Collaborative Consumption Marketplaces
More extentive treatment at Collaborative Consumption
"Collaborative consumption market places are everywhere: media, car rental, lodging, staffing, textbooks, apparel, custom graphic design and even finance. Netflix shares DVDs among a large subscriber base. ZipCar and GetAround make car sharing easy. Travelers rent a local's apartment for a few days through HomeAway and 9Flats. College students rent textbooks from Chegg. Moms exchange children's clothing on ThredUp. Graphic designers create beautiful paper products and fulfill orders through Minted. Short term borrowers find loans from a community of individual lenders on Zopa and LendingClub.
Loosely defined, collaborative consumption is a business model in which shared goods or services are distributed via a market place to a community of users. Collaborative consumption reshapes markets by changing supply and demand economics. These new market places shrink consumer retail demand. Each shared car eliminates five to 20 cars from circulation. A college textbook rented 10 times over its life will replace between five to seven new copies. At the cost of market size, reuse liberates the environment from excess consumption.
But these models also have the capacity to increase demand and the total market size by addressing new previously unaddressable segments. Netflix serves customers anywhere in the US by managing a single collection of movies and delivering DVDs through the mail. Blockbuster cannot compete with this model or serve sparsely populated, rural America well. The capital required to replicate video libraries across hundreds of additional stores is expensive and unprofitable." (http://www.huffingtonpost.com/mit-entrepreneurship-review/peertopeer-startups-are-e_b_837144.html)
"Of late, peer-to-peer (P2P) collaborative consumption models are blossoming. P2P models are much more capital efficient than their B2C counterparts because they do not require any capital investment to acquire assets. Instead, they rely on a community to supply them, typically in exchange for a revenue share of the transaction.
P2P car sharing enables car owners to rent their own cars. GetAround, a San Francisco based company, operates a market place for P2P car sharing at a fraction of the cost of ZipCar. Car owners use the income from rentals to cover car payments and maintenance costs. A P2P system is much more efficient - fewer cars on the road that are used more often. Nearly everyone benefits.
However, P2P models are more complex than B2C. P2P market places are two sided exchanges and require careful management of demand and supply growth. As a market place grows and strangers begin to transact, eliminating transaction friction by building trust and quality metrics is critical. Similarly, ensuring consistent transaction experiences is essential to building brand and leads to word-of-mouth marketing. Lastly, each exchange must decide whether to guarantee customer satisfaction. While a guarantee will increase liability of fraudulent returns, this promise increases a consumer's propensity to buy.
A pioneer in P2P exchanges, ThredUp has built a community of tens of thousands of moms who exchange children's clothing. Clothing buyers rate the quality and style of the clothes and the data feeds a seller's reputation informing future buyers. ThredUp guarantees satisfaction to decrease initial buyer fear. With careful management, ThredUp has grown their P2P market place successfully.
Technology is the key enabler for this resource allocation optimization. Market places attract customers and build communities using the web. Social networks, proprietary and public, underpin trust among users. With Facebook, it's easy for a host to vet a potential apartment guest's identity, particularly if they have friends in common. When it's time to pay, mobile phones coupled to payment mechanisms, enable transactions to happen anywhere. Since technology enables this resource allocation shift, as smartphones and mobile payments reach mass market penetration in 2011 and 2012, the disruptive potential of collaborative consumption markets will only increase.
One of the biggest challenges when starting a P2P market is delivering initial market liquidity through customer education and brand building. Most successful market places have sought to replicate an offline behavior online. P2P exchanges lend themselves to close interpersonal reactions. Consequently, these market places resonate with customers for emotional reasons. Ask the mothers on ThredUp who wrap their donations in tissue paper before sending the clothes on to the next mom. Or the brides who work with a stay-at-home mom on custom wedding invitations on Minted.
As these markets develop, cost, convenience and selection scale adoption en masse. Why pay for two Tuscan hotel rooms during your family's vacation when you could rent an apartment from a local on 9Flats for less? Why buy a college physics book only to sell it a few months later when you can rent one for a semester? Why pick up a drab economy car at the airport when you can rent a fire red Tesla located just two blocks from your San Francisco hotel? This is the power of the model.
When applied to the right market, collaborative consumption market places effect dramatic changes. To date, the most successful efforts have involved digital currency (lending), goods that can be mailed (clothes, DVDs), time & cost sharing of expensive goods (cars, apartments and books) and services (graphic design, commodity labor)." (http://www.huffingtonpost.com/mit-entrepreneurship-review/peertopeer-startups-are-e_b_837144.html)
Three Commercial Difficulties for P2P Marketplaces
"For many of the early adopters in the sharing economy, the experience of a peer to peer interaction is significantly better due to their unique characteristics. They like meeting a new person, or the fact that they’re reducing their environmental footprint, and therefore are willing to use a new platform.
However, for the mainstream user, these issues aren’t often a factor in motivation. To get the mainstream, P2P services need to offer something much better than the current solution. New users must have way to make (a significant amount of) money where none existed before, a much cheaper alternative to a current product or service, or a much more convenient solution to an existing problem. The big names in the space fit at least one of these categories.
The challenge is that it’s very difficult to create a situation in which the experience is an order of magnitude better for the mainstream. Making a few extra dollars just isn’t worth it for many people, especially if the P2P method is equally convenient or potentially even less convenient than how people are currently behaving. It’s even harder at the start, because new marketplaces lack…
Liquidity is the answer to the question “When I try to use a P2P service, can I find what I’m looking for?” For new two-sided services, it’s often no. The chance that someone in your geographical area has exactly what you want on the day/time you want it is just pretty slim if there are only 100 or 1000 users on a service. It’s known as the “double coincidence of wants”. Bo Fishback of Zaarly talks about how this was a problem for them in their original model here.
It’s possible to “hack” your way to liquidity with either a huge marketing budget, by focusing on single user utility, or by starting with a local or very targeted niche. If you don’t have a huge marketing budget (like every startup I can think of), your service has to be valuable to those first few users who sign up, so that they will continue to use it and even recruit more. If you decide to focus on a local niche too, you need some way of spreading beyond that locality. That’s an even harder challenge than picking something which will give your users a much better experience at scale.
On top of getting to liquidity, there’s an additional problem of competing with existing liquid services like eBay and Craigslist. Once a service reaches liquidity (most people showing up get what they want), it’s very hard to “beat” them. Your users aren’t likely to spend any effort on a new “risky” service when they know they can get exactly what they want somewhere else.
All of the services mentioned in the first paragraph happen to have some sort of venture funding. While some may debate the merits of this choice, the fact is that they all had plans to make a large amount of money.
Since most of the peer to peer services we’ve seen use a simple transaction fee as a way to make money, let’s do a little math (see more here). Let’s say you have 5 people on your team, and everyone makes $60,000 a year. That’s $300,000 a year you need to make, and since you only get to keep 10% of the value of transactions, there has to be $3 million going through your platform every year. Unless you’re dealing with high value assets (cars and houses), or very frequent transactions (shared transportation), it’s pretty tough to get to that number.
You need many more users than a company who makes $300 a year each off of 1,000 customers on a one time sale, for example. So while some marketplaces may see some traction and have a small core of users, they can’t return money to their investors unless they hit that “hockey-stick” growth." (http://ouishare.net/2013/03/why-its-so-hard-to-build-a-peer-to-peer-marketplace/)