Let’s Stop Throwing Out the On-Demand Baby with the On-Demand Bathwater
Originally posted August 2016
Stop listening to the media: the on-demand business model is not dead. It’s not as special as we hoped and doesn’t solve all problems, but let’s stop throwing the on-demand baby out with the on-demand bathwater.
Name me a popular tech blog or website, and I’ll find you an article penned in the last 6 months proclaiming the downfall of the on-demand economy. As hot as the on-demand economy was in 2014, the death of the on-demand economy is just as hot a subject in 2016. Although ride sharing startups like Uber and Lyft in the US and Didi Chuxing in China are still flourishing (given the latest investment rounds and cross investment activities), the on-demand backlash is happening. I myself shared this sassy tweet upon reflecting on the Quartz condemnation of Instacart and all things on-demand:
In fact, Quartz agreed with my “hot take” so much that they ripped it off in their March 19th weekly summary (“ The ‘Uber for X’ model rarely works except when X = Uber.”), without citing me (thanks Quartz!).
However, this “death of the gig-economy” meme has gone too far. The on-demand dream is not dead. It’s just that it’s not the silver bullet exception to the rule that investors and entrepreneurs hoped for. In fact, the on-demand startup is governed by the same basic principles as all other tech startups. By basic principles, I mean the same pieces of advice you’ll get in every Entrepreneurship 101 class or in at least 50% of all tech panels you attend giving advice to entrepreneurs.
Here’s are four basic startup principles that Uber & Lyft satisfied, but many of their other on-demand companions forgot:
1 — Great startups solve big painful problems.
The problem you’re solving needs to be big and painful, not just inconvenient. The ride sharing startups are solving a massive problem of providing more cost-efficient transportation. We’ve seen too many on-demand startups that are solving minor problems. For example, while food delivery has been an on-demand business that has struggled to yield successful startups, Dinnr tried and failed to provide same day ingredient service. Was having the right (and expensive) ingredients on hand that day to be able to cook dinner the problem? Clearly not. There is demand for a weekly box subscription service, like Blue Apron, but that addresses a bigger problem than sourcing ingredients on the same day.
There is a great analogy of “vitamins vs. pain killers” for identifying problems to solve, with the typical advice that a vitamin is a nice-to-have, but a pain killer is a must have. However, Nathan Furr summarized in his Forbes article, “The Secret to Entrepreneurial Success: a Monetizable Pain,” that the deeper issue at play is the size of the pain, regardless of whether it’s a vitamin or pain-killer.
However, the ultimate problem with the vitamin versus pain killer comparison is that it overlooks the more fundamental problem of discovering how BIG a pain you are solving. Many entrepreneurs solve “pains,” but most often they are chasing what I would call mosquito bites — sure the “pain” is a nuisance but often customers are willing to live with the nuisance than part with their money. Instead, you want to look for pain points that are shark bites — big, significant pains that no one can ignore! As Mike Maples told me about starting his very successful venture, “we were looking for a pain so big you needed a tourniquet. If you didn’t get it, you were going to die.” Now that is a pain worth solving. Therefore, the bigger the pain, the bigger the opportunity. As Vinod Khosla says, “no one will pay you to solve a non-problem” and by contrast, “any big problem is a big opportunity.”
2 — You need to be 10x better than the previous solution so don’t ignore your competition.
“You need to make sure your product is 10x better than that of your competitors. First, you’re probably exaggerating how much better it is. But also when you’re developing so is your competitor. So if you shoot for 10x better you might hit 3x better and that’s super important to win.”
Too many on-demand startups have sought incremental gains relative to exiting solutions, rather than focus on areas where 10x improvement (like ride-sharing) is possible. For example, Prim was an on-demand clothes washing service based in San Francisco. While laundry as a whole is a large problem/market, San Francisco already had a number of attractive alternatives to the old coin-operated laundromat solutions and adding an on-demand approach did not create a 10x or even 2x improvement. In the words of the founder:
“While I was hopeful Prim could figure it out, and I really enjoyed the service, the outcome isn’t entirely surprising. San Francisco already has laundry services like LaundryLocker (where you drop your clothes in a public locker), SF Wash (a delivery service where you pay by the pound), and Sudzee (which requires special lockable bags). That’s a lot of competition”.
