Thoughts on marketplace models, on-demand and the sharing economy

  The Jitney Bus  . Early 1900’s ‘Uber’.

The Jitney Bus. Early 1900’s ‘Uber’.

A lot has been written recently about the struggle with start-ups providing on-demand services. As Silicon Valley investors tighten their purse strings during an uncertain economic period, journalism has also followed suit with an outlook equally as pessimistic.

The on-demand grocery delivery service, Instacart, is one company who have been under the spotlight recently. There’s been polarising coverage about their profitability. The company use independent contractors (and some part-time employees) to pick-up and deliver groceries for their customers. With this model they can only realistically capture so much value from just delivery fees. After paying their contract staff, it doesn't leave much in terms of profit. However, the additional revenue that Instacart are supposedly securing through deals with retailers is likely to give the company a fighting chance. The jury is still out on whether this is a sustainable business model in the long term.

Homejoy, another marketplace business which used independent contractors to provide an on-demand cleaning service, wasn't so resilient. The company closed in 2015 after failing to retain customers once the promotional discounts disappeared. They also faced lawsuits around worker classifications. Eventually the venture capital runway ran out. A sad ending for the company.

Many other start-ups have all gone through their own respective ‘pivots’ in recent months too. Each moving towards more focussed services or one’s which no longer pursue the offering of ‘on-demand’.

So after all the initial hype with the on-demand economy, what’s going on here?

Firstly, the on-demand/marketplace bandwagon has clearly been jumped on by many without proper regard for the nuance of each industry it is being applied to. Investment has most likely been made to avoid missing out on the next Uber rather than on the true merit of each individual start-up and the uniqueness of their solution. Justifying a start-up through the ‘Uber for X’ rationale is starting reveal its flaws.

Secondly, I believe there are some even bigger concerns surrounding the new breed of on-demand, marketplace and even ‘sharing economy’ start-ups. These are bigger concerns than the immediate problems such as customer retention and difficult company financing periods.

It would be worth examining some of the key properties of these business models to bring these concerns to light. In particular, models which facilitate a service supplied through the use of independent contractors (or ‘partners’)external to the company. Doing so will put in perspective the potential long term value of such companies looking to bring new tech-enabled solutions to old industries.

Each industry and customer problem is different. The point with this exercise isn't denigrate specific start-ups. It is, however, to highlight the broader economic impacts of such models.

Asset sharing

If someone shares their asset with others, inherently they've managed to get themselves in a financial position sufficient enough to own the asset in the first place. Thus, implying they have some personal wealth to begin with.

There are, of course, great environmental benefits of such sharing economy models. It gives us the chance to make better use of things that would otherwise go under-utilised. Yet the point remains that those supplying the service are likely to be in a relatively more wealthy position compared to those who benefit from using the service. One social class qualifies for ownership and the ability to generate more value from their assets. The other, can but only access them. Greater access to things which a lower economic class didn't have access to before is certainly an improvement on an immediate level; but it’s difficult to see how it might bridge the inequality gap long term (should ‘equality’ be an objective of the sharing economy. Which I think it is; at least in principle.) If anything, it helps to expand the gap.

In such free-market conditions, some people will always try to ‘game the system’ on asset sharing platforms. For example, many property owners look to profit from a platform like Airbnb by listing more and more accommodation which they don’t live in. As such, these ‘micro-entrepreneurs’ are incentivised to acquire additional properties for themselves. The knock-on effect impacts the housing market. The reduced supply makes it more difficult, for those who are less well-off, to buy their first property.

This isn't to criticise platforms like Airbnb. Their intentions clearly aren't to skew housing prices. The company are actively addressing this problem too. It’s understandable that an issue like this hasn't been fully resolved yet. An innovation that’s less than 10 years old isn't likely to have all its creases ironed out. Yet the concept of sharing assets needs to be considered carefully by any business looking to provide a service which ‘unlocks value’ for asset owners. It can facilitate greater overall access but it may not necessarily lead to economic equality on the whole.

Repetitive tasks (human powered)

When a marketplace offers up a service that facilities the completion of a task which is knowable (and therefore repeatable); it’s likely that the marketplace itself will be incentivised to drive down the cost of supply for such tasks. Those ‘buying’ will always be looking for a competitive price. Repeatable things are what we, as a civilisation, got good at throughout the industrial era. Great scale and efficiency was achieved through factories and mass production.

