In 2009, when a company then known as UberCab started operating on the US market, we saw the rise of a new phenomenon that would come to be known as the sharing economy. The sharing economy is most commonly defined as an economy where physical or financial assets are shared as services through digital platforms.
Companies whose business models are built around the sharing economy (Uber and Airbnb are the most prominent examples) bring together people who have assets to “rent out” and people who want to use those assets without becoming their legal owner. Uber connects drivers and passengers; YouTube connects videographers and their audience; TaskRabbit connects people who need to run errands and lack time and people who are willing to run errands for others to make some money.
The sharing economy benefits multiple industries. Here are some platforms built around the sharing economy that operate in various industries:
Hotels and Dining: Airbnb, Couchsurfing, Feastly
Transportation: Uber, Lyft, Sidecar,
Services: TaskRabbit, Thumbtack
Retail: Alibaba, Neighborgoods, Deliv
Entertainment: Spotify, Earbits
These types of business have become widely known as Platforms: they connect producers and consumers and allow them to exchange value using the digital marketplaces, or “platforms,” where that interaction happens. Platforms are a unique type of business that don’t hold material assets – unlike traditional brick-and-mortar businesses. This is their strength, and this has been the core idea behind all Uber-like businesses.
[Uber. Image source: TheVerge]
A startup that is trying to employ the platform business model is often referred to as an “Uber for X.” Startup owners rarely object to this terminology – saying “we made Uber for…” is often the easiest way to describe their product.
Platforms like Uber receive mixed reviews, with critics saying that such platforms cause workers to lose social benefits and the security of full-time employment. Nevertheless, these platforms are still increasing in popularity, with new startups appearing every day and hoping they’ll be able to replicate Uber’s success story.
Why does everyone want to be an Uber for X?
Uber’s business model has several over ‘traditional’ models in the traditional economy – both for business owners and contractors. Let’s look at the benefits for both producers and consumers.
What are the benefits of working for a Platform?
1. Platforms provide work flexibility.
With platforms, contractors can decide when they work and how much time they put in. They can help people with full-time careers achieve an additional source of income, or can even be a primary source of income. According to a recent study by PWC, more and more people looking for flexible employment, and this trend is especially evident among younger generations and millennials. In fact, as many as 15 percent of male employees and 21 percent of female employees of PWC say they would like to work fewer hours even if it means that they would be paid less and promoted slower.
2. Platforms can provide jobs that bring in just as much money as you would expect to get from a traditional business (and sometimes more!).
It’s a common misconception that sharing-economy wages are, by definition, worse than full-time pay at traditional jobs. In the US market the federal minimum wage is still only $7.25, and even though certain states have their own higher minimum wages, the figure often doesn’t reach $10 an hour. At the same time, according to a recent article by Washington post, Uber drivers can be expected to make from $8.77 per hour (in Detroit) to $20 per hour in larger metropolitan areas.
[Gig economy. Image source: Huffington Post]
What are the benefits of owning a Platform?
1. Platforms replace traditional infrastructure by automating business operations.
Computer algorithms match providers of services with their consumers in the most efficient way, increasing profit margins for the business owner. For example, Uber’s automation results in more efficient logistics: reduced time to pick-up, the opportunity for back-to-back rides, and elimination of wasteful return trips.
2. Platforms are digital, and can grow faster than brick-and-mortar businesses.
Platforms match providers and a consumers without actually owning physical assets, and so they can often scale faster than a traditional brick-and-mortar business. You need a stable digital platform to make your business grow, but you don’t have to worry about renting warehouses, and it’s much easier to expand internationally.
3. Platforms have greater flexibility in reacting to changes in demand and supply.
Many of us have been in the situation when, on a rainy night (perhaps somewhere in New York), you call an Uber and end up paying twice the normal rate. It’s irritating. At the same time, Uber doesn’t hide the fact that on certain occasions their prices surge. This is because all their drivers are technically contractors, and they can’t be made to work when they don’t want to. Uber only works when people are offered sufficient financial incentives to leave their house on a rainy evening or on New Year’s Eve.
Traditional businesses (like cab companies) can’t do the same, because they have full-time employees with fixed wages. The sharing economy might seem like it’s abusing the free market, but nobody’s forcing people to use it since there are always alternatives. Uber can’t get punished for abusing a monopoly position, because they’re still competing with standard cabs.
We might hate the fact that platform pricing fluctuates significantly depending on how desperately people want a service, but it does maximize the profit for the business owner!
4. Platforms can integrate payment systems and enable acceptance of legal agreements.
Integrating third-party payment services such as Stripe or Braintree with a platform lifts the burden of having to provide a reliable payment solution. Recent data from McKinsey&Company show that in the USA, one-third of consumers are using their phones to make payments. Additionally, platforms build trust in other ways – from providing their own built-in insurance (Airbnb and Uber) to offering reviews.
[Payments in Uber. Image source: Fonearena]
5. Platforms require less initial investment than traditional businesses in the same industry.
When a new platform hits the market, they are often in a better position than some of their direct competitors because platforms don’t pay rent, repairs, utilities and other overhead costs associated with running a traditional business. Platforms can also reduce their expenses by hiring people to work online (let’s say, developers) at lower rates than full-time office employees would require.
Another unique feature of platforms is that users generate most of the value for platforms. For you as a business owner, this means that you can start small (providing that your design and architecture are scalable) and grow as users continue bringing more value to your product over time. When it comes to platforms, the sky is the limit. Uber is worth around $70 billion, and WhatsApp was bought for $19 billion, – and at the time of purchase WhatsApp had only 55 employees.
Here at Yalantis we like to follow the latest trends, and it’s clear that platforms are revolutionizing many businesses across the globe. We expect to be writing more on this topic in the near future!