Market Entry In The Sharing Economy
How To Launch A Startup In 30 Days
I have the pleasure of speaking with a variety of different founders everyday. I also engage with even more individuals entertaining the thought of launching their own startup one day. Before they launch, I always ask them to run lean because your initial vision is built largely on untested assumptions. I also advise them to be as productive as you can in the first thirty days without spending a dime or as close to as little as possible. They usually respond with, “There’s no way I can do that?!” If you do things manually in the beginning, then you can figure out how to automate in a cost effective process.
So, I felt the best way to demo my rationale for running lean would be by launching a startup within 30 days without spending more than $500. I didn’t view this as a dare, but more as a way to truly understand and appreciate marketplace startups. After brief research and for simplicity sakes, I decided on launching an on-demand fitness platform targeting yoga enthusiasts.
I conducted the experiment earlier this summer with a peer from Babson, Mike Castro. The experiment is presented below in five steps.
- Assess Opportunity: Understand The Forces At Play (Week 1)
The rules of traditional business have changed as new business models are disrupting industries with one of these being the sharing economy.
In 2010, there were 20 venture capital firms investing in on-demand startups. Today, there are over 198. The sharing economy has raised $9.4 billion and this number will only continue to rise. Year over year funding growth in 2014 alone jumped 514% to hit $4.12 billion. Globally, China and India lead the way respectively financing over 40 deals within the on-demand space. Leading the way for all startups is the car hailing service, Uber. Uber’s $5.5B raised is 28% more than all other U.S. on-demand mobile services combined. Uber’s valuation is $68 billion. At this rate, Uber will be bigger than GM, Ford, and Honda. Many automotive and transportation experts view the success of Uber as a premonition of what the future holds.
“Google and Uber plan to revolutionize mobility based on a new transportation paradigm. How can GM, a company that is often described as bureaucratic, succeed in a future that is often described as disruptive,” analysts wrote in a recent Deutsche Bank report on the auto industry.
Google Ventures (GV) has done 11 on-demand deals to 5 companies in the last 5 years. Some of these investments include Uber, Sidecar, RelayRides and Homejoy.
Not all dinosaurs are being left behind. Some are acknowledging the need to partner with startups. McDonald’s has partnered with Postmates for home delivery, Trader Joe’s is testing food delivery with DoorDash, Lyft linked up with GM, Ford partnered with Getaround car-sharing program and StubHub is trying to ease parking pain with ParkWhiz. The sharing economy has entered a wide variety of industries, pushing businesses to adjust strategies.
One of the main drivers of this shift towards adopting the sharing economy is the aggregation of demand on mobile devices for offline services.
“In the collaborative economy it’s not the idea of sharing that’s new… What’s different now is the introduction of technology into the concept,” says H.O. Maycotte.
The proliferation of on-demand startups is largely due to the combination of data, analytics, affordable cloud storage, universality of social media and popular use of smartphones. It is projected that there will be 6.1 billion smartphone users by 2020. Additionally, with GPS location-based technology independent workers can quickly respond to tasks and jobs.
2. Conduct Secondary Research: Get Educated On Growing Segment (Week 1)
The sharing economy is more about reducing costs, often by thirty percent, and less about actually sharing. Robin Chase, co-founder of Zipcar, describes the process as “leveraging excess capacity, building platforms for participation that organize and simplify the work of these collaborating peers.” The collaboration of peers, enabled by technology, can only succeed within a connected network or ecosystem. The best networks exist in highly concentrated metropolitan regions such as Washington, DC and New York City. Transient and lively cities populated with active citizens make for attractive testing grounds for startups. The two-sided marketplace can be fulfilled on both the supply and demand side due to the vast pool of potential applicants.
Fitness is a particularly interesting industry with regards to how startups are approaching the sharing economy. The development of scalable and repeatable on-demand businesses are frequently launching due to advancements in technological solutions. Many startups believe they have found a problem-solution fit in satisfying the personal training needs of fitness enthusiasts. Vint, Fitmob, Fytns, My24, Disrupt Fitness, Pillar Fit, peerFit and FitOrbit are some of the startups who have already taken initial steps towards sharing economy.
