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Lessons from Collaborative Marketplaces

In ever-expanding categories, consumers have demonstrated they want instant access to products and services without the ownership and commitment. Today, there are at least a dozen unicorn (valued at $1 billion or more) collaborative companies, including Uber and Airbnb (both valued at double-digit billions), Lyft, Didi Kuaidi (China), Ele.me (China), Delivery Hero (Germany), Hellofresh (Germany), Instacart, Blue Apron, BlaBlaCar (France), Ucar Group (China), and GrabTaxi (Singapore). Incredibly, none of these companies existed a decade ago. To be fair, some may not exist a decade from now. Many of their business models are expensive and hard to scale, and it’s not clear in all cases what the path to profitability looks like.

Even with these caveats, traditional businesses can glean important lessons from the early success of these collaborative services. Elements of their practices, such as branding and humanizing service professionals or offering online ratings and reviews, could be applied to any business. First and foremost, collaborative companies have adapted to the expectations of today’s always-connected consumer (and worker), recognizing that convenience and a delightfully easy-to-use mobile app have become table stakes:

  • Create a dead-simple mobile app. All successful collaborative companies start with a simple-to-use mobile app or build an integration into one of the top mobile messaging apps such as WeChat or Facebook Messenger. No matter how much complexity there is behind the scenes in matching drivers with riders or coordinating who cooks or picks up a meal, all of it is abstracted from both consumer and worker, and the end result is the consumer is able to order what she wants in seconds, with just a few taps.
  • Humanize service providers. The Lyft driver who comes to pick you up isn’t some anonymous cog. You are shown her name, photo, hometown, and hobbies. The etiquette is to sit in the front seat and fist bump: It is a truly human interaction. On Airbnb, people renting out their homes aren’t called “landlords.” They are “hosts” who share their photos and interests on their profiles. More broadly, the more skilled the professional, the more consumers expect to be able to research that specific individual online before they decide to go with him or her, even if they trust the company overall.
  • Provide community ratings and reviews. After every Lyft or Uber ride, Airbnb stay, or Postmates delivery, both consumer and service provider rate each other and can leave detailed reviews. Consumers value transparency and have come to expect peer ratings and reviews. These days, many consumers, especially millennials, won’t set foot in a restaurant without first consulting Yelp, a dedicated community review site for local businesses. Online reputation has become so essential that LinkedIn has recently launched its own freelance marketplace, called ProFinder.
  • Offer speed and convenience. Today’s consumers expect things to happen instantly. They do not want to be put on hold or made to wait. Consumers routinely cancel on Uber drivers who are too far away, and they hang up when the hold music has been playing for too long. Consumers also value convenience. They do not want to walk to a taxi stand or even have to pick up their own groceries—they want everything to come to them. This is why Starbucks is testing delivery service as an extension to its Mobile Order and Pay app and why Amazon Prime has become so popular. Recently, Uber launched a new delivery service, UberRUSH, which allows customers ranging in size from 1-800-FLOWERS to local small businesses to tap into its local transportation network. The challenge is that last-mile delivery is extremely expensive.
  • Proactively share status updates. Consumers also expect real-time status updates, such as how the ride-sharing apps display a map of where the driver is at precisely that moment. Consumers want to know how far away the driver is so they can come out and meet the driver just as he is pulling up. Online apparel retailer Everlane has started sharing order status updates via Facebook Messages so customers know when their order has been shipped and what the ETA is.
  • Store payments and preferences. The beauty of mobile apps is it’s generally secure to keep users logged in to your app. Lyft, Instacart, and Postmates all do just this. They also store payment information and preferences, such as recent orders and last pick-up/drop-off points, making it extremely easy and frictionless to place a new order.
  • Democratize access to luxury. Private car service used to be reserved for busy executives, the wealthy, and special occasions such as prom or weddings. The same was true for courier service, private chefs, valet service, and on-location hair and makeup services. By mobilizing community labor and allowing for fractional ownership, collaborative marketplace companies have been able to drive down costs, increase demand, and democratize access to these once-luxury products and services.
  • Activate idle resources and find buyers in local regions. A big aspect of the collaborative economy’s cost advantage comes from tapping into unutilized or underutilized local assets, such as an idle town car, an empty house, or an unemployed person.

Collaborative companies are also fascinating from a business-model and supply-chain perspective.

  • Extremely lean supply chains. Uber and Lyft are the world’s largest taxi companies but own no vehicles. Airbnb is the world’s largest hotel, but owns and leases no real estate. By claiming the digital last mile for both workers and consumers, these companies have been able to build multibillion-dollar businesses off of mobilizing and managing other people’s underutilized time and assets.
  • Demand-based pricing. Although demand-based pricing has been around for years, such as for plane tickets and even bridge tolls, it has not traditionally been applied to most arenas. Uber’s surge pricing and Postmates’ blitz pricing have brought this practice into car service and deliveries, respectively, partly to help temper demand when it far exceeds the supply of workers at that moment.
  • Big data and machine learning. Uber learns from every pickup, every ride, every rating. It collects data on which driving speeds were achievable on which roads, where there was gridlock traffic, and which routes drivers tended to take despite the driving directions suggesting otherwise. All of this data feeds into its self-driving car project. In a head-spinning twist, Uber is using its drivers to learn how to someday replace all or most of those drivers with an autonomous vehicle.

Once they solve the initial chicken-and-egg problem (generally by offering free trials to new customers and guaranteeing minimum earnings per hour worked for workers), collaborative marketplaces can get very large very quickly. They exhibit inherent network effects and, therefore, tend to be winner-take-all, monopoly-like markets. Ever heard of Summon, Hailo, Curb, or Sidecar? Neither have most people. Uber and Lyft dominate the ride-sharing space.

