On-Demand Local Services: The End of SMB Advertising as We Know It?

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Shopping cart on a navigation barThis is the third column in a three-part series on the impact and dynamics of On Demand Local Services. The first two columns are here and here.

On demand local services (ODLS) are reaching peak internet fame. As the general business model and framework grow into every local service vertical you can imagine (weed delivery anyone?), its poster child Uber last week won the tech world Oscar for startup of the year — even despite recent disasters.

As I wrote in the first two parts of this series, ODLS will be mobile payments’ killer app, and will give rise to the “1099 economy.” But as I continue to research the topic, it’s evident that it could be much more: it could define the next era of local marketing. And like many disruptive technologies, it could advance local marketing but also threaten to kill it.

Stepping back briefly to define ODLS, It usually involves services that are summoned on-demand through mobile apps, then promptly fulfilled offline. For users, it brings immediate needs to their fingertips. For providers, it aggregates demand. This creates marketplace transparency that brings together buyer and seller more efficiently.

It does this by offering customer acquisition capabilities to service providers — such as a real-time map of everyone nearby that needs a ride, or an apartment cleaned or a dog walked. Many ODLS apps also handle things like payments and scheduling. Those lowered overhead costs then create favorable unit economics that are passed on to customers.

Those are the basics — nothing new. But something else occurred to me lately: ODLS flips the traditional local advertising model. Instead of marketing proactively to generate demand, that demand is captured and revealed for service providers to react in real time. Put another way: Marketing is replaced with a commerce engine.

This is analogous to the Just in Time revolution in manufacturing, where inventory is produced closer to its sale. This improves cash flows and reduces capital requirements. In ODLS, customer acquisition costs are likewise reduced when marketplace transparency lets providers deploy inventory (i.e. service appointment or pickup) exactly when and where it’s needed.

After thinking in these terms about ODLS, I began to realize it ties to other notable trends in local media and commerce. Street Fight’s Steven Jacobs has written about how local marketing generally is flipping in this way: demand comes first and supply can adjust, given the commerce tools that are joining the traditional marketing mix.

It also aligns with the “OS for SMBs” concept I’ve examined. Media companies that service small businesses aren’t just selling them advertising anymore. A smarter play is a bundle that includes tools that help them run their business (reservations systems), keep customers (CRM) and transact (payment processing). ODLS brings this to another level.

Then you have societal, economic and generational factors: 50 percent of the world population is urbanized, up from 37 percent in 1975. That density creates a network effect for ODLS. Unemployment rates have created a healthy volume of ODLS service providers, such as Uber drivers. And as we discussed last month, Millennials are nice match for anything labeled “on demand.”

These macro factors, along with ODLS unit economics have caused it to be the largest area of VC funding of the past year. According to CB Insights, ODLS companies raised $2.6 billion in 2014 (including Uber’s $1.2 billion infusion in June). This happened at a rate of roughly 20 deals per quarter and a series A average of $7.83 million.

That’s why we see ODLS apps expanding into every local service category imaginable — some utilitarian, some whimsical, some downright absurd. This raises important questions like how many ride hailing apps the market can sustain? Or do we need even one on-demand app for ice cream delivery?

As for the sector’s overall fate, the deep roots of its economic, cultural and technological drivers indicate staying power. We’ll see a shakeout and market correction to the continued exuberance. But the overall sector — though it will evolve — could be here to stay. Cue the shift from internet fame to real fame.

speaker_MichaelBolandMichael Boland is chief analyst and VP of content at BIA/Kelsey. Previously, he was a tech journalist for Forbes, Red Herring, Business 2.0, and other outlets.

Mike Boland has been a tech & media analyst for the past two decades, specifically covering mobile, local, and emerging technologies. He has written for Street Fight since 2011. More can be seen at Localogy.com