However, ClassPass (not listed in above chart) is by far the most successful of all startups in the fitness space. ClassPass is subscription based charging $99/month for unlimited classes at over 300 studios in New York metro area alone. ClassPass is offered in over 30 cities and has raised $84 million in five rounds of funding. Users can attend three classes per studio each month with in-app options to purchase more classes. There are no included discounts with affiliated partners and it can be hard to book classes at peak hours for hot studios. ClassPass has become aware of the overcrowding issues for users to fully enjoy the experience.
“One of the interesting things about marketplaces is sometimes it’s the more the merrier: If the market grows larger, everybody is better off,” said Marina Krakovsky, author of The Middleman Economy.
That’s not really the case with something like gym memberships. ClassPass has recently altered their business model raising the price of the membership from $99 a month to $190. That’s almost double the initial price. “The majority of our members never exceed 10 classes in a month, so we wanted to provide an option more in line with their needs,” the company said in a statement to Huffington Post. As someone who was a member of ClassPass I can attest to the user dissatisfaction. The subscription model is flawed and I believe purchasing per class is the better direction to head in in order to be a successful fitness startup.
3. Conduct Primary Research: Ideation (Week 2)
After thorough investigation, the attractiveness of marketplaces in transient cities and my background in sports (professional lacrosse) we felt there was a real void in the market for an on-demand marketplace for at-home fitness, specifically yoga. A new understanding of the consumer is needed, especially one that leverages excess capacity, cost and user happiness. In order to fully and truly understand market entry in the sharing economy, we launched our own on-demand startup, NamaStay.
NamaStay (Namaste + Stay) is a two-sided marketplace connecting users with certified yoga instructors. I, personally, identify with this concept because I find it difficult to schedule my life around attending classes at yoga studios on time. After cancelling a few classes, I wondered why can’t the teachers just come to me. While considering the dilemma Mike and I figured it’d be important to research if there is even a market opportunity for this pain point and it turns out that the yoga industry is witnessing massive growth.
Total yoga participation is 36.7 million with an estimated 80 million who are likely to try yoga. 72 percent of active yoga participants are female and the location they’d most like to practice is at home. The participation rate is growing 7.6 percent annually, workforce is growing five percent, and studio growth is 3.8 percent. Overall, the market opportunity for yoga instruction is $3.7 billion and $3.3 billion for personal instruction. Yoga teachers by nature have flexible schedules and work part-time as 1099 contractors. NamaStay is the intersection of the market opportunity. Washington, DC also happens to be one of the top ten cities for yoga in the country. There are 271 Yoga Alliance registered teachers and 22 registered schools.
To prove or disprove our assumptions we conducted 11 beta trials in Washington, DC which included five teachers and seven students. The teachers taught at local studios in my neighborhood. I introduced myself after class and ask if they’d be interested in teaching in-home private classes. If yes, then I followed up via email to arrange their lesson with a friend of mine. Following the private sessions, sometimes with couples, we emailed a survey (Google Form) to both the teacher and the student. We uncovered a few important details from the surveys: majority are beginners, 100 percent would sign up again, students said they would pay between $50-$80 per session and loved the personal attention to health issues. The teachers said they felt “very comfortable” in the student’s home, willing to travel 6–10 miles, want to teach more because majority are part-time and would recommend to other teachers. We believed this data to validate the opportunity to utilize the excess capacity of people’s homes as makeshift yoga studios.
4. Develop Business Model: Test Assumptions (Week 3)
Majority of classes are before and after 9–5; the NamaStay model will allow access to people during work hours. In theory this will provide a steady stream of predictable income while building instructor’s name brand and consumer contacts, and between higher paying clients. It introduces contact points to convert clients to an instructor’s rates/packages since NamaStay limits the frequency of classes per teacher. Prominent yoga teacher, Mary Catherine, points out that in the greater Washington, D.C. area, the range for teacher pay varies between $30–75 per class in a yoga studio, though it’s typically around $35–50. Catherine also mentions that the pay structure is similar in California, though teachers in Los Angeles typically make a little more than the rest of the state. In any case, substitutes typically receive the same rate of pay as the teacher they’re replacing for that specific class.
