
Why Many On-Demand Platforms Fail - endswapper
http://themacro.com/articles/2016/10/why-many-on-demand-platforms-fail/
======
paulsutter
On demand startups usually fail because customer acquisition cost is greater
than lifetime value (CAC > LTV).

Retention is the most common driver. Even good virality can't overcome bad
retention.

A rough advance estimate of retention is the "toothbrush test": do people use
it as often as a toothbrush. Services used rarely are more likely to be
forgotten by the next use. If they need to find you again on Google, your
competitor can buy them with Adwords.

I saw a startup once for a mobile app to arrange funeral services. I had to
chuckle because that may be the lowest possible score on the toothbrush test.

~~~
duncanawoods
>> A rough advance estimate of retention is the "toothbrush test": do people
use it as often as a toothbrush

Ugh - I have heard this before - its such an unhelpfully high level that it
fails its purpose as target setting advice. Almost nothing is a "twice a day"
service. Whether its Uber or Pizza, the vast majority of users do not use them
twice a day despite their love and loyalty. For the few businesses that are
e.g. FB, Slack etc. its because they are communication oriented rather than
task oriented so they are more like monitoring a feed than using a tool.

Sure, its wise to be sceptical about services that are once per life "AirB&B
for gravestones" or once per year "Uber for Christmas decorations" but your
once per month billing/invoice system is likely to have high retention once
you get customers locked in.

~~~
paulsutter
The toothbrush test isn't just retention, it's also about sales velocity. A
product used monthly tends to have a slower sales velocity than a product used
weekly. The pace of the decision cycle is related to frequency of use. For a
monthly use product, the moment the customer learns about the product will be
an average of 2 weeks from when she needs it. That's two weeks for her mind to
get distracted with other things. It's easy for the evaluation to get pushed
by one or more intervals, and even once the decision to purchase has been
made, there might be a month delay before the close and that's a month in
which urgency can fade and a chance for it to get set aside.

Note how sales velocity and retention are similar, can you retain customer
interest long enough to close a sale?

There are successful occasional use products. It's not meant as a threshold or
black and white test, its just one factor to consider when choosing which
business to start.

------
Animats
The question is whether there are useful stops between Uber-like total control
and a lead generation service.

Servicemaster operates in that space. Some workers are employees and others
are franchisees who may have employees of their own. That works, and
Servicemaster, after 85 years of operation, has a market cap of $4.5 billion.
Not a get-rich-quick scheme, but a success. HomeJoy tried to compete with
them, not too successfully.

Then there are the lead generation services. Plumbers have these; most of the
ads in what's left of the Yellow Pages go to the same call center. They don't
do much and they don't make much.

Operating somewhere between those points seems to be difficult. It's not clear
yet if Uber makes it; they're still losing money, and eventually, the
investment money stops flowing in and they have to cut costs. (Look at
Twitter. Growth is not enough.)

~~~
danieltillett
The only way any of these business types work is via the greater fool
approach. Uber is a great investment if you believe you can find a bigger fool
to offload the company onto [1].

1\. I am talking about Uber's current business. If they can solve the
automatous driving problem before they run out of cash (or fools) then they
will be a good investment.

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vonklaus
I think this is done poorly and misses the biggest issues on demand startups
face.

The largest issue is failing to understand the difference between a commodity
and a service, and how easy a substitute is to find.

Others vs uber(and uber like companies) are different

Uber solves an extremely hard problem that looks easy, it also has very few
alternatives. The other services solve a problem that is less urgent, had many
substitutes and is largely less valuable.

Uber provides transportation when and where it is needed. If you simply need
(using the most well known detivative business) to borrow a skill saw from
your neighbor for a tool sharing site you have many options. This project may
be planned in advance, you may be able to purchase a used tool, and you may be
able to borrow kne free.

The issue is how _variable_ a service is. Uber can generate transportation for
where and when you need it. However it may appear that the commodity is
transportation, but that is the variable. Finding a user and providing them
transportation from an unknown location, to an unknown location, immeadiately
is hard. A ride from Logan Airport to south station is much different than a
rake/hammer.

Each ride has a large amount of logistical constraints. Out toolsharing
example has to solve all the same problems _except_ a tool is always the same
tool. A ride is never the same ride. It makes it much less valuable, and much
easier to compete as there are often many substitutes and less expediency.
Therefore coverage & on demand has a sup/demand musmatch, is prohibitively
expensive and can only take a very small slice if value.