Often, collaborative companies claim to be removing the middleman. In reality, they are the new middleman, albeit a more efficient and tech-savvy one. As essentially monopolies, they have tremendous power in both setting prices for consumers and determining how to split revenues with workers.

The conventional view of the relationship between the customer and the company is like a one-way conveyer belt. The consumer sits at the end, waiting for products and services to roll off the line, so to speak. The company hopes it has produced or staffed for what the customer demands, and it is all very straightforward. This view has become outdated. In today’s on-demand economy, companies must build a conveyer belt that goes in multiple directions. It is no longer one-way to consumers, but rather goes back and forth and around, involving consumers who also sometimes double as drivers and workers, and a whole new cast of characters who bring new value to the supply chain and customer experience.

In this new world, as Jeremiah Owyang has pointed out, product makers are being reinvented as service providers (think of the IoT business models described in Chapter 2 or Blue Apron delivering fresh ingredients and recipes), service providers are becoming marketplaces (Lyft, Uber, Luxe, Postmates, and Instacart are all great examples), and marketplaces are giving rise to products. For example, in “participatory commerce,” community members get involved in the funding, design, or creation of products. Kickstarter and Indiegogo do this for crowdfunding. Threadless, Minted, and Local Motors do this for T-shirts, wall art/cards, and auto vehicles, respectively.

Retailers and product makers that fail to participate in serving or at least transacting with the customer risk becoming commoditized. As Silicon Valley tech executive Andy Raskin has pointed out, most people don’t notice, care, or remember the manufacturer of the last plane, bus, or train they rode on. They don’t choose to fly on United Airlines versus Virgin based on who made the plane or choose to have their laundry done by Laundry Locker versus Rinse based on which brand of detergent each uses (beyond, say, specifying they want detergent that is natural and eco-friendly) or where the detergent was purchased from.

For existing companies with a well-defined mission and organization, it can be hard to grasp—much less test and implement—this fundamental shift in the relationship with the customer. But it’s not impossible, as furniture and housewares retailer West Elm has shown with its LOCAL program, in which the company essentially functions as a marketplace for the wares of local artisans. West Elm customers are asked to vote on their favorite small business makers from the local community. West Elm then provides the winners, such as Brooklyn-based jewelry designer Re Jin Lee, with a monetary grant and a platform both digitally and in West Elm stores to generate awareness and sell their goods.

Challenges and Criticisms of the Collaborative Economy

The collaborative economy has been under attack on several fronts. First, many of these marketplace companies are still fundamentally unprofitable and will require very large sums of capital to reach profitability. One reputable venture capitalist who invests in this space said he would be surprised if most of these companies survived over the long term, as they are very far from a sustainable business model. For some, the challenge is being able to raise enough money to reach profitability and have a shot at becoming self-sustaining.

Second, regulatory battles are still being fought over whether rules that apply to traditional industries such as taxi companies and hotels ought to apply to marketplaces such as Lyft, Uber, and Airbnb. Critics accuse collaborative companies of playing regulatory arbitrage, operating in gray areas just beneath the rule of law and maximizing user acquisition and profit until the laws can catch up.

Related to this is the ongoing debate about whether on-demand workers should be treated as contractors or employees. No one can deny marketplace companies have benefited immensely from the lower cost of hiring on-demand workers as contractors, but the tide seems to be turning on this point: Certain cities and jurisdictions, including Seattle, are allowing certain types of workers to unionize. In 2015, several marketplaces, including Sprig, Luxe, and Instacart, voluntarily began to transition some of their independent contractors to employees, complete with benefits such as unemployment insurance, worker’s compensation, Social Security and Medicare contributions, and, depending on the number of hours worked, health insurance. Although this practice raised their labor costs by 30% or so, these companies say they are benefiting from being able to train employees, hold them to certain quality standards, and maintain a consistent schedule, which will ideally increase predictability and reduce turnover.

A third criticism leveled at collaborative companies is that they try to present a more social and community-oriented face to consumers than is actually the case. Critics argue that Zipcar, Capital Bikeshare, and Airbnb are just glorified renting and leasing. Even the words “sharing” and “collaborative” can seem like propaganda. As much as millennials self-report themselves as being mission driven, they and other consumers more broadly cite affordability and convenience—not a sense of community—as the top drivers of their decision to consume on-demand services. The truth is that most people don’t want to befriend their Uber driver, get to know the previous owner of their designer dress, or spend a lot of (or any) time with their Airbnb host!

Ride-sharing marketplaces work because rides are relatively transactional, and it’s more efficient to not have to rely on the same driver each time you need a ride. Airbnb works because most people don’t want to rent the same place in the same city over and over again. For certain jobs, however, customers actually want to keep working with the same individual professional because of the trust and context that have been established. Home services, professional services, salons, and child care all fall into this category. This was the challenge for Homejoy, which was founded in 2010 as a marketplace for in-home cleaning services. Customers used the site to find and book a professional cleaner—but once they found someone they liked, many went off Homejoy, working directly with the cleaner. The company shut down after five years and raising nearly $40 million of venture capital.

A final challenge is what the future will look like for drivers in the ride-sharing economy given that Uber is developing its own autonomous vehicle and competitors like Lyft will just as easily be able to deploy autonomous vehicles being developed by Google, Tesla, Apple, and a handful of other companies. The automation of many job categories beyond professional driving is a much larger issue confronting society that is discussed at length in two of my favorite recent books, Rise of the Robots by Martin Ford and Second Machine Age by Erik Brynjolfsson and Andrew McAfee.

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