As an entrepreneur who has moved from the e-commerce world (products going digital) to the on-demand world (services going digital), I believe the ODE has a shot at being as big if not substantially bigger than e-commerce. To understand why I’m so optimistic about the ODE, let’s look at four consumer behaviours that are driving the rapid adoption of the industry.
Ask any retailer or brand manufacturer and they will tell you that consumer behaviour has changed more in the last 5 years than it did in the 150 years prior. For me, the ODE sits squarely at the intersection of four of the largest consumer behaviour changes:
- Mobile – You’d have to be living under a rock to not have already seen probably 50 interesting stats about this trend that was kicked off 10yrs ago with the release of the iPhone. My personal favourite: the average American looks at their phone 82 times a day (sorry I probably just ruined your day….21, 22, 23, 24…ugh!)
- Social – Again, I’m probably not going to surprise you with this one, but here’s one from Facebook’s 2016 Q4 results: Facebook had 1.8b monthly users and 1.2b of them (66 per cent) are DAILY and 1.1b of them are mobile daily users. It’s important to note this is all of Facebook’s properties which include Facebook proper, messenger, Instagram and WhatsApp.
- Bifurcation – Bifur-what? Ok, this is probably a new one for you, so I’ll spend a bit more time on it. The ‘Great Recession ‘of ’08 changed consumer behaviour in very interesting ways. The biggest change (as reported by Deloitte and Forrester) is what they call the “Bifurcation”. Basically, US consumers had two reactions to the recession – they either became value oriented or convenience oriented and they have split pretty evenly.
- o Value oriented – This group will spend large amounts of time and effort to save a dime. Their reaction to the recession was to become super financially conservative, focus on paying off all debt and minimising purchases overall and when they do buy, it is carefully considered and usually at a substantial discount. One of the biggest success stories since the recession in the world of retail is TJ Max – this is their perfect target market.
- o Convenience oriented - This group came out of the recession with a different lesson – they valued their personal time more highly. The existential crises of the recession made them think: “Wow, I’d rather spend time with my kids, hobby, etc.” vs. mowing the yard, cleaning the house, driving around looking for things, etc. These folks jump on Amazon Prime (to the tune of 65m+ US households) because they quickly decide that spending $100 to get free 2-day shipping will pay for itself on just 1-2 trips to the mall, Walmart or Target.
Another way to illustrate bifurcation is through a retail example – if you are a retailer that doesn’t focus on one of these two areas (Nordstrom and TJ Max) , you are painfully stuck in the middle and either closing a lot of stores (Macy’s, Sears, JC Penney), or filing chapter 11 (The Sports Authority, Radio Shack, etc.).
- Zero Friction – The last trend is a little more subtle until you think about your daily transactional experiences and I call it zero friction. The best way to describe Zero Friction is that great low to zero friction customer experiences dramatically bend your expectations both for one vendor and most importantly ALL vendors. Most folks use the Uber example here (press a button on phone, car comes in <5mins – now how does it feel to stand on a curb waving your hands in the rain for 30mins?) But my personal favorite example is Starbucks. Starbucks added mobile ordering to their app in Q3 2015 and the adoption rate has been so insane that a year later and Starbucks is struggling to keep up with demand because peak times are seeing mobile orders hit 20 per cent+. Whenever I go to a Starbucks and forget to mobile order, the exact same experience from mid-2015, now feels like it takes a lifetime. The kicker for zero friction though is that it spills outside of that one vendor experience.
For example, imagine after the zero-friction Starbucks mobile order+pay experience that you are now in Walmart and there are 200 people checking out and 3 registers open. Suddenly that experience is 100x worse now because I’ve readjusted my expectations thanks to the Starbucks app, Uber, self-service checkout, 2-day Prime shipping, same day Prime Now shipping, etc.. The punch line of zero friction is that if you are a business and aren’t spending a large chunk of your time figuring out how to make a zero friction consumer experience, you can bet your competition IS and you may find yourself facing an existential crisis very quickly. It took Starbucks customers less than a year with mobile order+pay to get north of 20 per cent and cause them to start thinking about completely retooling their stores to handle the surge.
At the heart of these four big changes in consumer behaviour is an intersection where the ODE lives. ODE users are mobile, social, love convenience and want zero friction. They don’t want to call you three times to schedule an appointment. They don’t want 8hr arrival windows. They don’t want to DIY.
Conversely if you can give them a disruptively and innovatively low or zero friction option, you will win their hearts and minds. Instead of DIY (Do It Yourself), give them DIFM (Do It For Me). Give them an app and communicate with them that way (or text). Give them flexibility and transparency. Put the control of the transaction in their hands vs yours.