So, in this connected era, do we want to replicate this approach to business? Marketplace businesses who focus on delivering ‘repetitive tasks’ have done so with a push towards ‘on-demand’. They've leveraged the immediate advantage of using internet technology and smartphones to facilitate an instant connection. The co-ordination of the task no longer requires those performing the task to sit inside of the organisation. Previously they had to because companies didn't have a means of co-ordination. This has now changed.

The best illustrative example is Uber. I previously wrote about Uber here. The post was largely positive about their potential as a company to create and capture value in the world. This was, however, without commentary upon how they will supply that value.

Today, Uber have scaled their operations to the point where their business model and economic incentives are becoming clearer. Recent reports and papers all point to the growing tension between the supply of value (by driver partners) and capture of value (by Uber Technologies Inc.) It’s clear when a marketplace business like Uber scales it’s operations, the company is incentivised to decrease the cost of supply in order to offer greater value for the customer (riders). In doing so, we’re beginning to hear a lot more about the dwindling earning potential highlighted by many Uber driver partners. It’s clear what the trajectory is for Uber. More so than some of the reported earnings (reports as low as $0.30 per mile for driver partners), an even better cost for Uber would be to get as close to $0.00 per mile as possible. It just makes business sense for them as the platform owner. To achieve this drop in costs would require an innovation in how the service is provided. That innovation, of course, being driver-less cars (eventually powered electrically from a solar energy source). It’s a future which is certainly still a good few years away. At least at scale. However, the short term pain of getting there is going to be felt by the human drivers who are currently supplying the service. (Side note: the shift to driver-less cars for Uber would cause a different problem. They either take on the enormous cost of trying to own and maintain the fleet themselves, or each car is owned by other organisations or individuals who lease their vehicles to Uber. At which point the cost of supply issue comes back in to play; albeit with different challenges).

It can be safe to say that with any marketplace business, supplying any kind of ‘repetitive task’ using human labour will be incentivised to reduce the cost of that labour until it drops to near zero. A sad but true property of our decades-old industrial era approach to ‘efficiency’.

Creative acts

One of the most promising models for this new era is one which looks to leverage human creativity. Where humans are the supply, and the value they co-create is an act of creativity, they themselves have the power to increase their own earning potential. When architected correctly inside a marketplace model, this can align with the incentives of the platform owners.

In the previous example of Uber, the driver partners don’t set the base rates, nor do they control the surge pricing. They therefore don’t hold the full power to determine their own earning potential.

Conversely, if the human supply is able to capture more value for themselves by putting more effort into their ‘work’, then the all three parties benefit: The platform owner, the supply, the customer. This is the positive aspect of Airbnb. Their platform can be considered a combination of both asset sharing (accommodation) and a creative act (hospitality). People who put more effort into their ‘work’ as hosts have the potential to capture more value for themselves. Through providing a unique experience for guests, they control their ability to earn more for their service; even if they own a relatively modest property.

The important point here is that this power lies with the individual and notthe platform owner.

Facilitating creative acts accesses far greater human potential. Rather than utilising people to simply deliver a homogeneous service; platform owners can tap into the diversity and variety of a global community. It is this sheer diversity which a large group of people (who don’t reside inside an organisation) can do really well. Better than if a company tried to do it themselves.

This was highlighted by Robin Chase, founder of Zipcar, in her book, Peers Inc. Chase describes how the platform and their ‘peers’ are a perfect marriage because both sides bring their respective strengths. The platform; scale and standardisation. The ‘peers’; diverse and personalised service.

Conclusion

The future of marketplace models, on-demand and the sharing economy, where supply is best powered by humans, should focus on problems where creativity can add value. This would be a mutually beneficial model for all three parties involved in the long term. We can still improve society by solving the typical ‘repetitive tasks’ with internet connectivity and a marketplace. However, these are best solved through technological innovations such as software, robotics and, in the near future, artificial intelligence. It removes the burden of uninteresting work for humans and avoids the potential economic unfairness that these businesses would systemically encourage.

Neil Smith

Neil Smith Design LTD, 1 Davenham Ct, Liverpool, L15 8GD, United Kingdom