~~~
yetanotherme
A tool is almost never the same tool. There's huge variance.

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somedudetbh
This is a pretty naive look at how services in this space work from someone
who wants to build one.

Uber is fundamentally unlike all of these other "Uber for X" startups. First
of all, @paulsutter made a great point: the CAC is > LTV. How many times in
your life are you ever going to have to hire a...home decorator or something?
A painter? The reason why Geico advertisements are on all media literally all
the time (they have like five completely different mascot strategies!) is
because you almost never make a choice about car insurance, and when you do,
they need to be top-of-mind. This is the same problem that affects a huge
swathe of terrible startup ideas, not just on-demand services: the whole
category of travel management, niche social networks, event-oriented tools,
and yes, most "Uber for X" products. It works for Geico because the LTV of a
Geico customer is high enough, because Warren Buffet is an amazing capital
allocator and amazing at identifying and retaining operational talent, so
Geico runs at roughly break-even on the insurance product, but frees up a
large chunk of float for BH to deploy and earn high returns. That business
requires doing like 10,000 impossible things right and they do it. An app that
lets you summon a guy who trims trees to your house the one time you realize
you need a tree trimmed has none of these qualities.

A lot of comments here are about how 'the jury is still out on Uber' because
it loses money. But cabs don't lose money, collectively. Uber's aggressive
money-weaponization growth strategy is certainly high-risk, but there have
been tons of businesses that direct requests-for-transit-via-car to
independent contractors and clip a fee: virtually every taxi dispatch company,
say (contractor vs. employee depends heavily on the history and regulatory
structure in a given market). The idea of having for-hire cars distributed
through the city and used on an on-demand basis is also profitable for
zillions of people. The idea of adding on an app that summons the cars more
efficiently, handles payment, and clips a fee is not that hard to believe in.

OP frames the issue about the lack of variance in quality of an uber ride
vs...what? Hiring a plumber? Do any of us have the ability to identify a
quality plumbing job vs. not quality? I mean, the toilet flushes now, or it
doesn't. I think this is _close_ to the issue, but the issue is more about
'what adds value': being close to me right now, and able to get to me
immediately, on a pre-determined price schedule trumps everything in ride-
hailing most of the time (sometimes you want a limo, or something special, and
maybe you won't use Uber. Maybe you want to hire a driver for a month while
you are in India. You probably won't use Uber. Different parts of the value
equation are changing value). Most of these on-demand apps operate in markets
that don't have this quality. Other things are important.

The post also goes into the 'Trust' question. This is a classic trap for
technology entrepreneurs, right up there with 'building tools that makes it
easier for non-technical people to build apps'. So many zillions of dollars
and hours of smart-people-work have gone down the drain building web of trust,
chain of trust, and other trust management products, and they basically don't
work at all. What works is "Does this thing have a lot of five-out-of-five
star ratings from real-seeming people compared to how many one-out-of-five-
star ratings it has?"

This is essentially 'word of mouth' online. The ratio of 5:1 star ratings over
a threshold. This is basically how all real-world functional trust systems
work: ebay, amazon, yelp, etc. Yes they have enormous problems. Yes they are
really stupid. Yes they can be gamed. Yes it weights all sorts of idiots
equally. But guess what? It works well enough for most people to make purchase
decisions. Every fancy smart thing we've ever come up with that's more
sophisticated than this is basically useless (e.g. the global tls cert web of
trust, the various pkis, every product that builds a FOAF trust web underneath
arbitrary objects).

Afaik, on-demand 'uber for x' products work one of two ways, mainly: \- as a
marketplace, where they fail because of all the normal chicken/egg problems,
but basically because the ltv of a customer is very low and the cac is very
high (once you run out of VC cash to subsidize the service to extremely low
prices.) \- as an ONO service with employees, where the unit economics
supposedly become good with crazy scale, but it's extremely difficult to get
there again when you run out of subsidy cash . The classic example here is
Kozmo. I'm sure Kozmo's model predicted that eventually, when a delivery
person was delivering a candy bar to five people in the same building, the
unit economics turn the corner, but it consumes insane volumes of cash to get
there, if there's even a 'there' (I'm not aware of any company who has ever
gotten to this point. It is possible that Postmates will be the first, if they
survive).

