Sharing Economy Business Models: What Works and What Doesn’t

The sharing economy is one of the most fascinating economic phenomenons we’ve seen in recent history. It is at once one of the most powerful yet vulnerable business models out there. Despite its success, it’s hit a bit of a roadblock recently, with tough legal battles and a few early company casualties.

Let’s take a look at a few notable sharing economy businesses and see what went right, or what went wrong.

Uber
What went right: Efficiency and enjoyability. People use Uber because it’s much easier calling a ride on the Uber mobile app and knowing exactly when an Uber will come than trying to hail a taxi outside or speaking to a human dispatcher.

Uber employs 1099 contractors as its drivers. This works because transportation is a commoditized service, meaning there aren’t as many purchase considerations in booking a ride as in doing something like booking a rental on Airbnb, an example of an uncommoditized service marketplace. All Uber drivers need to do is get their riders from Point A to Point B successfully, so there’s no need to thoroughly train the drivers, which would require them to be W2 employees.

The 1099 model allows drivers to have complete flexibility, which makes Uber great at matching spikes in demand with increased supply.

It’s also a much better experience riding with Uber than in a taxi. Uber has a rating system under which low-rated drivers are dropped from the platform. Uber drivers are thus incentivized to be friendly–this is why many of them offer free snacks and make friendly small talk, which makes for a better rider experience.

Airbnb
What went right: Variety. If you book a room at a hotel–any hotel–you know exactly what you’re going to get. This isn’t the case with Airbnb. You can find a place with a private theater, a zen garden, you can even stay in a castle.

Airbnb, unlike Uber, sells uncommoditized products. People care a lot about where they’re going to be staying, so variety is important. The key is the listing process. It’s easy listing your place on the site, and this is why Airbnb currently has over a million listings. When there’s such a numerous and diverse group of producers, there’s more variety in price and location. If you’re visiting a small suburb, you may be limited to cheap motels or old bed and breakfasts. But with Airbnb, there’s sure to be nearby places listed on the site, no matter where you’re going.

Instacart
What went right: Convenience and accuracy. Convenience is what brings people to the platform; they want to save time by having someone else do their grocery shopping.

Accuracy is what keeps people on the platform. Groceries aren’t commoditized; people are very picky with their preferences for food. This is why Instacart has switched from a 1099 model to a W2 model. This allows them to sufficiently train their workers so that they’re grocery shopping experts who can bring users exactly what they would’ve gotten themselves.

Instacart’s business model is particularly unique in the sharing economy because it appeases the entire ecosystem. It satisfies its shoppers by offering them W2 employee benefits, it satisfies its customers by ensuring accuracy and efficiency, and it even satisfies the grocery stores by expanding their sales. In that regard, Instacart succeeds where even Uber and Airbnb do not, since they both face stiff competition from competing taxi and hotel industries.

TaskRabbit
What went wrong: Lack of focus and control. TaskRabbit is trying to be the Uber of everything. It’s not really necessary to explain why this is flawed. Instagram, for example, started off as a cluttered platform with a multitude of features. It was eventually changed to the platform we know today with a sole focus on sharing photos. And that clear focus is what led to its success. To learn more about Instagram’s transformation, read this blog post here.

TaskRabbit also had a flawed pricing model. It lacked control over its pricing. This is okay for uncommoditized services like lodging in the case of Airbnb, but not for a commoditized service. If Uber lacked control over its pricing, it wouldn’t be the $50-billion dollar powerhouse it currently is. To learn more about why uncommoditized pricing doesn’t work in a commoditized marketplace, read this article.

Homejoy
What went wrong: Poor customer retention. Homejoy was one of the more promising companies in the sharing economy, having picked up $40M in funding and quickly gained traction. But it couldn’t keep its customers.

The issue was in the pricing model. Homejoy did the right thing by giving discounts to first time users, who could use the service for about $19. After that discount was used, however, Homejoy would charge more than $80 for a 2 ½ hour cleaning. The difficulty wasn’t in getting people to try the platform; it was in getting them to stay on the platform. According to this Forbes article, only 15% to 20% of customers booked again within a month.

The company also grew too fast. With a huge round of funding, Homejoy expanded into 30 cities in just a six month span. It cost them a huge sum of money, and it all went toward drawing in one-time users. After that, it was hardly viable for Homejoy to continue down that path, and the costly legal battles regarding its 1099/W2 status was the nail in the coffin.

This article was written by Erik Zambrano and Andy Hsu.

Filed under: Platform Innovation | Topics: platforms, sharing economy