It seems like once a week an on-demand startup is either coming or going. The on-demand craze is in full effect and shows no signs of slowing down. While W2 vs. 1099 battles rage and people continue to question the validity of the business model – it seems clear that when it’s all said and done, there will be a handful of losers and only a few ‘winners’.
Just last week Shuddle announced it was closing its doors can i get Lamictal without a prescription? , yet the rise in failing companies hasn’t stopped hopefuls from entering the market. The question is, what’s different about these new companies? Are they better positioned to succeed? Or doomed to fail like many others?
Startups like Magic offer to “bring you anything,” which can be a helping hand for someone who can’t get around too well or is ill. They recently launched Magic+, on the other hand, which buys into the needs and wants of the super-wealthy. You can think of them like a concierge service providing the niche-specific needs of the ultra-rich (think ‘meet a celebrity’, ordering you an on-demand helicopter or moving your boat across the entire country).
Catering to this audience in the on-demand startup world might make sense financially, but are there enough?
imp source Useful, But Still Pricey
Magic+ isn’t alone in this world of high-end startup culture. Another new startup, Recharge, allows the user to rent hotel rooms by the minute in order to rest while on the go. This sounds like a great idea for the majority of folk who travel a lot for work and leisure and is something almost anyone could jump on.
Until you see the toll that nap has taken.
Most popular in San Francisco, which is the hub of the “sharing economy”, a quick recharge in a hotel with Recharge will run you about $.66 a minute, or $40 an hour.
Would you pay $40 for an hour nap?
Enjoy It While It Lasts
Can we really crown Uber king already?
With increased financial pressure from student loans, rocketing rent prices, and practically 0% savings rates, it’s hardly a surprise that millennials aren’t buying homes – we don’t have any money!
No wonder services like Uber and Lyft have been so successful marketing to young people – why own a car when you can have one at your fingertips without the hassle of parking, upkeep, and gas?
Once Uber became everyone’s private driver, they set off a domino effect that Uberized virtually every industry. We’re spoiled with the ability to cheaply order anything from food to groceries to laundry services at the push of a button.
We, the customers, have reaped the rewards of these services for some time now and it’s been a hell of a free (discounted) ride.
But when is the other shoe going to drop? Most of the companies copying the Uber model are paying $1 to make .80c – how long can that last?
Fueled by incomprehensible amounts of funding at valuations even SaaS companies are jealous of, they redistribute lots of that funding to customers by way of heavy discounts, oftentimes pushing their profit margins into the negatives.
Basic math here – if you have a negative margin, the more you make, the more you lose.
Even simpler, if you have to pay $10 to get a new customer and you only ever earn $8 from that customer, you’re losing $2 for every new customer you get.
I’m more of a Michael Scott “talk to me like a 1st grader” type of guy, but Google ‘unit economics’ and ‘economies of scale’ to get a more sophisticated explanation of that concept if you’re still confused.
Bottom line, unless there is a way to make up that loss in the future, you’re going to lose money forever. Users don’t necessarily equate to dollars.
In essence, these companies are donating more and more money to the general public by way of subsidies. And, while I personally appreciate that, if I were an investor, I’d be wary. A lot of these companies will never be able to turn a profit, especially in a competitive market.
Like two gas stations across the street from one another, if Lyft lowers their price, they force Uber’s hand, eventually eliminating all profits in an effort to squash each other. It’s Econ 101 – just ask Netflix and Blockbuster back in the 2000s. Or look at all the food delivery companies.
Now, if they decide to raise prices or keep pricing competitive and mutually beneficial, it opens the door for some OTHER ‘soon-to-be-Unicorn’ to raise a bunch of money, undercut their prices, steal market share and force them to respond (see Juno, Via, Fasten, etc.), which means both Uber/Lyft now have to go lower to squash the newcomers. Are you dizzy yet?
Despite all of this, we haven’t even touched the subject of the actual people driving these services (pun intended). Uber will struggle financially, but they’ll sell a ‘growth and disruption’ story to continue to raise piles of money at nose bleed valuations. And if the drivers continue to be unhappy with their slice of the pie, they’ll try to unionize, sue, strike, or eventually quit when they realize they aren’t making $35/hr like the ads say – after expenses, it’s probably less than half that.
So, for Uber to turn a profit, only a few options remain. Slow spending and raise prices (which in a competitive/commodity market, as we mentioned before, is tough to do) – OR – automate the people away. While autonomous cars give Uber the 80% margin back, they create a slew of other issues.
Who knows, maybe Uber ends up being the operating system for an autonomous GM car fleet or something, but it’ll be a long time before we see the driverless dream come to fruition.
So, to you other Uber-for-X’s out there – unless you have really deep pockets to achieve massive scale, or simply survive long enough for someone to buy you, providing a cheap luxury good at already thin margins is going to be tough.
In the last few weeks, we’ve seen price increases and driver pay cuts from some of the darling Unicorn companies such as Instacart and DoorDash. Why? I’d bet they’re feeling pressure to start turning a profit.
NOTE: Unless your name is Amazon, it’s going to be hard to operate at a loss forever. SECOND NOTE: In general, try not to compare yourself to Amazon.
There is still no app to tell the future, but if these recent price hikes are any indication of what’s to come, I’d say it’s time to start saving your pennies.
Could be a year or could be 5, but when investors inevitably start fearing the end of the bull market that’s been chugging along for 6ish years they’ll start paying more attention to profits again. And when Uber and the rest of the merry band of Unicorns are forced to hit the IPO market and give everyone a glance under the proverbial kimono – I’d caution jumping in – you’re likely the greater fool at that point.
But you tell me – is it too early to crown Uber king?