Welcome back! For those of you who have been with us through this series, we are about to unpack the second of the three software business models Crema implements when building digital products. If this is your first read within this series, thanks for joining in on the topic. I highly recommend that you read our first two posts on the Crema Difference and the Multi-Sided Model, and watch us elaborate even more in our videos.
Today, we move full steam ahead into a discussion of the On Demand Marketplace model. This type of model is getting larger in terms of economic activity and spending. Industries such as transportation, e-Commerce platforms, and general services have seen numerous companies (think Uber, eBay, TaskRabbit, etc.) disrupt the status quo. You can read a lot more about these trends and this growing economy at the Harvard Business Review.
At the end of this post you will have greater clarity on the model itself, challenges that we have seen among businesses embracing this model, and how Crema can help business owners navigate through those challenges. Let’s begin.
The On Demand Marketplace defined…
A marketplace that can only scale through continuous growth in two separate user groups: the seller AND the buyer. Both parties value immediacy and are dependent on the merchant to facilitate the transaction.
In any business, there is the seller, the product or service, and the buyer. Traditionally, if I were to start a business, the only party that I have to convince to purchase my product is the buyer. For example, if I were to open up a coffee shop my goal would be to convince a customer to buy my coffee through marketing and advertising efforts.
In the on demand marketplace model, I have to convince both parties (buyer and the seller) of the inherent value of being an active participant on the platform. I am no longer an owner trying to sell my product to the buyer only. I am a third party that owns a platform, and am responsible for providing the buyer AND the seller in order for it to be successful. This model qualifies for the chicken and the egg scenario and it is very difficult to execute.
A great example in the market today is Uber. In their model, Uber is the third party that has to provide the seller (Uber Drivers) and the buyers (Uber Riders). If they focus only on one, they will not succeed. They have to convince the seller that there is high enough demand to 1) make money; and 2) entertain the thought of giving strangers a ride in their car. They also have to convince the buyer that there are enough sellers out there to warrant them downloading an app and then waiting on a novice taxi driver to pick them up and take them to the correct destination.
That is just the beginning. Not only is Uber responsible for creating a sustainable business model for themselves, but they have to create a sustainable business model for the Uber Driver in order for them to even consider the opportunity. In short, you are creating an online economy, not a business.
This model is undoubtedly the most difficult for the above reasons. It’s hard enough creating a business, let alone an online economy! Below are three challenges to be aware of when approaching this type of business model.
First, as mentioned above, simultaneously cultivating both sides of the marketplace is the greatest challenge facing this model. Two sides means two different messages of value, two different marketing strategies, two different sets of customer behaviors and preferences, etc. The list could go on and on, but the key thing to remember is that this model creates a dual focus, so be prepared to have two strategies to approach those different focuses.
Secondly, centralized or decentralized? This is the question. Will your model control the goods, pricing, and execution? Or, will you choose to leave this up to the supply side (seller)? In our previous example, Uber uses a centralized model in that they control pretty much everything except actually driving. Decentralized examples include businesses like Airbnb, eBay, and SeatGeek in that they primarily broker a transaction, but do not set price or manage inventory.
Lastly, there are legal challenges to the on demand model. These can be myriad, but bottom line is that you need to make sure your business is protected. Be sure to consult with a legal expert to explore legal challenges specific to your on demand business. One example is labor law. Labor laws are different between states and countries…so be ready to address this.
Crema’s approach to these challenges
Much like the multi sided model, it’s best to start small. Crema recommends that entrepreneurs focus on a niche, and potentially a single market. For example, if you were to start an on demand business connecting families and babysitters, presuming you’ve already proven market viability, you might start hyper local with only one neighborhood. Putting in the effort to build up small helps to identify pitfalls, unseen wins, and a replicable process for expansion.
Another approach with which Crema has seen success is by building up demand through pre-orders. By first proving the buyer side of the marketplace you are helping potential sellers solve one of their biggest issues, finding new customers!
The on demand economy is growing rapidly and will continue to increase until instant gratification is no longer an appealing concept (read sarcasm). The approach is without question a viable business model, and also has many difficult challenges. However, for the entrepreneur or product developer that starts small, sells the concept early, and has a lot of grit…it can be done.
Stay tuned for our final write-up in this series about the SaaS (Software as a Service) Model. You won’t want to miss it.