Thoughts on the On-Demand Service Economy Part III

This is the third and final installment in my On-Demand Service Economy series. You should read Part I and Part II before reading this post.

I previously discussed how these apps play a role in my everyday life and what the economics look like for the contract workers. But the real question is how sustainable are these businesses? Can the on-demand service economy survive beyond this current economic boom?

The Core Problem

In my opinion, the primary reason for my pessimistic outlook with these apps is the fact that none of these are “must-have” products. They are “nice-to-have” apps. Do I need an on-demand maid? Or massage? Can’t I get my lazy ass up and drive myself to the grocery store? Why do I need to pay someone to buy my groceries and deliver them to me? Easy answer: I don’t. So once the price gets too high, I am no longer willing to pay for the service.

There is no way I could afford to use these services as often as I do if there were priced any higher. And therein lies the problem. In order to reach critical mass, these companies need to keep prices so low that you don’t think too hard about justifying the cost. These apps really cater to the top earners in densely populated areas. And it’s really hard to grow and scale a business with such a small market and small margins.

We are seeing companies use their millions of dollars in venture capital to give huge discounts to acquire a new customer. All in the name of growth, which is the key to Silicon Valley success. More customers means more revenue in the future, even if that means you’re paying $1.50 to make $1.00 in the short-term. But what happens when the VC funding goes dry and the discounts become obsolete?

Why These Apps Work Today

In the first dot com boom, HomeGrocer.com and Webvan were the poster-children for dot com greed and bust. The grocery delivery services raised over a billion dollars combined, with Webvan eventually buying HomeGrocer for stock (Webvan is now owned by Amazon). These companies spent millions on acquiring customers and building infrastructure, like warehouse and distribution channels. It’s easy to point to these reasons, along with the deficiencies in mobile technology, as to why the first iterations of on-demand businesses didn’t work out.

Today’s on-demand apps enjoy two advantages. One is a fully mobile market. Nearly everyone has a smartphone, with GPS and internet capabilities. Plus everyone is more comfortable making purchases through their phone. During the original dot com era, online payments was in its infancy. Trust was still being built. But now, paying for something through your phone is ubiquitous behavior. Secondly, today’s delivery apps are less reliant on infrastructure.

The way apps like Instacart and TaskRabbit are set up, there is no need for warehouses full of product. Instead, they piggy back off the existing infrastructure of grocery stores. No longer do startups have to set up supply chain management and forecast how much product to buy. They simply hire contract workers, who walk into stores, buy the products, and deliver them. The combination of mobile usage, less infrastructure, and contract workers allows startups to start making more money, faster.

What’s to Come?

If you were to put a gun to my head today and I’ll tell you only two companies make it out alive. Amazon and Uber. I think that there’s going to be a great consolidation with these on-demand apps in the next few years. Both of these companies poised to dominate the on-demand in the future because they’re both well funded.

The Case For Uber

Despite Uber’s PR nightmares, it’s still a well capitalized company. They have vast distribution channels with their legion of drivers all over the world. But I think Uber’s poised to dominate the on-demand economy because of one thing: driverless cars.

Uber wants to make their service so affordable that everyone can afford to give up their cars and just take Uber. What’s the one thing that not only costs Uber the most but gives them the most headache? Its human drivers. If you’re to remove drivers for driverless cars, you can drop the price of an Uber and eliminate the security concerns over a driver’s background. Plus, Uber would still make money per ride, than they currently do.

You can see the writing on the wall. Uber is testing out lunch deliveries. For $12, you can get a lunch delivered to your office within 10 minutes. Just as easy as getting a ride. I can see this service expanding beyond food. Again, you’ll see even more hyper-growth once Uber has a driverless fleet of cars.

The Case For Amazon

Amazon has an infrastructure that can support a vast on-demand economy. Their service, Amazon Fresh, is starting to roll out to more cities, outside of San Francisco. Because Amazon has a multi-billion dollar business to support it, as well as a huge existing customer base, they are able to do what companies like Webvan couldn’t. They can establish warehouses full of fresh food, ready for distribution.

Amazon’s Prime customer base might be their best asset. They have a subset of Amazon users who are pre-identified as power buyers. They use Prime to buy more items, with faster delivery. These customers are already paying a yearly fee of $99 for the Prime service. Amazon Fresh costs $299 a year and includes all Prime features. Existing Prime members get a pro-rated refund on their Prime membership when Fresh is purchased. The cost to acquire customers is dramatically lower than a startup starting from scratch.

Jeff Bezos is a long-term thinker with cash on hand. I wouldn’t bet against him in anything. He’s not afraid to dip into negative margins to gain market share. I wouldn’t be surprised if we’re all getting our food from Amazon at some point down the road.

The on-demand service economy is here to stay. The only question is, what existing players will be around in five, ten, fifteen years? It’s my guess that we’re going to see a lot of growth in this industry in conjunction with the fall of many services. Companies like Uber and Amazon are going to win because they’ll be able to offer the same luxury that companies like Instacart and Postmates offer at a much lower cost. What do you think of the on-demand economy and its future?

[Image 1 Courtesy of TheNextWeb]

[Image 2 Courtesy of Richard Masoner]

[Image 3 Courtesy of Techcrunch Screenshot]


Originally published at boumanblog.com on December 7, 2014.

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