A decade ago, only commercial enterprises thought about asset utilization. The financial crisis of 2008 pushed many individual consumers to take stock of what they owned and think about more creative ways to use their assets to generate income.  This gave birth to the “sharing economy,” which is simply “people renting things to each other” [1].  The increased prevalence of sharing wouldn’t be noteworthy, except for the fact that ‘unicorns’ like Uber and AirBnB have leveraged this age-old virtue to disrupt industries that have been unchallenged for more than a century (the last major innovation in the taxi industry was the gasoline powered taxi and taximeter in 1907 [2]). What has enabled this new economy, what are the outcomes, and why do we care?

Enablers

Online technology has enabled peer-to-peer sharing because of two basic reasons: decreased transaction costs and increased trust [1].

While it used to be hardly worth the effort to post an add in the newspaper and find someone to rent your dust-collecting toys and tools, the proliferation of two-sided marketplaces mediated by online platforms has substantially reduced transaction costs [1]. Now you can rent equipment from your neighbor for a small coordination fee through an online platform (i.e., SnapGoods), for less time and money than a trip to purchase the same from a traditional retailer. Sharing assets is not only easier, but also less stressful, due to the trust generated by peer-reviews and social networks [1].

Outcomes

The two major outcomes are increased asset utilization and consumer control.

For consumers, increased asset utilization means owning less stuff and using stuff more. It’s simply about finding other people who are willing to pay to use your assets when you don’t need them, so your possessions are making money for you rather than taking up space. This “asset light lifestyle” results in not only new sources of income, but also in paying less for the goods you need, since peers are willing to rent out their assets at prices far below those of conventional businesses [1].

The “peer economy” has given more control to consumers through increased access to productive resources. This is a result of both lower costs to own assets (because of potential peer subsidization) and lower costs to use them (because renting makes previously out-of-reach accommodation, transportation, and equipment affordable).

Additionally, consumer control has been bolstered by increased access to information online. Online reviews for vendors and goods facilitate more informed purchasing.  Internet encyclopedias and search engines have reduced the time it takes on average to find answers to consumer questions by more than two-thirds [3].

So What?

Increased consumer control and the rise of the “asset-light lifestyle” are inciting arguably the most dramatic economic power-shift of the century. The sharing economy is not only disrupting the taxi industry and the tourism industry; it is revolutionizing every product and service delivered in our materialistic society. Why? Because the very structure that makes conventional consumer markets so attractive is crumbling beneath the feet of every market leader.

To understand this, we need to look no further than Harvard Business School Professor Michael Porter’s Five Forces Framework [4].

 

Porter's 5 Force Framework

Porter’s five competitive forces are use to evaluate the profitability of an industry [4].  The sharing economy impacts each of the five forces negatively for a multitude of industries (making them less profitable for incumbents). It increases the threat of potential entrants and increases substitutes; virtually overnight, anyone can use his or her own assets to provide goods and services once delivered only by professionals. Most significantly, it drastically increases buyer power. It’s no surprise that traditional companies are demanding increased regulation of peer-sharing businesses. High prices previously acceptable to consumers are being decimated by the availability of cheap peer rentals. Once incredibly attractive, near monopoly industries (i.e. New York City taxi’s) are facing fierce competition, from the least obvious market entrants: the customers themselves. Buyers now have options, information, and control.

We are perhaps seeing the greatest macro-shift in economic power since the world order was re-drawn at Bretton Woods in 1944. Only this time, it’s not elite diplomats deciding how the global economy will operate.  It’s the ‘common man,’ not countries or corporations, that’s defining the rules of the game.

End Notes

[1]  The Economist, “The rise of the sharing economy,” http://www.economist.com/news/leaders/21573104-internet-everything-hire-rise-sharing-economy

[2]  The Atlantic, “Why you can’t get a taxi,” http://www.theatlantic.com/magazine/archive/2012/05/why-you-cant-get-a-taxi/308942/#

[3] The Economist, “Net Benefits,” http://www.economist.com/news/finance-and-economics/21573091-how-quantify-gains-internet-has-brought-consumers-net-benefits

[4]  Harvard Business Review, “The Five Competitive Forces that Shape Strategy,” https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

By: Adam Stanek


read more

Sharing is Caring

Show and tell? No. Show and share. That’s what we should be teaching our children in elementary school. Why? The “Sharing Economy,” “Collaborative Consumption,” “Peer-to-Peer Networks,” you name it, are exploding in a number of different industries and rightfully so. Before long they will undoubtedly have a role in each and every of product and service that we consume in the future, and they should. For those of you who don’t know what the sharing economy is, let me quickly explain.

