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Investors Still Betting on the On Demand Economy

How on demand service startups are pivoting for long term viability...

Can on-demand software and tech innovations alone really disrupt the services that largely fuel themselves through human capital?

Is The End of 鈥淯ber for X鈥 Upon Us?

Almost everyone is drawn to improved on-demand convenience, but not all are willing to pay for it. Realizing that convenience typically results in higher charges, certain start-ups have moved towards wealthier clientele while others have focused on a mass addressable market in an effort to take advantage of economies of scale.

Unless on-demand startups target large enough markets like dining, grocery, or shipping industries to grow margins through volume discounts, or actually find the viable customer subset willing to pay service premiums, software innovations alone appear to hold the key to unlocking additional value from traditional on-demand service models…

…or is there a much more neglected market disruptor waiting in the wings to be leveraged? And no, I鈥檓 not talking about self-driving cars.

Read on to see how certain startups are changing the on-demand economy landscape to position themselves for long-term viability.

Where Digital On-Demand Startups Improve Margin

What are the key expenses that new on-demand service startups can reduce or eliminate through modern innovation?

Personnel Costs

The cost of hiring either 1099 (independent contractors) or full-time (W-2) employees is significant in any on-demand service business, but the type of service offered usually drives the cost per individual service provider.

For example, companies offering highly skilled on-demand doctors will incur higher personnel costs than those offering on-demand chauffeurs, but the desire for exceptional medical service compared to rides from A to B allows more highly skilled service providers to differentiate their brand through extraordinary quality.

Real Estate Costs

Value creation in on-demand businesses is largely won by exploiting efficiencies in Real Estate costs.

On-demand services can be split into 4 separate genres regarding their real estate requirements to conduct business:

The Four On-Demand Real Estate Cost Categories

1. Just Connect On-Demand

Think car-sharing services or babysitting companies.

In this category, even the traditional service models need limited real estate to do business so digitized on-demand approaches can鈥檛 improve margins much through reductions in square footage.

Instead, their focus becomes creating technologies that build massive service provider liquidity for instant customer access.

2. Just Add Delivery

The Just Add Delivery category provides new or improved delivery solutions for existing traditional services – like food or grocery delivery. Businesses like Habitat have taken a DAAS (Deliver As A Service) approach and are beginning to see success.

Customers pay for the added convenience of delivery and on-location servicing so this model is most susceptible to an economic slowdown. Customers may forgo the luxury of convenience if downturns cause disposable income to dry up.

3. Consolidate Real Estate

When traditional brick-and-mortar service businesses like restaurants switch to on-demand models to remove storefront requirements, they create significant value by reducing and optimizing their real estate footprints. This can be seen through companies like FreshDirect.

Delivery can take place right from the warehouse maximizing efficiencies in infrastructure and supply chains, however, added delivery and logistical costs must be managed so real estate reductions aren鈥檛 negated.

4. Eliminate Real Estate

Those on-demand startups that can completely eliminate their real estate overhead have the most margin to gain from disrupting traditional cost structures.

Think of this in the example of Zeel, an on-demand in-home massage company, who does away with the entire need for a storefront altogether. You can see a similar structure in the on-demand labor and staffing space by looking at on-demand staffing companies like Laborocity. Laborocity provides businesses groups of highly qualified workers to help with general construction labor and event staffing, again, eliminating the need for a storefront.

Not only is shifting the point of service more convenient and attractive to customers, it virtually eliminates barriers to entry for individual service providers who want the flexibility to work for themselves.

However, there is a reduction in job efficiency as compared to single point-of-source service businesses so minimizing supply issues and transit times through technological innovation is imperative. In English: standing at your salon booth all day is much more efficient than driving around to people’s houses, so the advantages of being on the road have to outweigh those of staying put.

How Digital On-Demand Breaks From Tradition

Digital on-demand service startups create value and produce market disruptions if they innovate in the following ways:

– They provide scalable service provider liquidity to their customers (i.e. Uber).
– They consolidate, move to lower cost commercial zones or completely eliminate their real estate footprint altogether.
– They leverage technological innovation to reduce supply chain and logistical costs or challenges.

However, there is a neglected yet significant factor on-demand startups must address going forward…

On-Demand Economy Revenue Sharing

Technological innovation to reduce or eliminate traditional cost structures drives on-demand service value creation, however, the path to long-term profitability seems to have another critical component – solving both sides of the marketplace.
The emerging on-demand startup secret sauce is how well companies can share revenue with their service providers doing all the work. Translation: your workers, not just your customers, need to get a better deal or why would they join.

The cost of recruiting, training and maintaining service providers for on-demand models is significantly underestimated and individuals will likely opt for more income instead of work flexibility over the long haul.

If hair stylists can get steady, guaranteed work at salons, it will be tough for them to take their talents out on their own if the demand in an area is not already obvious. This effectively creates a difficult chicken or the egg scenario for such individuals.

Real estate eliminator category examples like hair salons, massage studios and auto shops (where employees are often underpaid and overworked) are ripe for market disruption as the corporate office can easily increase revenue sharing with their service providers without any increase in price to customers.

Investors seem to be supporting this kind of karmic on-demand business model as revenue sharing startups like YourMechanic, GladlyDo, Soothe, and Zeel are dominating the on-demand economy field in recent investment rounds, having raised a cool $70million between the four of them.

The On-Demand Economy Lesson Learned

On-demand service startups must technologically innovate to bring customer convenience at competitive pricing while also sharing increased margins among their service providers doing the work. Those companies that can add value to both sides of the marketplace will flourish in the fast-growing on-demand economy.

 

Thoughts? Hit me up. Woody@Laborocity.com

Woody Klemmer is the Co-founder of Laborocity, a company that provides businesses with qualified workers, 鈥淒oers鈥, on-demand.