3 — A proper business model includes indirect costs.
One of the most frustrating trends we see in on-demand startups is the lack of appreciation of the cost structure of their business, specifically unit economics. This sounds like common sense, but understanding fully loaded costs for on-demand business is far more complex than in typical manufacturing or software businesses, especially in parsing out which costs are variable vs. fixed. Adam Price does a great job summarizing unit economics and where startups typically go astray in his article “The Unit Economics of On-Demand Delivery Startups Explained”.
Here is the “Unit Economic Theory ” equation:
Basically, a company needs to ensure that they are bringing in more revenue per hour than it costs them to incentivize a person to pickup and run your deliveries, complete your tasks, etc. If this gets out of whack, the company is losing money every hour they operate. Now, let’s examine each variable and discuss the implications and where many of these on-demand companies are in trouble.
In my opinion, on-demand parking and on-demand food delivery startups are the most egregious violators of this principal (and Adam Price again does a great job reviewing food delivery startups here). The biggest issue that bogs these startups down is the under appreciation of the cost of their work force. While Uber and Lyft drivers can carve out a living driving full-time or supplement their income by using excess capacity in their calendars, the on-demand food delivery and on-demand parking jobs are different. The hours are less flexible (during rush hours or meal times) and the option to earn a full-time wage is not possible (too small of a demand and lower willingness to pay). This dynamic causes massive turnover of these part-time workers as they seek more stable, flexible and/or lucrative opportunities. Therefore, while the cost associated with an individual worker per delivery may make your profitability equation tilt positive, it’s the hidden costs of replacement costs (recruiting, training, on-boarding, etc.) of a high-turnover job that makes these companies unprofitable. Increasingly, we’re starting to see companies like LuxeValet recognize this issue and turn their contractors into full-time employees in order to reduce the turnover costs, while also guaranteeing supply and avoiding legal concerns.
4 — Know your audience: your local market is not the rest of the world.
The final principle is the most intuitive and, especially in Silicon Valley, often the most overlooked. Silicon Valley entrepreneurs (as well as those in other tech-savvy higher affluence cities around the world) often take for granted that their future (and potential vast majority) market are not like their initial test market. Not everyone lives in a small apartment, has a 6-figure salary and a smart phone, doesn’t commute by car, and is immersed in all things digital.
But this point has been egregiously ignored by many an on-demand startup as they try to extend the on-demand models into new niches. For example, Cherry was a on-demand car wash service, launched in 2012 and folded in 2013. As it turns out, the initial demand they identified in SF for finance people and tech workers wanting their car washed while at work and willing to pay a premium for it did not extend beyond San Francisco and possibly New York. While this sounds obvious for a business like Cherry, is it so different for on-demand food, parking, pick-up and delivery, handyman services, and even the on-demand hero that is ride sharing? Probably less than we think.
Gary Coover is a tech and startup business model junkie who honed his snark through years of strategy/BD work, co-founding a startup, and a few years in Korea and the Bay Area working for Samsung. Gary currently runs Global Operations for the Samsung Accelerator, helping architect, launch and scale the Accelerator and its startups in New York, San Francisco and Tel Aviv. His opinions are his own, as are his tweets, which are occasionally above average.
Additional content from this author:
- What Entrepreneurs Can Learn from Olympic Silver Medalists — The Importance of Market to Your Startup
- State of the Bot — where are we now and where are we heading?
- Design as a Differentiator is Dead — Long Live the Business Model!!!
- Finding the Right Incubator “Unfair Advantage” — In the end, the unfair advantage is the key differentiator for both start-ups and incubators
- Frame Your Next Project for Success: a 6 Question Cheat Sheet — A former consultant talks about something other than hotel points and frequent flier miles
- The Startup Revenue Model Smell Test — Why Path may be in trouble
- The Lasting Tech Innovation of our Time: Putting a Price on Talent — Through the use of acqui-hires, Facebook, Twitter and Google have led the seismic shift in the way teams and talent are valued