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The on-demand economy is a bubble—and it’s about to burst

Uber Bubble Will Burst Soon

Enjoy on-demand services while you can.

Whether it’s getting a lift whenever you want or ordering pad thai from the comfort of your couch, the rise of the on-demand economy has made a lot of people’s lives more convenient. But many of the services we know and love might not be around in a few years. Those that survive will continue to make aspects of your life as easy as touching a button but there will be many more that will die a swift, quiet death.

After the rapid growth of Uber and Lyft, venture capitalists and entrepreneurs saw major opportunities to apply the principles these ride-sharing apps embody in other verticals. Food and grocery delivery on-demand services such as Instacart and Doordash quickly followed, along with dozens of others such as parking service Luxe and dry-cleaning delivery Rinse.

But just because massive companies like Airbnb are finding success in the travel sector doesn’t mean that on-demand delivery of goods and services in other areas has been solved. Other than ride sharing, lodging, and food delivery, mass-market adoption for on-demand uses is shaky at best. (In fact, we re not even sure if the on-demand economy is technically legal.) Instead, venture capital is fueling the space and essentially subsidizing services. But VC money does not make your company invincible, and you can only finance growth through venture money for so long even  Uber and Lyft are burning through a ton of cash

 

The on-demand bubble is poised to burst and soon. This is because of our lack of brand loyalty, episodic customer use, and the use of precarious business models. The services that survive will focus on locking in customer and suppliers, objective outcomes (such as getting from point A to point B), a high frequency of use (you need food every day, for example), and services where automation can eventually help play a role to bring down costs.

Lack of loyalty

Consumers of on-demand products feel no inherent loyalty to a specific brand, especially when the outcome of the service is objective (such as ordering food from the same restaurant) and similarly priced. For example, if you want groceries delivered to your house, do you really care if you receive the goods from  Amazon Prime, Google Shopping Express, or Instacart? How many times have you flipped back and forth between Uber and Lyft to find cheaper rates? If you have a single bad experience with one service, you’ll likely switch to another there’s no shortage of them for you to try out, after all, and there are always new ones cropping up with cheap sign-up offers.

The same goes for the employees at these companies—if you can really call them that. (Uber doesn’t.) The on-demand economy isbuilt on 1099 employees, who are independent contractors. These workers are not allotted the same level of benefits of full-time employees and are considered self-employed. This is both a strength of the model and a weakness.

By making Uber drivers (despite efforts to unionize) and Lyft drivers 1099 workers, these companies are able to maintain low-cost structures because they don’t have to pay benefits such as healthcare; you are also not on the hook for unemployment payouts if a 1099 employee is fired. But the flipside is that Uber and Lyft are constantly competing for workers, as good drivers aren’t tethered to a single company by an employee contract: There is no reason for a Lyft driver to remain loyal to Lyft, just as there is no incentive, other than ride-milestone bonuses, for an Uber driver to solely drive for Uber. Your next Doordash delivery might be completed by someone who also delivers for Instacart, and you can often find the same apartment listed on both Airbnb and VRBO. This concept, on both the supply side and the demand side, is known as “multi tenanting.”

Every on-demand company that supplies services using people faces this problem. Companies like app-based restaurant Sprig have tried to solve this by making its delivery and logistics teams employees, thereby incentivizing them to stick to the service. Sprig employees of all levels are also entitled to perks, like stock options.

Service is episodic and expensive

Even services that have amazing reputations sometimes conclude that customer behavior is too episodic and inconsistent to predictably figure out realistic revenue goals to be profitable. For example, you may love Luxe’s service, but how often are you willing to actually use an on-demand valet? Many people are happy a service exists to serve a niche purpose, but they won’t use it on a regular enough basis to bring in a reliable cash flow and keep it afloat.

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Jon Ouazdi
Admin
TransGates Limousine

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