Collaborative Consumption - Business Models
Rachel Botsman in the Rise of Collaborative Consumption:
From pp. 220-221, chapter 10:
"Collaborative Consumption may be consumer and community orientated, but its benefits are shared across businesses. Thousands of new opportunities have already emerged under Collaborative Consumption with successful revenue models based on memberships (Zipcar, Bag Borrow or Steal), service fees (Airbnb, Zopa), and micropayments for usage (BIXI, BabyPlays) being established. Also, as companies start to redefine themselves as acting as the bridge between individual users and the community, we will trust them more, and as a result interact with them in different ways. This broader and deeper relationship provides an opportunity for the company to offer more ancillary services such as personalization, workshops, and community support. Etsy is an example of this model. The net result is that while we may see a downturn in the number of products consumed and the amount we shop we won’t necessarily see a decrease in the overall revenue of the company. This democratization and flowering of new companies does not necessarily come at the detriment of existing businesses. Companies such as Interface and Netflix show that it is possible to reposition from an old vertical retail model to an integrated collaborative one with huge cost savings and increases in consumer loyalty.
We believe Collaborative Consumption is part of an even bigger shift from a production-oriented measurement system that just gauges the amount we sell to a multidimensional notion of value that also takes into consideration the well-being of current and future generations. Just as individuals are beginning to rethink the dichotomy between self-interest and collective good, some governments and businesses are starting to rethink their own metrics that have prioritized certain forms of progress."
Excerpt from What's Mine Is Yours by Rachel Botsman and Roo Rogers. Copyright © 2010 by Rachel Botsman and Roo Rogers. Posted with permission of HarperCollins Publishers. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
1. Rachel Botsman:
Company takes a service fee for successfully matchmaking buyers and sellers, hosts and guests, and borrowers and lenders. The fee taken varies across marketplaces from 5% to 40% depending on the value of the transaction and the support services provided.
Airbnb TaskRabbit WhipCar
Company offers basic services or use of the platform/app for free. Users then 'trade-up' for additional benefits and exclusive features.
Tiered Subscription Plans
Company offers a range of subscription plans at different price points based on frequency of use or number of goods desired.
Hub DimDom Netflix
Company purchases unwanted goods direct from customers and then recycles and re-sells the products (or its parts) for a higher value.
Sells a back-end platform or piece of software that companies can customize and use.
Company charges a flat monthly or annual membership fee regardless of usage.
Membership Plus Usage
Company charges a one-off or annual membership fee (sometimes with different plans offered based on frequency of use). Additional fees are charged based on usage.
Drive Now Barklays .'
"Many of the initial players in the Asset-Sharing Movement followed a business-to-consumer model. Think of Zipcar owning a fleet of cars shared by consumers, or Netflix providing a mechanism for customers to share its inventory of movies. What has emerged now is consumer-to-consumer sharing. And there is a major cost advantage here. Tomasz Tunguz, a principal with Redpoint Ventures, wrote recently that Zipcar spent 71% of its 2010 revenues acquiring and servicing cars. In the C-to-C market, the companies facilitating these arrangements have no such fixed costs.
While the trend toward consumers monetizing unused assets is picking up steam, Clemons says corporations have been doing this for years. For example, he notes, aerospace firms Boeing and Grumman formed time sharing computer services divisions as far back as the 1970s to allow government and commercial customers to tap into their computing capacity. Later, some companies looked for efficiency by outsourcing, selling off their internal computing operations in some cases and then buying those services from outside vendors. More recently, with the advent of cloud computing, Internet giants like Google and Amazon have made some of their massive computing power available to others. "This combination of monetizing assets when you can, or getting them off the balance sheet and then paying for them when you need them, has been motivating companies for a long time," Clemons notes.
The key to this trend, he adds, was diminishing transaction costs. If the costs and risks of handing over critical functions to outside vendors were high, companies didn't do it. But as more firms emerged to handle those tasks, and developed into trusted providers with proven track records, those transaction costs fell. The result is that over time, "companies did more and more outsourcing, and they became less firm-like and more market-like," Clemons notes.
This same decline in transaction costs is driving the movement toward collaborative consumption, according to Clemons. "The transaction cost -- essentially the hassle factor -- has dropped low enough that people can now do things they couldn't do before." Still, he argues that while corporations are well aware of the risks they take in outsourcing, consumers who are renting space in their homes or use of their cars may not be fully aware of the potential downside. "Industry understands the risk-reward payoff, and they are very strict about what you can and can't lease out," Clemons points out. "The fact that as a consumer you can easily arrange a monetizing transaction for your assets has nothing to do with the risk associated with it. It is not risk free." (http://knowledge.wharton.upenn.edu/arabic/article.cfm?articleid=2714)
When will it fail?
"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." (http://spinfluencer.com/2012/01/when-collaborative-consumption-fails.html)