The sharing economy is a peer-to-peer online marketplace that connects individuals in which one is offering a product or service, that they own, to rent to another individual who only needs to utilize the product or service for a short period of time. In so many ways they’re a modern day co-op for individuals. The benefits to an individual to contribute a product or service to the marketplace is that they are able to generate extra income on something that otherwise would have been sitting idle. The benefit to the individual consuming the product or service is that they are able to avoid having to purchase something that they may only need to use once or twice and are also able to rent it for less than if they were to from a traditional company. Sound like something that should have been around for while? In theory, yes. In practice, no.

The challenge historically has been that there has not been an efficient way to facilitate such a transaction that could generate enough scale and thus attract investment in order to make pursing a business worthwhile. However with the continued growth and trust in the overall online economy, ranging from mobile, online transactions and payments, GPS location integration, the “cloud,” and processes generally becoming simpler and more convenient to execute, a number of companies have sprang up. AirBnB, RelayRides, Uber, TaskRabbit, or Elance sound familiar? If not they will, as each is quickly progressing towards a $1 billion in transactions according to Forbes. In fact AirBnB was recently valued at $10 billion while Uber is being valued around $18 billion, which would rank both higher than many companies in the S&P500 in terms of size.

So what does all of this mean? Well its great for the individuals participating in them, but traditional retailers and providers of various products and services will need to begin to look for new ways to differentiate themselves in order remain relevant to the consumer and avoid the “bank-something” word. What’s more is that marketplaces in the sharing economy have tremendous network effects which means they continue to get better and better and become even more useful to the individuals who utilize them when more folks join the marketplace to provide or consume products and services. This is good for the individuals, but bad for the traditional companies. They also tend to be a “winner-takes-all” (WTA) market, meaning that there usually is only room for one player. This is due to the strong, positive network effects described above and limited consumer demand for differentiated products. Which is good for the developers of new platforms, but again bad for traditional companies.

So if you’re reading this and are not an individual, the answer for you may be to get in on the action. However you better do it fast. In addition to the above, the sharing economy tends give a significant advantage to those who are the first to get in due to the network effects and WTA characteristics. But in the meantime have a unique skill or trait? How about some spare time? Perfect, put them online and start making some extra money here and there. Others have will enjoy the savings. If not, just think of an industry that isn’t benefiting from the sharing economy and create one and watch the money roll in. Others will also enjoy the access you have created.


read more

If I told you there is $1,500 hidden somewhere in your apartment, where would you look for that? In a safety box somewhere in your bedroom? Under your mattress? You probably wouldn’t look in your…closet! And that would be a major mistake! We all have disastrous clothing habits. We buy way too many clothes and wear only a fraction of what we own. We get bored easily with items and don’t give them the attention they deserve. What about this Armani jacket that you wore only once? Don’t you think there is a better place for it that in a dusty bag in your cellar?

Hopefully, this waste is shortly coming to an end. The rise of online clothing re-commerce businesses is about to change forever the way we dress. The stars are now aligned for these businesses to shine, supported by favourable tailwinds. The Y-Generation has realized that we don’t need to own everything. Younger crowds are seeing the benefits of spending more efficiently. You don’t need to own a $500 Herver Leger dress. You can rent it on Rent the Runway for $150 for that one week-end where you need it. You don’t need to own all the songs you listen to. You can just get Spotify for $10 a month and listen to more songs than you would have ever bought for the price of one album.

Collaborative consumption in the clothing space is on the rise. Three types of business models have emerged. On the one hand, companies like Poshmark, Threadflip and 99dresses have rolled out marketplaces. They connect buyers and sellers and charge a transaction fee. They have understood the pain points of Ebay and aim to recreate an “Ebay for fashion”. By focusing solely on this vertical, these startups can propose a unique experience to their customers and create a community. On the other hand, companies like Thredup have adopted a merchant business model. They acquire items from sellers and resell them online. By paying sellers upfront, they can attract those customers who value time and certainty over profit. The third model is a hybrid one. Companies like Vestiaire Collective or The Real Real offer concierge services. While these are still marketplaces, they curate collections very thoroughly. They also take care of photographing items and shipping.

Each model has its pros and cons. Marketplaces have attractive economics but need scale and they can get confusing. Merchant models are greedy in capital and raise logistical complexities, but sellers love them because they save time. Hybrid models do not solve for the uncertainty and target mostly high end luxury. It is not yet clear what model or what companies will win this space. But what is clear though is that whoever you are, there is somewhere an online company that can help you monetize your closet easily and efficiently. So what are you waiting for?

 


read more