You, me and P2P…new markets, new problems

In this blog I will explore why P2P businesses are able to thrive in some markets but not in others. The business model works in A, but doesn’t work in B even though A and B seem similar. The issue doesn’t always lie with the business model but with the different marketplace.

In his article, Bill Guley lists 10 factors to consider when evaluating the potential success of new Digital Marketplaces -

1. New Experience vs the Status Quo.

Is your service giving the customer a new experience? Before you would have had to go to a video store to rent a movie. Now Netflix offers you a better service without leaving your sofa.

2. Economic Advantages vs the Status Quo.

People are more likely to choose a P2P business if it offers them a chance to make or save money. Airbnb caters for both. If a property owner has a room that isn’t used, they can offer it for rent and receive income on something that wasn’t previously utilized. The same can be said for the customer who uses the room as they can get a better price than a traditional hotel.

3. Opportunity for Technology to Add Value.

Previously when a small company needed a one off piece of work done and didn’t have anyone in-house, they would have had to put the work aside until they could hire someone new. By using a service like Freelancer the company can hire someone online within minutes and have the work completed in a short space of time.

4. High Fragmentation.

This comes down to supply and demand. The more consumers and suppliers you have, the better chance your P2P business has of succeeding. Take eBay for example. If you search for shoes you gets thousands of different brands, colours and styles.

5. Friction of Supplier Sign-Up.

When a company goes to a new market signing up suppliers is relatively easy as they follow the proven process model (Yelp, Uber and GrubHub). For others such as OpenTable it can be painfully slow and increases the cost. As part of the roll-out the supplier needs to install a PC with internet connectivity. However getting suppliers is the easy part, getting customers is more difficult and more important.

6. Size of the Market Opportunity.

Proper market research needs to be done before entering a new marketplace. There is no point in entering a market where you have little chance of success. It is better to limit your losses and move onto a more accessible market.

7. Expand the Market for the whole industry.

The ease of use of Uber has led to an increase in the number of times its users will use an alternative car service. By using Uber it gives the consumer an opening into how easy car sharing is and has expanded the market for other car services.

8. Frequency.

Higher the frequency the better. The more restaurants Yelp has at launch time in a new marketplace, the better chance the launch has of succeeding.

9. Payment Flow.

Getting paid immediately via mobile payment is better than issuing an invoice and having to sit around waiting for it to be paid. However setting up mobile payments isn’t always so easy, as one of the readings we did around mobile payments in Japan, China and South Korea showed. It all depends on what part of the world you are in.

10. Network Effects.

This is quiet difficult to achieve straight off. Take OpenTable, the more restaurants available for the consumer, the better the value received.

It is very rare that you would get 10 out of 10 factors when looking at a marketplace but the author says if you can get 7 or 8 than you have a high chance of success. I think that if you hit 5 in most markets especially the first 4 and no 9 you are onto a winner. If you can offer something new and unique you will draw customers to your business. Although if you can’t get paid quick and easy then your expenses will rise and force you out of the market.

In order to succeed companies need customers. In their paper Horton and Zeckhauser look at the sharing economy from an economic point of view. One of the main issues a P2P company faces in a new marketplace is -

“A key challenge in all markets is facilitating trust among strangers, and this problem is acute in P2P rental markets, given the “opportunity” renters have to misuse or destroy the owner’s capital.”

In their paper Einav et al. (2015) delve deeper into the problems faced in different markets.

“The goal of peer-to-peer markets is to create trade between large numbers of fragmented buyers and sellers. Doing this efficiently requires solving several core market design problems. One is to match buyers and sellers effectively, while keeping search frictions low. A related problem is to establish prices, or to organize the market so that prices will be set competitively. Finally, a potentially difficult problem is to ensure that transactions are safe and reliable for buyers and sellers.”

Trust is massive and unfortunately when it is lost, nearly impossible to regain. This problem isn’t just in developing markets, but in developed ones too. When I was researching my first blog I went on eBay for a look and ended buying clothes from the US. Payment wasn’t a problem, PayPal and MasterCard took care of that. I eagerly awaited each update. Your package has been dispatched. Your package has been sent to another distribution centre etc. Even though I knew it would eventually make its way to New Zealand, there was always a doubt in the back of my mind that the package could go missing. Imagine then someone who has just got access to the Internet and you a faceless P2P company are trying to get them to buy your service from half a world away. How do you convince them that yes you can be trusted and they can give you what little money they have? They are afraid you will steal it unlike that nice Nigerian Prince who says he can make them lots of $$$ if they give him their bank account details. Can you really trust a stranger to drive you home safely via Uber? Can you really trust the stranger sleeping on your couch or in your spare room via Airbnb? The point I am getting at is that trust is a 2 way street, so companies need to work hard to gain the customers trust and even harder to keep it.

Another issue that we covered in the readings in class is for all of these services you need Internet access. Take the example of Facebook and Google trying to sign up users in India and how they misread the situation and made things worse. They are still there trying to make inroads into the market, it is after all one of the biggest economies in the world. They have learnt some lessons but progress is slow. Companies need to be aware of economic, social, cultural, political and legal issues too.

Having read all the material above I have to conclude that each market is different and so is each customer. When entering a new market you have to take everything into account. Use what you have learnt from previous experiences to guide your next expansion. The best thing to do is not waste time. If you are going to fail then fail fast… There is no point in wasting time and money on a venture that is going to fail. Learn from it and move on.

Next time. Do P2P companies have a future or are they a fad? How are traditional companies fighting back and regaining lost market share?

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Good night and good luck