Why on-demand marketplaces need urgency.
Jeremy Levine and Rafi Syed recently posted about the nascent opportunity that remains in unbundling horizontal marketplaces (Amazon, Craigslist) into distinct verticals (taxis, home cleaning, shared rentals). This opportunity is illustrated through the now-famous craigslist defragmentation pitch deck slide:
The proliferation of the vertical marketplaces is only just beginning, specifically in the on-demand verticals. But as more entrants attack the same on-demand niches (see: home cleaning), these companies will inevitably sacrifice margin to win on price, thereby limiting the market opportunity. I believe that the ultimate differentiator for dollar opportunity is not in the vertical, but the magnitude of urgency within that vertical. Let’s explain through a base case using Uber:
- Drivers are losing money (gas, mileage, car depreciation, opportunity cost) for every mile they drive with an unoccupied vehicle
- Meanwhile, customers are actively searching for on demand services because they feel inconvenienced and/or desperate (e.g., late, cold, inebriated, stranded, etc.)
As my partner at Dashfire, Kelsey, points out, “both sides need the other urgently” thereby creating a desperate demand for the offering. Desperate demand allows for increased (or surge) pricing and an instant multiplier on the revenue opportunity.
We supported the launch of an on-demand home cleaning company in 2012 called LoClean. We saw great acquisition economics, but learned quickly that price not convenience was the ultimate driver(1). This is evident in Handy and Homejoy; both have dropped prices over fifty percent the past few years. There are certainly times when my home is a mess, I need to have a shirt dry cleaned(2) for a meeting tomorrow, or I’m too lazy to drive to the grocery store. But what is the maximum multiple I would pay for the immediacy of having HomeJoy, Washio, or Instacart serve me? I’d likely pay 1.5x the $50 to get the home clean, but I’m better off doing it myself than paying 3x.
The pricing power Uber has achieved as compared with most “Uber For X” is the difference between convenience and desperation. Convenience has a limit. Desperation does not. The repercussion cost — when the outcome cost no longer outweighs the service price multiplier — is much lower for home cleaning than for urgent transportation, which is far more frequent. I would pay 2x if I need a home cleaned today because it’s convenient. But if I’m late for an international flight, I will accept a much higher surge multiplier because the consequence is far more expensive. The desperation / surge multiplier allows for exponential market size increase. What vertical is next?
(1) The other decision elements in marketplace economics are frequency (you need a cab more often than you need dry cleaning), quality and time. Take vacation planning on AirBnB as it relates to quality and time. AirBnB wins b/c it provides a high quality user experience, low cost optionality, and review-supported high-quality staying experience. There isn’t a desperation or urgency to make a decision, so you can read reviews, make inquiries, and price compare.
(2) Full disclosure, our sister company FarShore works with Pressbox. I believe that another dimension of vertical marketplaces is to actually augment the supply chain. Pressbox does so by building 24/7 lockers to collect laundry in apartment buildings.