Collaborative Consumption - Business Models

Typology

"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)

Discussion

When will it fail?

eric schwartzman:

"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)