As most folks who in startup land saw yesterday, Shyp shut down. Scrolling through twitter today, I saw a smart tweet that sums up why I was never bullish on this model and similar kinds of startups that serve affluent customers at premium prices. There just isn’t a big enough market for these products, and even these affluent customers are only willing to pay so much, so margins tend to be terrible.
And when you look at these businesses, the big driver of both high costs and low margins is ultimately labor. If a driver costs $15–20/hr all-in (hourly wage + workforce management) and can only complete 3–4 transactions an hour (a small fraction what a UPS deriver does), that adds can add double-digit percentages to the cost or subtract double digit percentages from the margin.
Meanwhile, companies that do understand this problem have built massive businesses consumers love. My favorite example is IKEA, which incidentally in most of the world isn’t thought of as furniture for college kids. Their products are cheap, but while most Americans assume it’s because they’re low quality, the main driver is that they’ve made the same product cheaper. They ship the product disassembled, sell it out of their warehouse, and engineered a product it’s easy for you to put together with the fifteen cent Allen wrench they include in the box.
Sure, you’d rather have a fully assembled piece of furniture delivered to your house, but most people prefer a cheaper product and don’t mind putting it together.
For a long time, I’ve been looking for models that serve the customer better, but assume they’re willing to put on their pants and leave the house for a good deal. I can imagine businesses that focus on delivery-today-near-you, or food-to-pickup-near-you, and that these businesses would could deliver products more cheaply and more conveniently than traditional sellers.
In the startup world, I’ve seen a few examples of this. We could mention Bodega for the hate retweets, but maybe instead I’ll mention Josephine and Homemade, which both allowed customers to order great meals from local cooks and pick them up on the way home. Both hit antiquated regulations and died despite promising businesses. This model (they were pretty similar) is cheaper than Blue Apron, has a much better cost structure than restaurants paying for premium retail space, and most people come home around dinner so stopping along the way isn’t perceived as a high cost. Cheaper and (maybe) better.
There are labor-intensive businesses that make the world a lot better for consumers, and of course Uber is the poster child. But mostly we’ve seen the wave of startups that tried to cargo-cult this model have found their markets to be much more efficient.
I’m not exactly sure where we’ll see the tech IKEA emerge, but I suspect this is for two reasons. Firstly, as the cliche goes, we build things for ourselves, and we’re in a pretty lucrative line of work. I don’t think there’s anything wrong with making things for rich folks and you do you, but protip to would-be founders, it’s pretty well-fished waters.
Second, and much more interesting to me, technology almost always gets cheaper at scale, so it’s often smart to start with the premium customer and a plan to eventually serve everyone. This works for hardware companies that can lower prices as volume grows, and for software companies, who can eventually segment their markets to capture every marginal dollar at whatever price point specific customers can afford.
But it doesn’t work for logistics companies, which is ultimately what this entire category is. Logistics companies’ architectures (see FedEx) dictate their business models and cost structures, which in turn constrain or enable the product they can deliver and the customer segment they can serve. If you want to make a product Everyday Americans™ will love, you have to start there.
All that is to say, I suspect there are several Uber-scale opportunities in using novel logistics (and also under-employed labor, btw) making better things for consumers who won’t ever make a starting engineering salary at Uber. I don’t really know what they are, but if you’re working on one, I’d love to hear from you.