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Jan 23, 2012

When Collaborative Consumption Fails

by Eric Schwartzman




The business model known as collaborative consumption — where buyers and sellers trade without intermediaries through an online community marketplaces — has been a homerun for Ebay and Craigslist.

But a new breed of start-ups like AirBNB, which apply the same model to service industies, where responses times are critical, and relationships matter, may not  fare so well.

Here are three examples where service oriented community network business models fall short:

1. When Buyers Need Protection – The more important relationships are to successful transactions, the more risky peer-to-peer transactions are.  When there is very little promise of future revenues, sellers are much less motivated to perform. If I chose to purchase raw materials from a vendor based soley on price, and the quality is inferior or they can’t deliver on schedule, that could shut my plant down. And time is money, so I need a relationship with someone who can fix problems quickly. And the same is true in most service industries, which is why they may ultimately fail at collaborative consumption.  Take AirBNB for example. Their listing hosts can evict guests without cause, and there’s virtually nothing meaningful the service can do about it. On the other hand, if guests back out of a booking, they could wind forfeiting half the booking fee.

2. When Buyers Need Support - Recurring revenue is what motivates sellers to remedy problems.  In the case of a community networks like AirBNB, where the likelihood of repeat business between the same buyer and seller is much lower than it would be for a hotel chain, motivating the seller with the threat of a bad review is defeated by the seller’s ability to slam the buyer with an equally bad rating. And AirBNB does not serve as an arbiter of truth. Given the size of the network and the number of transactions, how could they? Service oriented collaborative consumption business models don’t scale well.

3. When Response Times are Critical – If you’re unhappy with a purchase on Ebay, you can file a dispute on your own time, from the comfort of your home. But if you’re locked out of an apartment you rented from AirBNB, your ride doesn’t show or your task doesn’t get done, you could be looking at 5 hours in dark hallway, a missed flight or no dry cleaning.  Mishaps are often nobody’s fault.  But when they happen, they do need to be resolved, and that’s what service industries are about. Connecting buyers and sellers to trade services without protecting either side with adequate support is critical.  But the expense of providing that support for a community network just may not be scalable for these nascent companies.  Adding standards and verification could be the answer. The question is can these companies afford it without sacrificing their profitability?

Social media business models are not one-size fits all.  Just because collaborative consumption works for some online marketplaces does not mean it works for all, and services may be too economically challenging for these start-ups to delivery.

The jury is out on whether or not service oriented collaborative consumption businesses like AirBNB, Uber and TaskRabbit will be able to adequately satisfy those customers in an environment where response times and relationships are important.

This post is based on an experience I had renting an apartment through AirBNB.  If you’d like to hear a podcast discussion about what happened, click here.

 


Categories: collaborative consumption
  • Wei Leen

    Hi @Ericschwartzman:twitter , I think you cut to the bone here. Points 1 and 3 have good solutions in the existing business models of companies in the collaborative consumption space, but point 2 is really a work in progress. I have some thoughts about that from working in this space, would be happy to discuss them over an email exchange.
    In any case, I look forward to your further thoughts on collaborative consumption.

  • http://bit.ly/bceuf ericschwartzman

    Hi Wei Leen! Thanks for the comment? What’s on your mind? Can we chat here?

  • http://www.savident.com/ Paul Savident

    A good article @ericschwartzman, though I was feeling it was rather swaying to being one-sided until I read “Just because collaborative consumption works for some online marketplaces does not mean it works for all, and services may be too economically challenging for these start-ups to deliver”.

    As you say this is based on your own experiences and I do believe that, in the end, we are talking about ‘trust’ and different business sectors.

    My business partner and I launched http://www.RentMyItems.com in the UK in September of last year and we have been focussing very much on the local community level of renting household items between Rentors and Rentees.  Though our search range allows for distances of 15 miles from the Rentees home we are finding generally that the area for Rentees to rent items from Rentors is much tighter than this – maybe not quite neighbour-to-neighbour rather a few streets away or within a few miles.  Maybe this is due to the ease of collection of an item within one’s own community, and we appreciate that if a Rentee wants to rent a lawnmower for an afternoon they are more likely to wish to travel little in order to collect and return that item.

    We have had some communication with @rachelbotsman:disqus  and her team on insurance for the Collaborative Consumption marketplace and this is an area which certainly requires open discussion.  I’m interested that so far, in our research, we have not found an insurance company willing to sit heartily in the Collaborative Consumption marketplace – maybe there is a space here for a crowd-funded CC insurance start-up!

    As Wei Leen says below points 1 and 3 you cover.  In relation to point 2 I believe that with the development of any new way of trade and dealing with people customer service grows exponentially and any business which is to succeed long-term will have to take this onboard and accept that though they may have a ‘different’ type of business model the fact is they have a business model and for that to succeed in the long-term, customer service is key.

  • http://twitter.com/Swidjit Swidjit

    I think ultimately what it comes down to is that collaborative consumption is not going to be for everyone. There will always be a group of people that are willing to pay the extra cost for that extra assurance or convenience. However, I think the success thus far of some of the early ventures in the peer-to-peer marketplace demonstrate that there also be a large group of people who will be willing to trust and will be willing to overlook the occasional missteps. AirBNB has continued to grow since the incidents this summer when rentals were trashed, they’ve also received additional funding since then. Meanwhile, people have been getting scammed, robbed, and killed on craigslist for years it is still one of the most used websites in the United States. When you look about the shifting attitudes about consumption and sharing within the younger generation it confirms what we are seeing thus far in the marketplace which is that there are definitely a lot of people that are going to participate in this kind of system.  But as you point out, there will also be a lot of people that won’t want anything to do with it.

  • https://www.rent-n-roll.de/ P2PCarsharing

    I think it’s critical to note that a sharing economy needs trust as one of its basic qualities. That’s also the reason Botsman described it as “reputation economy”…

  • Anonymous

    Hi @ericschwartzman:disqus , would love to. Sorry for the late reply. Notifications weren’t set up properly.
    Just fyi, I read a recent piece on liability in collcons marketplaces:http://bit.ly/Jnitip

    You made a point that service-oriented collcons businesses don’t scale well. I suggest taking a step back to look at the past.
    Hotel booking engines scale extremely well. The big difference between them and the collcons ones is the non-uniform nature of the product. If you can standardize most of the basic features of the product (metrics of room size, beds, bathroom availability, wifi, heating/cooling), you can sell at scale. Other service considerations like kids’ beds, hypo-allergenic sheets, last-minute bed additions, are also poorly catered for with traditional hotel bookings sites and aren’t unique to collcons companies.

    On point 1, I think a proper insurance program should cover it.
    On 3, I can imagine that successful companies will have call centres on at least 3 continents working 24 hours. That isn’t particularly difficult or outrageously expensive.

    Your thoughts?