For me, any company that fits in that realm, is part of an already large ODE space and over time this space should be 4X as big as e-commerce because when you look at US GDP, Goods are 20 per cent and services are 80 per cent.
Where is ODE in the ‘hype cycle’?
With that background on the ODE, you would think I’m about to show you a chart that is up and to the right at a greater than 45 degree slope right? Not so fast. It turns out that new disruptive technologies or what I prefer to call ‘Waves of Innovation’ go through a pretty well known adoption lifecycle that Gartner calls the hype cycle and is illustrated here:
Even in the modern age when you have platforms like FB growing much faster than anything before, we still go through the hype cycle, but in 5-10yrs vs. the previous 20-40yrs (Microwaves for example). I remember camping out for my iPhone 1, literally overnight. I opened it, got it setup and then after a couple of days realised that all it was was a phone/ipod and camera in one device vs. the 3 I had before. It was cool, but you couldn’t really do anything ‘new’ with it. Then a year later the app store came out. Boom, it was off to the races. When a new technology is past that initial excitement with early adopters, but has lost a bit of its lustre, that’s what Gartner calls (are you sitting down) the trough of disillusionment!
With that quick tour of the hype cycle behind us, let’s look at where the ODE space is at. Analyst firm CB Insights publishes a quarterly review of funding for on-demand startup companies and in February released their Q4 2016 report which is best summarised with this graphic:
Does this look familiar to you? What we are seeing is that the ODE space is clearly in the trough of disillusionment. In fact if we took the big three transportation companies out (Uber, Lyft and China’s Didi Chuxing), it would be even more pronounced.
What’s happening is outside of transportation a lot of companies were founded like Homejoy, Luxe, Instacart, Postmates, YourMechanic, Handy, etc. that have fallen into three buckets:
- Failed – Homejoy is the poster child for this category. They were an ODE home-cleaning service that used a marketplace model and famously burned through over $60m in capital and went out of business in dramatic fashion. In the car wash space you have several such as Cherry and Squeegy.
- Jury still out – Instacart (grocery delivery), Postmates (product delivery), Handy (home cleaning)
- Clearly succeeding – The transportation companies have not revealed their financials, but several Uber leaks have indicated they are not only growing rapidly (over 100 per cent y/y), have tremendous scale (~$7b/yr ARR), but also are at a minimum profitable in many cities, regions and countries. Blue Apron in the on-demand food/meal delivery space is doing very well reportedly on track to hit over $1b in ARR in 2017.
How does ODE get out of the ‘trough of disillusionment?
I believe the number one thing that many of the failed and potentially failing ODE companies suffer from is that they put the financial model in front of the consumer experience. Homejoy is a great example:
- If you were a happy customer that had a great cleaner, Homejoy would not guarantee you that cleaner in the future. So you were incented to go direct to the cleaner. Since Homejoy collected 30 per cent plus from the cleaner, the cleaner was also incented. Therefore, every good customer experience resulted in churn of BOTH the customer and the cleaner.
- If you were an un-happy customer that had a bad cleaner, Homejoy would refund your money but couldn’t guarantee the quality of the next cleaner (see the first bullet).
The result – death by accelerated churn on both the demand and supply side of the marketplace. What if Homejoy employed the cleaners full-time? They would have been able to more completely control the good experiences and limit the bad experiences. Their margins wouldn’t have been as artificially high and perhaps they wouldn’t have been able to raise as much capital, but at least they would still be around.
For ODE to make it out of Gartner’s Trough of Disillusionment through the Slope of Enlightenment to the Plateau of Productivity (mainstream adoption), companies have to focus on creating great customer experiences and constantly challenge themselves:
- How do you work from the ‘customer back’ vs. worrying first about margins or the ability to raise capital?
- How can you appeal to the convenience oriented consumer by making their lives easier and DIFM vs. DYI?
- Consumers want transparency, give it to them. In today’s world, if you, for example, mark up the groceries you are delivering, the consumer is going to find out very quickly and be upset at the lack of transparency. Another example is bait-and-switch. The classic example is auto services like Jiffy Lube. You go in expecting a $60 oil change and leave having spent $200 on strongly recommended upsells. Consumers hate these experiences.
- Consumers want control of the transaction, give it to them. Allow them to change, modify and cancel whatever they want without having to jump through hoops.
- Instead of letting a marketing metric drive your thinking, give your customers options. Maybe it will be hard to measure or less impressive to your investors, but customers love choice. For example, instead of forcing all customers to download an app, give them a phone number to call or a transaction web experience for desktop/mobile.
The final point I want to re-iterate that is even broader than the ODE: if you don’t provide an amazing zero friction experience, someone else will and the way these platforms work, your customers are a click, app-install, tap or swipe away from switching.
Scot Wingo, CEO, Spiffy
Image Credit: Spiffy