No, the On-Demand Economy Isn’t About to Implode

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For all of its regulatory and political challenges, many things remain attractive about the on-demand economy—that is, the collection of companies, from Uber to Instacart, built around workforces summoned with a tap in an app. The bar for entry to work is lower…

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For all of its regulatory and political challenges, many things remain attractive about the on-demand economy—that is, the collection of companies, from Uber to Instacart, built around workforces summoned with a tap in an app. The bar for entry to work is lower. The work itself is flexible: workers choose their hours; can work for competitors; and are their own bosses (or at least that’s the promise). And in spite of the legal gray area in which many on-demand companies continue to operate, the market has spoken. Consumer demand, and a willingness among individuals to join a growing pool of cheap and flexible labor, shows on-demand is here to stay.

Or is it?

A slew of startups designed to deliver instant gratification are struggling. Last year, on-demand home cleaning company Homejoy shut down. Grocery delivery service Instacart recently cut wages for couriers, and on-demand valet parkings startups Zirx and Luxe reportedly have shifted away from an on-demand model to emphasize a subscription-based service. Food delivery business SpoonRocket shuttered this week after reportedly failing to raise money or attract a buyer.

As the tales of woe pile up, it’s tempting to argue we may be reaching the limits of an on-demand economy. Companies seem unable to make ends meet. And in an increasingly risk-averse investment environment—where funding doesn’t flow as freely and shareholders scrutinizing profit margins can be easily spooked—the financial strain could lead some companies to fold.

But the demise of a few companies does not signal the end of the on-demand idea. As in many other industries, the on-demand economy is experiencing growing pains. Investors and economists remain optimistic that the best businesses will endure. Those that reach a careful balance of time, money, and value of service for a critical number of people will, experts say, stick around.

On-Demand Schadenfreude

The pleasure taken in mocking the on-demand economy’s excesses and struggles is a subgenre of schadenfreude unto itself. “San Francisco tech culture is focused on solving one problem,” goes one infamous tweet that rocketed through the ranks of the tech-fatigued Twitterati. “What is my mother no longer doing for me?”

“Entitlement is a straight line pointing heavenward,” declared a New York Magazine piece covering the rise of on-demand laundry apps. Medium’s Lauren Smiley put it more bluntly: “The on-demand world isn’t about sharing at all. It’s about being served. This is an economy of shut-ins.”

And sure, some of this cynicism makes sense in a world where the smartphone has become a broker for services big and small—or downright facile, depending on how you choose to view it. Today, you can summon your own personal chauffeur, butler, chef, florist, bartender, or fashion consultant via app. It’s a whole world of “Uber for X” startups that are based, the fear seems to be, on the often trivial whims of some (likely young, white, male) tech founder. So it’s understandable that many people would delight in seeing that approach show signs of weakness.

But Arun Sundararajan, a professor at New York University’s school of business, disagrees that the on-demand economy on the whole is facing a reckoning. “I haven’t seen the failure of any particular company point to the lack of viability of the space in general,” he says. Rather, he says, we’re still seeing the effects of experimentation in a relatively immature industry—akin to some of the earlier flameouts of the first dot-com boom. Every era seems to be stuck with its Webvan, its Kozmo, its

Sundararajan says proclaiming the demise of the on-demand idea overlooks the many ways on-demand businesses can be configured, from how prices are set to whether they hire independent contractors or official employees. Companies are still figuring out what works. Some will rise, some will fall. What the on-demand economy creates as a whole, he says, is the possibility of a more decentralized labor force, which consumers are increasingly coming to expect. “A lot of economic activity down the road is going to flow through platforms that have a mix of centralized and decentralized labor,” Sundararajan says.

Take, for example, the tech giant that spurred so much investor excitement over the premise of the on-demand economy in the first place. Uber is now the world’s most highly valued startup at $62.5 billion. What Uber accomplished, according to Enrico Moretti, a labor economist at UC Berkeley, is a much better way of matching demand and supply. “I can stand on a corner hoping that a cab driver passes by, or I can open my app and call an Uber or Lyft driver,” Moretti says. “That’s a lot of value added, and it’s efficient.” Whether those specific companies ultimately succeed, the demand for what they offer is strong. Consumers see value in being able to travel that way. So long as that’s the case, someone will likely figure out how to let someone summon a ride with a smartphone.

Survival of the Fittest

OK, so what about the rest of the on-demand economy, all the other services accessible via phone?

Because the nature of on-demand necessitates a high volume of transactions on low margins, yes, some experiments will fail. Plus, on-demand businesses have much slimmer margins than, say, software businesses, says Ryan Sarver, an investor at Redpoint Ventures who sits on the board at Luxe. “You have less room for error,” Sarver says. And it may be much easier for such on-demand businesses to get into the red when mistakes happen.

Sarver says his firm looks at several factors in deciding whether or not a venture is worth investing in, including market size, user experience, and the prospects of delivering a product different enough from what already exists at a price people are willing to pay.

And each of those factors can vary depending upon the specific service offered. On-demand food delivery, for instance, is vastly different from transportation, Sarver says. Transportation is more of a utility, he says, where a consumer’s decision depends on which service can do the job reliably, and at a good price. Food, on the other hand, is much more preference-based. “You might say, ‘Today, Thai sounds really good.’ Tomorrow, you might want burritos,” Sarver says. Within food delivery, startups are still trying to determine which logistics model makes the most sense: offering delivery from existing restaurants (Postmates, DoorDash) or preparing a menu of meals to offer customers every day (Sprig, Munchery).

“Both models can work,” Sarver opines. But the companies that make those models work will be the few, he says, that manage to nudge customers into a new activity or habit that represents a real change in consumer behavior.

The question ultimately becomes one of where consumers draw the line when it comes to paying for someone else do something for you. “Some people will be willing to pay a fee to free up, say, an hour of their time and do something else,” says Sundararajan. He posits that the more we start thinking of on-demand services rather than big assets as the way to fulfill our needs—say, using Uber and Lyft rather than plunking down a down payment for a new car—the bigger the pot of money these on-demand companies can go after becomes.

Right now, on-demand companies are in the middle of a big experiment to see where consumers’ limits lie. “There’s certainly a lot of discretionary stuff, things that contribute to leisure,” Sundararajan says. “I think they can be profitable, but they may not get to the kind of scale that Airbnb or Uber has.”

In other words, stuff that’s really useful has the potential to be huge. Stuff that just satisfies your need to feel like a petty dictator with a smartphone, maybe not so much.

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