Postmates is an interesting play because unlike most of these on-demand
services, there's at least a world in which like you could _imagine_ if there
was a small but positive way to get the unit economics to work, the LTV
outstrips CAC because people need to order food and stuff all the time. Many
times a day possibly. Even if Postmates made a penny/order on each active
user, you could have a very high order volume over a very long time that would
eventually get over the CAC cost. BUT the idea of the unit economics getting
there is...hard to see. I have a friend who orders coffee from postmates
_every morning_ instead of making it or going out. He just has a postmate
drive up the hill to his house from starbucks. Starbucks! It's not even like a
fancy coffee place. It's interesting to think about a world in which that
postmate is running like, a hundred starbucks orders on an optimized loop, and
they're still able to charge $5 or whatever for the delivery. That starts to
look _possible_ but insane. As it is, it's twenty minutes up the hill, twenty
minutes down, never mind the starbucks time.

The other world of on-demand stuff I think is interesting to think about is
grocery delivery because I think grocery delivery is basically doing something
different than what it thinks its doing: the on-demand delivery aspect of it
is a vehicle for grocery price discrimination.

It's an old joke that rich people don't know how much food costs: George Bush
Senior at the checkout counter, Lucille Bluth saying, "it's one banana,
michael, what could it cost? Ten dollars?" That 30 rock episode where Jack
Donaghy says something about the "grocery concierge" telling you a sack of
potatoes is four hundred dollars.

But groceries remain an insanely low margin business. Grocery chains operate
at around 2-3% margin. Independent grocery resellers in immigrant
neighborhoods are even tighter. Costco's grocery business is run near break-
even (they make money on the membership fees. This is also why, long run,
Amazon's non-AWS business best comp is Costco.)

I've shopped for groceries on amazon pantry. Sometimes I'll type something in
like "soy sauce" or "rice". Is that a good price? I sometimes literally don't
know if its 2x the normal price or .5x. There are things I know the price of
well: avocados, milk, liquor, coffee. But there are tons of things I don't
know, and i've been buying these staples for years!

Grocery stores have very little power to raise prices, but if they could
segment the market to provide a service like delivery to a price-insensitive
consumer that allows them to charge 20-30% more for certain staples, the
excess margin in the groceries completely dominates the cost of the delivery
business.

This is the Instacart strategy. It's very interesting. A lot of the unit
economics problems of these businesses go away if you just...make things
expensive. What if coffee was $30? Sure, postmates would work fine, if anyone
would pay. But groceries have larger tickets where a 20-30% increase in price
might not be objected to by wealthier price-insensitive consumers. Instacart
basically is selling coffee for $30.

I'm very curious to see if this works. I mean, it seems insane, but less
insane than say HomeJoy, Rinse, Washio, Homee, Handy, the 'uber for kids',
Lugg (this has gotta be the worst idea of the bunch), the one that parks your
car, the one that washes your car, the one that fills your car up with gas,
the (multiple!) ones for private jets, the massage one, etc.

~~~
DJN
>> This is a classic trap for technology entrepreneurs, right up there with
'building tools that makes it easier for non-technical people to build apps'.

Can you kindly expatiate on why building dev tools for non-technical people
requires a web of trust?

For any given individual, evaluating whether such tools work for you should be
a pretty quick exercise similar to test-driving a car. Why would you need a
web of trust?

~~~
somedudetbh
it doesn't. My point was only that lots of technology entrepreneurs view
'generalizable web of trust' as a good opportunity, when it is not, similarly
to how they view 'tools to make it easier for non-technical people to build
apps' as a good opportunity, when its not.

SOrry if that was confusing i was writing pretty stream-of-consciousness

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davemel37
I think a fundamental way to think about on demand is that the worker/service
provider/driver is the real customer not the end user.

So, if you are uber and the only trust factors are solved by technology (i.e.
where the driver is and how soon theyll get to you) it can create a new class
of workers.

if you are in skilled home services, trust is built by the provider not the
platform, so the only current value is lead generation for the worker...which
doesnt require a platform.

The argument of this post is that there is an opportunity in home services for
a platform to really cater to the service providers in a way that they always
want to transact on the platform and thay they can use to manage and grow
their steady customers...with on demand being the leadgen side of the
platform.

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programminggeek
Most businesses that are one-off type businesses tend not to work well. Uber
works well because you will use it often enough and is basically a similar
model to other transportation services like Bus and Train transit.

