Just by tapping on a smartphone today you can summon a home cleaner via Handy, order groceries via Instacart, wash your clothes via Rinse and get flowers via The Bouqs. Fancy Hands will send personal assistants your way. TaskRabbit will pick up a gift, and Postmates will deliver it. There is a large variety of custom apps for different purposes.
The obvious inspiration for all these is Uber, whose strategy is deemed innovative and disruptive. Applying the ‘Uber for X’ model has become remarkably popular during the past years. Although the model might have seemed simple, it turned out rather challenging to replicate. The tech articles regularly report on startups that are struggling to grow despite fair prices, satisfied customers and employees. Companies like Prim (laundry), Zoomer (meal delivery), and Homejoy (home cleaning) all shut down soon after launch. Many on-demand service providers have been plagued by lawsuits and competition.
What if some industries just do not go well with the Uber-like business model? Or is it all due to the lack of market research?
When Uber commenced their journey, the taxi market in many cities was not customer-friendly with high, protected prices. This gave Uber an opportunity to compete for customers and become a leader. Transportation is a basic high-frequency need, and many people take taxi rides every day. This is how Uber managed to win many repeated customers and benefited from the network effect.
The market for home cleaning services, as well as several other markets, differs from transportation in one crucial way. Service repetition requires trust between a customer and a service provider. Customers invest their time to communicate their preferences and house-specific details to a cleaner, building the so-called knowledge capital. Do both parties need a platform to organize the next cleanup and invest their time again?
Homejoy wasn’t growing because clients and cleaners were taking their relationships off-platform: after an initial encounter 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.
This is different from the on-demand transport industry where each transaction is unique and building a relationship is not required. Hence, the customer comes back to the platform for every new ride.
When Uber started conquering the market, its strategy was disruptive and innovative comparing with the main competitor – the monopolistic taxi market.
The time period of 2014-2016 was also a golden time for everyone who wanted to get funding for their business. And so many entrepreneurs did. With the sheer number of on-demand service startups on the market, the competition became fierce, and underfunded startups started to shut down.
Prim, an on-demand laundry startup, cited having to compete against its own supplier at one point before shutting down. While Zoomer, a food delivery startup, failed to mitigate the magnitude of UberEats.
When entering a competitive market, every new startup should differ from existing players and fairly evaluate its prospects to deliver a product that’s original enough.
The nature of the on-demand model is based on convenience and low prices – as low as an average citizen can pay for this convenience, and as low as to be more attractive than your competition. Moreover, on-demand startups often claim that they will start offering high-quality service at even lower prices as they grow. But that does not always happen: prices rise, and services go south.
How did Uber manage to retain its competitive prices and stay profitable? First, Uber began as a luxury service and even now is still acquiring new markets with its premium Uber Black offering. Only further along the road the company rolled out its cheaper services (UberX and UberPOOl). So, the magic of Uber is that it uses its luxury-segment margins to cut its prices for more low-end markets and expand its service. Second, although Uber’s mid-market margins are thin, its economy of scale means there are enough rides sold in enough markets to make the business viable. Finally, as a global leader, Uber receives global funding.
For their long-term success, companies have to pay attention to two options: either ensuring customer retention or offering high-margin services to cover for other low-margin products and marketing costs.
Positive User Experience
The efficiency of Uber-like companies is typically based on the self-employed status of their staff, who are classified as contractors rather than employees. This is called the 1099 economy.
The big advantage of the 1099 economy is that startups do not need to bear insurance and other costs applicable to traditional employees, which helps save up to 30% on labor costs. But there is one pitfall: when workers are not classified as employees, companies are not legally allowed to provide training or guidelines on how to perform duties. As a result, high performance is hard to achieve.
Uber doesn’t need to train its drivers as driving is one of the few skills that most people are taught in a relatively standardized way, which automatically prepares them to work for Uber without any training.
On the contrary, house-cleaning startups can’t do without training the cleaners to do their job properly. Customer dissatisfaction and ensuing worker misclassification lawsuits was the main reason why Homejoy shut down.
Quality is not something that can be enabled by technology: people need to be trained and coached on regular bases. If a company continuously receives bad reviews, it would be better for this company to sacrifice labor cost-cutting, change its approach, and hire employees to be able to train them and control their output.
Survival of the Fittest
It may seem that the on-demand services market is fully packed and unwelcoming to newcomers. But this is not exactly so. It is important to understand that the Uber-like model doesn’t fit every industry and business idea. And sticking the “on-demand” label does not automatically make a startup an “Uber for X”. There are many ways in which an on-demand business can be configured, from how prices are set to whether independent contractors or in-house employees deliver the service. Each bidding startup should figure out what will work for its success depending on its particular business case and operational model.