Why ‘On-Demand’ Alone Isn’t Enough to Make a Viable Business
The success of Uber has created a feeding frenzy as companies rush to create an “on-demand” option for every part of the service economy. The winning companies are taking common, high-frequency services and making them more convenient and efficient through technology.
Yet, other companies are struggling as they try to capitalize on the trend by taking low-frequency, low-demand, luxury services and making them “on-demand” for on-demand’s sake. The problem with these startups is that they require a seismic shift in consumer behavior in order to succeed and create lasting value.
Advances in technology, in addition to growing mobile adoption, have changed both consumer expectations and service provider capabilities. Consumers expect to be able to quickly and easily order local services online; and service providers finally have the ability to make that happen. With a few swipes on my phone, I can easily request a car service from Uber, order a sandwich from GrubHub, book a plumber via my company, HomeAdvisor, and make a restaurant reservation on OpenTable. It’s a new level of technology-powered accessibility and efficiency, and it’s widely referred to as the “on-demand economy.”
The aforementioned companies appear to be the winners in this new paradigm. Each boasts hundreds of millions in revenue and each is growing extraordinarily quickly. Uber is rumored to be increasing revenues at well over 100% in 2015, GrubHub recently reported 50% year-over-year growth, IAC’s HomeAdvisor announced 40% domestic revenue growth in its second quarter, and OpenTable was growing at approximately 20% per year when the company was acquired by Priceline last year.
What does each of these companies have in common? Each has delivered on the promise of the on-demand economy. Each has used technology to fulfill a common, existing consumer want or need in a more convenient and efficient way. Before OpenTable, people used to call restaurants, wait on hold, and hope to snag a reservation. OpenTable has condensed this experience into a 30-second process. The company’s success can be attributed to the fact that it didn’t try to create a new type of consumer demand; it simply streamlined an existing consumer need.
With successful on-demand incumbents now established in many of the largest sectors of the service economy, new companies are trying to get in on the on-demand trend in a more speculative way. Riding on the coat tails of UberX, these companies are “uberizing” luxury services in an attempt to bring them to the mass market. But it’s not working. Luxury services are too expensive for mass consumption. And they’re expensive to provide as well. Some companies just don’t seem to get the fact that while offering services “on-demand” makes them more convenient for the consumer, it doesn’t fundamentally change what the services cost to provide.
Take Homejoy, the on-demand maid service company that recently shut down after attracting nearly $40 million of venture capital (VC) investment. While the idea of making a more technology-friendly cleaning company certainly isn’t a bad one (NYC-based MyClean has been profitable for years), Homejoy got carried away. Instead of focusing on making the experience of hiring a cleaner better for consumers with an existing need, the company sought to bring maid service to a mass market — targeting those previously priced out of the service. Unsurprisingly, the company found that many consumers will hire a maid at the promotional price of $19, but far fewer will hire the maid a second time at the regular price of $25+ per hour — the cost required to cover the cost of the service.
TaskRabbit, one of the initial on-demand startups, initially tried to create demand for luxury conveniences like having someone stand in line to get consumers the newest iPhone. But when demand wasn’t there, the company wisely pivoted to focus on bringing convenience to existing (and much more common) consumer needs such as cleaning, handyman and moving services. BlackJet, a high-profile “Uber for private jets” backed by Ashton Kutcher and Jay-Z, has also been public about its struggles to find a viable luxury on-demand business model.
Similar VC-backed “on-demand luxury for the masses” companies such as KitchenSurfing and Kitchit (personal chefs), GlamSquad (personal stylists), Washio (laundry service) and Zeel (massage therapists) seem to pop onto the scene every day. But I can’t say I’m that optimistic about their chances for success. While there may be a market for each of these companies, it’s not the mass market the VCs are hoping for. Success in this market doesn’t come from betting that millions of consumers will change their purchase behaviors. Success in the on-demand economy employs a simple, time-tested formula: taking an existing service — one that a lot of people use — and making it better.
Adam Burrows is SVP of business and corporate development at HomeAdvisor. His responsibilities at HomeAdvisor include general management of HomeAdvisor’s subsidiaries (mHelpDesk and CraftJack), strategic partnerships, and M&A. He has also served as a mentor for TechStars and an advisor for several other successful internet companies.