After receiving additional feedback from teachers, we realized that NamaStay should not be compensating teachers the same rates as a group class at a studio, but rather a private class at a student’s home. We gained even greater detail on private class data after interviewing Mimi Rieger, well respected yoga teacher in DC. The average private class costs $130 per person, $150 per class for up to two people and $1200 for a 10-pack of private classes. Using this information in addition to the surveys and overall market data from secondary research, we determined the rates of NamaStay. NamaStay will charge $80 per class up to two people which is 62% off a typical private class and 53% off a typical private class per client. NamaStay takes 12.5% per client which leaves the teacher receiving a majority of the pay with $70.
5. Launch MVP: Expand Trial To New Customers, Iterate (Weeks 3–4)
Initially, after purchasing Godaddy Domain ($12.99), we began manually testing the service without a mobile application and we realized it discouraged users from booking appointments. So, like many of the sharing economy startups, we came to the agreement that we would be licensing cost efficient software to build my service off of. Engage, by MINDBODY, enables NamaStay’s own branded app to display on every client’s phone which provided more user discovery. Engage is a tailored app service that pairs the convenience of Engage with a look and feel that’s uniquely yours. You employ individual instructors around the DC area. Instructors are paid either a flat rate or a percentage of each session. Each individual instructor’s appointment schedule will be posted on the NamaStay app and on the NamaStay profile on the Engage app. The instructors manage their in-home appointment availability on their own through the main desktop appointment screen of your Engage system or through the MINDBODY Engage business mobile app.
Once a client selects an appointment and books a class, the teacher will get an automatic email notifying them that someone has booked an appointment with them. After the appointment is finished the teacher will complete the appointment in the system through the MINDBODY Engage app. The teacher can schedule a second appointment or sell a package of sessions and take payment for the session right there on the spot with the Engage app.
Final Results/Thoughts
You don’t have to sell equity or pay a ton to launch an MVP. Our only expenses were logo design ($299), stock photo ($10), mobile app ($99), domain ($12.99) and landing page ($60). The total cost coming to $480.99. Notice we managed to stay under the $500 ceiling without spending a dime until we did the research and developed a business model.
We could have cut the costs even more by not being so particular on having a decent logo and web layout, but we really wanted to draw in new users from social media (Twitter and Facebook) and capture useful information like email addresses and location. Our costs could have also gone in the other direction. Engage by MINDBODY is available for just $99 per month across all the following platforms: iPhone, iPad, Android and tablet. (Continuous updates are included.) This really helps my bottom line. Otherwise, we’d be spending between $20,000-$70,000 for just mobile app development. We were also able to upload a landing page using Launch Rock in under an hour with minimal costs which is pretty incredible. Those costs would sink our business before I even got off the ground. We’re experiencing firsthand how technological advances in the last ten years have really benefited startups.
Soon after 30 days, we decided to shut down the startup. As Boris Wertz states, “ It’s typically a binary outcome for marketplace startups at the beginning.” Either you go big or you go home. It’s important to realize that the on-demand service model that lifted Uber to its massive valuation won’t work for every vertical. Yoga teachers, by nature, are easy-going and free. NamaStay couldn’t consistently deliver quality customer service as half of our supply would abrubtly decide to “travel the world.” Seriously, I’m not kidding. This might just be the case in my experiences testing the DC market, but a true on-demand marketplace requires sufficient liquidity on the supply side.
In hindsight, we’d try to identify some of the major supply problems and think about how to manage those issues from the beginning. Without the time constraint of 30 days we probably would have taken it a step further and conduct more systematic analysis on the sharing economy.
Again, big thanks to Mike Castro for partnering up (and splitting the cost) with me on this experiment!
Sources
http://versionone.vc/wp-content/uploads/2015/11/Marketplace-Handbook-11-08-2015.pdf
http://knowledge.wharton.upenn.edu/article/the-sharing-economy-a-new-way-of-doing-business/
https://www.yogaalliance.org/Learn/How_to_Manage_Yoga_Teachers_at_Your_Studio
http://salarybystate.org/tag/how-much-do-yoga-instructors-make
