The success of Uber has inspired hundreds of startups to call themselves the “Uber of X, Y, or Z.” There are now apps to order groceries, have you car washed, get legal counsel, and much more. Uber is part of a broad category of on-demand mobile services. Thanks to smartphones and cloud computing, it’s easier than ever to connect people who need a job done with people looking to take on some extra work and monetize their spare time.
This new marketplace model is responsible for shaking up numerous industries. Uber and Lyft drivers are disrupting the taxi industry. Homejoy and Handy traditional cleaning companies. Entrepreneurs and investors are excited by the massive opportunity potential, while others worry that the Uberification of our economy will turn every good full-time job into a flex-time gig. However, amidst all the fear and exuberance, it’s important to realize that the on-demand service model that has lifted Uber to its $40B valuation won’t work for every industry.
Several underlying factors made the taxi industry ripe for disruption by on-demand marketplaces. While these ingredients certainly aren’t unique to hiring a ride, they do not cut across all industries and verticals. Consequently, finding an untapped market and saying you’re going to build the “Uber for X” is hardly a surefire route to success.
So what are the underlying drivers that enabled Uber to thrive in the car service industry? There are three key elements: it’s a commoditized service with a high purchase frequency that is truly time-sensitive.
Underlying Commoditized Services
When it comes to hiring a ride, most of us are happy as long as a driver brings us from Point A to Point B in a clean car without getting lost. This makes us pretty flexible in terms of who delivers the service. Yet the more complex the service, the harder it becomes for consumers to accept the idea that somebody at random will show up each time. We develop preferences for who cuts our hair, babysits our children, performs home repair, and gives out legal/medical advice.
To overcome the trust-barrier, marketplaces can leverage user reviews and Facebook profiles. For example, through Facebook Connect, Airbnb has managed to make people feel safe and secure when opening up their home or staying in a stranger’s place. Other strategies are to certify the service provider pool, tie into existing review sites/peer testimonials, and offer money-back guarantees.
Sites do exist for non-commoditized services today. But they operate more like a lead generation engine than an actual marketplace capable of facilitating the entire transaction with the couple-of-taps simplicity of Uber.
Marketplaces for complex transactions will need to productize their services, with boxed offerings that pre-define the scope, pricing, duration, and deliverables of a service. By removing choice and customization from the process, it’s more realistic for customers to arrange a complex service on a mobile app.
High purchase frequency
The best marketplaces have high purchase frequency and regular usage. For city dwellers and frequent travelers, taxis are used on a daily, or at least weekly, basis. Few other services have such a high purchase frequency. On top of this, Uber also enjoys significant spill-over effects as travelers move from one location to another.
With high frequency use cases, customers fall into the habit of using the same service as long as they’re satisfied. It’s easy then for a startup to become the “home screen app” for that particular use case. By contrast, it is much harder to retain customer mindshare with lower purchase frequencies. For example, if customers need a yard cleanup a few times a year, they’re more likely to begin the research process over again each time.
True on-demand use case
Many of the services that fall into the on-demand mobile services category aren’t actually “on-demand.” In most cases you don’t need a cleaning service or house painter to show up within minutes, or even the same day. But, taxis are a different story.
A true on-demand marketplace requires sufficient liquidity on the supply side. Without enough available drivers in a car service marketplace, customers will be left waiting on the curb. This creates a large barrier to enter the market, since a new competitor needs to launch with hundreds of providers, not just a handful.
By contrast when services can be delivered with more flexible timing, it’s easier for competitors to enter a vertical or new location and there’s less of a “winner takes all” dynamic. As such, we can expect just one or two major players for a true on-demand service, while less time-sensitive markets will be crowded with smaller companies.
This is not to say that Uber will be the last multi-billion dollar Unicorn in the marketplace space. I have no doubt that some savvy companies will figure out how to move more complex transactions online, shaking up more industries in the process. However, entrepreneurs and investors need to be thoughtful when evaluating the underlying factors of a marketplace and vertical, as the “Uber of X” won’t necessarily work as well as the original.