10 Reasons That On-Demand Services Fail
Is the on-demand dream all it’s cracked up to be? Hundreds of startups have flooded the market with “Uber for X” models in the past few years, but the landscape in 2016 is filled with just as many failures as successes. Buzzy startups like Homejoy, SpoonRocket, Shuddle, and BlackJet all shut down, and many others have pivoted away from their early missions.
Venture investors put $17.8 billion into on-demand businesses last year, but consumer adoption has been slow, at best. While 72% of Americans have used some type of on-demand service, adoption rates for ride-hailing apps and grocery delivery services sit at just 15% and 6%. Even among on-demand startups with robust user bases, the challenges of growing and scaling can be daunting.
To uncover why so many on-demand startups fail, we asked some of those that have found success. Here are the pitfalls that they said they next wave of founders should make sure to avoid.
1. Failing to focus on unit economics “Generally speaking, most businesses spend too much to acquire a paying customer, and see minimal return on that investment. There are many companies that spend well over $200 to acquire a user, and only generate $20 to $30 in revenue for that user. We have seen many companies raise upwards of $20 million, spend a tremendous amount of that capital on marketing to artificially boost user numbers, insert hockey stick graphs into their investor decks, only to see the numbers decline because little thought was given to long term engagement. (Devaraj Southworth, Thirstie)
2. Not solving real problems “Some of the Uber for X ideas are nice ideas, but they haven’t really hit on a big enough problem or don’t provide a great enough solution. For example, look at some of the on-demand car wash companies. It just isn’t a big enough or frequent enough problem, and the solution isn’t that valuable — convenient or cost-effective — so it ends up being a very tough fit. Many on-demand companies are just dealing with Band-Aid type problems instead of emergency room-type problems, which makes the solution not appealing enough to enact user change.” (AJ Brustein, Wonolo)
3. Being something they’re not “I have seen on-demand companies, some pretty popular ones at that, which consider themselves either customer databases or logistics companies. In order words, they view their success in their ability to provide customer data to other parties instead of focusing on the service they provide to customers. Other companies in the on-demand space decide to compete with their partners in an attempt to take the vertical, like warehousing, distribution, marketing and delivery. This defeats the purpose of a lean on-demand service, while creating friction with those who could be resources and partners.” (Jonathan Gropper, BeerRightNow.com)
4. Not considering the competition “Huge competition is a reason on-demand startups fail. Investors interested in on-demand services have lots of options to choose from. Plenty of food and restaurant delivery services, even dog walking services have a few options. It’s hard to survive in this highly competitive market.” (Stas Matviyenko, Allset)
5. Poor relationships with workers “There are so many options for workers to find gigs that if your solution isn’t fulfilling the needs of the supply side, you will lose the workers. Generally, pay is the number one factor — many companies make promises of ‘up to $30 per hour’ but there is no guarantee and often the actual amount you make is much less. Beyond pay, people want to feel respected and valued. They want a sense of community and belonging, and an opportunity to grow. On-demand companies that forsake their supply for a focus on growing demand, or commoditize their supply, find a lack of loyalty, increased churn, and a poor overall experience for both sides of the market.” (AJ Brustein, Wonolo)
6. Not understanding local audiences “Founders assume an over-demand for their product line up, offering macro-level products where micro-environments exist. At BeerRightNow.com, we focus on understanding each market we are in, providing market specific products and making sure they are appropriately priced. Seems like common sense, but many companies improperly assume they can translate success between disparate markets.” (Jonathan Gropper, BeerRightNow.com)
7. Not understanding the profitability inflection point “After receiving initial funding, many startups go on a spending spree assuming customers will come in at a high enough rate to offset the high per customer acquisition cost. They then assume the customers they previously acquired will be recurring enough to offset the pre-existing overhead. Quite a few startups assume they can ‘beat the clock’ and turn profitable before funds run out. Most lose that bet. Many companies would have a much smarter and leaner organization, not to mention a larger market share and lower overhead, if they contemplated merging with existing or complimentary companies.” (Jonathan Gropper BeerRightNow.com)
8. Forgetting user engagement “This issue addresses a products value proposition. You may have an unbelievable idea for a product that has a single use case, however if the product isn’t engaging or it doesn’t have multiple use cases, a consumer will likely forget about your product as it competes with others for mind share. This is not to say that the product is not valuable, but you will have a difficult time building a true business with it.” (Devaraj Southworth, Thirstie)
9. Over-promising on supply or demand “Balancing supply and demand [is important, and] you cannot over-promise to either side. The way we have managed our supply and demand has ensured that satisfaction levels and NPS at both the customer and provider ends are very high, thus keeping churn super low.” (Ritu Narayan, Zum)
10. Chasing the competition “Avoid the urge to chase your competition. Clearly you should keep a keen eye, track them and analyze their actions. But do what’s best for your business, not others; make decisions and execute on your strategy. Periodically you should review the outcome and results, and make adjustments as needed, but don’t slow down. Don’t be afraid to make assumptions, because you will have to — and the sooner you prove or disprove them the better.” (Devaraj Southworth, Thirstie)
Stephanie Miles is a senior editor at Street Fight.
Interviews have been edited for length and clarity.