A lot of businesses require subscription or other predictable recurring
revenue to truly work. Even golf courses, bowling alleys, heating and air
repair companies, bug terminators, advertising, etc. tend to rely on recurring
revenue as the major source of revenue.

Even restaurants and bars rely on recurring revenue. You show me a restaurant
or bar without regulars and I'll show you a restaurant or bar about to go out
of business.

~~~
dredmorbius
Catering, for restaurants, also. And Mother's Day.

For many venues, events: golf and bowling tournaments. I don't think that
works for pest control though....

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dnautics
I wonder why a company like homejoy doesn't become a flat cost subscription
platform where they offer scheduling, organizational, and billing tools for
the particular on demand service.

~~~
danieltillett
Because you can’t make any money this way.

Any service where the costs are dominated by labor and the enforcements of
labor regulations is weak (i.e house cleaning services) is doomed from the
start. The only question is why the "smartest guys in the room” missed this
with homejoy.

~~~
icebraining
What about The Maid International, Merry Maids and Molly Maid, all of which
seems to have been operating for over 30 years?

~~~
douche
From experience with some of these services, quality is wildly variable, and
they cost two to three times more than more consistent local non franchise
alternatives.

As a consumer, they suck bogwater.

~~~
danieltillett
I don't have your personal experience with any of these services, but it does
provide a good explanation why even the franchise model has not taken much of
the market. It really is a business area where anything beyond individuals
working for themselves struggles.

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cheriot
This matches part of the description of HomeJoy's failure[1]. Home service are
relationship based so a middle man is only Uber-like for the first cleaning.
After that the cut has to be smaller or the customer and pro will deal
directly. Even that doesn't quite capture the additional complexity in
matching pros with customers. The work is more qualitative and the pro needs
jobs that are more similar in location, expectation and needed supplies.
Homejoy was too much like uber to work.

Yes, they ran out of cash because CAC > LTV, but that's a bit like saying an
AIDs patient died of the flu. There's an underlying cause.

[1] [https://backchannel.com/why-homejoy-failed-
bb0ab39d901a](https://backchannel.com/why-homejoy-failed-bb0ab39d901a)

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javiercr
I really liked the view of the article. However it's assuming one thing that's
not true for every on-demand or p2p service marketplace: the service provider
is a "pro".

I'm co-founder of a p2p marketplace for dog sitters and dog owners and most of
our sitters are not "pros" (as in people who do it just for money and full
time).

IMHO that's the basic difference between a truly sharing economy platform and
just an "on-demand service".

These two kind of companies tend to fall under the same umbrella, often
because the ones that are just on-demand services use the "sharing economy"
label to protect themselves against regulators.

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jaypaulynice
The on demand platforms fail because these startups can not predict demand
like Uber can. Uber has public data like concerts, sport events, rush hour,
nightlife which are all pre-planned. Uber can then direct its drivers where
the demand is.

On the other hand Uber for healthcare for example is impossible because you
can't predict who will get sick when and where. It's impossible to know how
many doctors you would need on a given day. So it's a lot of wasted money and
doctor time.

------
dilemma
Can possibly add that these platforms fail because they're designed to be
unprofitable. Their competitive advantage is that they don't need to make a
profit, being supporter by venture capital. When that dries up, few seem able
to re-wire their business logic, and re-model their organization to fit.

More than anything, what seems to be lacking is long-term vision for the
platform as a business.

~~~
vonklaus
I believe this is a symptom or result. I think founders underestimate the
complexity of services or over estimate value.

Finding a someone a place to stay in jakarta, indonesia is much different than
a place to stay in Boston, London, ect. The person, service, lication and time
are all variables. This is complex, hard and valuable. The same goes for
uber/lyft. There is expediency and significant variables to account for as
each pickup and drop off is dynamic so while it appears to be a commodity; it
isnt.

To your point, some ideas sound great and get funding but are not complex,
urgent nor particularly valuable. On demand "lunch" competes with either
direct ordering, a local option or brown bagging it. Eat 24 provides a
directory & information search engine not physical delivery(in most cases). So
while it seems like they violate what I said, they dont have huge infa costs.
Other "similar" providers will go get you the food and deliver it. A user is
not willing to pay a huge premium for that in most cases, and the volume must
be significant amd clustered. Eat24 takes a small percentage for a software
solution, the other type needs a large percentage for a phys solution.

So they comvince vcs to back them until they get "big" which they wont and
achieve economies of scale. However, they cant, because expenses scale pretty
in line in those models

