia? The social impacts, risks and opportunities are what drives the necessity for regulation. Understanding this fundamental layer will help widen your horizon and the discussions
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.