On-Demand Services: Lessons Learned From the Rise and Fall of Homejoy
The news that on-demand home cleaning service Homejoy is shutting down at the end of the month probably doesn’t come as a big surprise to those paying attention to the hyperlocal space. Recent departures on the managing team, a rumored failed acquisition attempt, and lawsuits that potentially undermine their model’s viability were pretty clear harbingers of what was to come.
Homejoy’s CEO and her story were always inspiring to my startup GreenPal, which is a marketplace connecting homeowners and local lawn care companies. I rooted for Homejoy along the way, cheering their rapid expansion and massive fundraising milestones. In the end, though, I believe the greater gain are valuable lessons to glean from their rapid ascension and demise; some are positive, and some are traps to avoid falling into. I’m not an employment attorney, so I will not get into the legality of the 1099 debate, but rather will focus what HomeJoy has taught us about the fundamental dynamics of introducing tech into the home services space.
As a fellow entrepreneur in the local home services space, but obviously an outsider to what went on internally at HomeJoy, here are a few key lessons that stick out in the company’s rise and fall:
The trap of applying Uber’s top-down model to a more complicated vertical like home services.
For better or worse, most startups in the on-demand services space treat the supply side as a commodity. Obviously, this model has worked for Uber and Lyft and appears to be working for Instacart and Postmates; however, the attempt to commoditize home cleaning labor does not appear to be working. Examining Yelp reviews for Homejoy and Handy as a proxy for customer happiness would indicate that a positive customer experience has not scaled well with either of the platforms’ bookings. Consumers expect a quality service executed at their home by an experienced professional — and it turns out that even great software cannot make a housecleaner want to do a thorough job in cleaning a home.
Failure to acknowledge that the economics of home services are really tough.
Whether it’s home cleaning, lawn care, or pool servicing, the dynamics of the home services industry are very challenging. Low barriers to entry cause the existing industry pricing and margins to be already razor thin, even before a tech-based marketplace attempts to revolutionize it. Effectively adding in a middle man to take a chunk of the thin margin leaves no meat on the bone for the service provider to deliver a quality job and ultimately please the customer. Startups applying Uber’s model to home service verticals fail to recognize that Uber and Lyft created an entirely new market alternative that sidestepped the regulatory bloat of the taxi industry, unlocking the margin to fuel its viability. Homejoy suffered a negative contribution margin on every cleaning it performed; as cleaning bookings scaled, labor (its biggest cost driver) scaled unsustainably as well.
The mistake of premature blistering venture backed growth.
Many entrepreneurs dream of raising 40 million dollars of venture capital; however, scaling atoms rather than bits is tougher than it might appear. Thanks, Uber, for making it look easy. Typically, a local marketplace startup will launch in their home city, pamper and satisfy their home base of clientele, raise venture capital, and only then attempt to blow out to 30 cities by the following year. We’ve seen this cycle repeated by Exec, Zaarly, TaskRabbit, Handy and Homejoy. VCs want one thing — huge, fast growth. Any startup taking on venture partners has to deliver that growth or die trying. Homejoy taught us that customers don’t care about how fast you have to grow; they just want a spotless kitchen floor.
A positive lesson deals with feasible local services product distribution.
Observing how Homejoy acquired customers does leave us with some valuable lessons around a viable distribution strategy for local home services startups. Upon examination Homejoy acquired much of its customers through paid channels such as Yelp, Groupon, Facebook, and Adwords and achieved impressive massive distribution on a local city by city level. Achieving liquidity with local product distribution is one of the toughest challenges local marketplaces face; however, this core strength of Homejoy reinforces the notion of nothing kills a broken product faster than world-class marketing.
Homejoy took an impressive run at revolutionizing home services; my belief is that ultimately the future of on-demand home services will be delivered by service professionals with existing client bases. Only when those professionals decide that they are good and ready to participate and grow their small businesses on a digital platform will the Uber-of-x experience be possible for home services.
Bryan Clayton is Co-founder and CEO of GreenPal a marketplace connecting homeowners with local lawn care companies via web/mobile app. Previously he founded Peach Tree Inc, a leading landscape firm operating in Tennessee, ultimately growing it to 125 people through successful acquisition.