LEARNING to LOVE (OR LIVE WITH) the SHARING ECONOMY by Judith Wallenstein and Urvesh Shelat

LEARNING TO LOVE (OR LIVE WITH) THE SHARING ECONOMY By Judith Wallenstein and Urvesh Shelat

This is the second of three articles on the shar- als or their desire to consume less for the ing economy. The first article focused on op- sake of sustainability. Sharing platforms portunities created by the sharing economy can provide access to new markets and cus- and provided a preview of industries (besides tomer segments by lowering costs for con- mobility and hospitality) likely to be affected, sumers who want to use an asset but can- as well as insights into consumer attitudes to- not afford to own it or who want to use it ward sharing drawn from a survey conducted for only a short period of time. Sharing in Germany, India, and the US. This article ex- platforms can also increase the purchase amines the strategic options that sharing of- price of shareable assets, since buyers are fers for emerging and established companies often willing to pay a premium for items and how both can create competitive advan- that can generate revenue by being shared. tage. In the third article, we will peer into the future of sharing in the global economy and To be sure, the sharing economy poses analyze promising business models. threats to companies with business models based on ownership. But in those threats he sharing economy, exemplified lie the seeds of opportunity. Tby the rise of Uber and Airbnb, has been one of the most notable economic forces of this decade. Traditional patterns The Advantages of Sharing of ownership and consumer behavior have The sharing economy has reached far be- seemingly been turned upside down by yond rides and room rentals to include startups, leaving incumbents to ponder a high-end cameras (ShareGrid), boats (Boat- fundamental threat to their businesses. bound), clothing (Rent the Runway), and agricultural machinery (Trringo and Ravgo). The forces that underlie sharing are eco- These examples just hint at the potential nomics and business logic, not the aversion for sharing to ripple through the economy. to ownership often attributed to millenni- Sharing is gaining in popularity precisely because it makes economic sense. Consum- In terms of supply, not all assets are equal- ers who use sharing services are looking for ly capable of being shared. The best assets value, according to BCG’s research. for sharing are interchangeable: the user does not need to reconfigure them for each The German truck manufacturer MAN, for use, and their usage patterns facilitate shar- example, established its LoadFox sharing ing. That is, they are used for relatively platform in 2016 to help smaller German short periods of time, and those uses can logistics providers and carriers supplement be stacked sequentially to build a recurring the cargo of trucks with less than a full revenue stream. Finally, transfer and trans- load. (BCG Digital Ventures is a partner in action costs need to be low. Otherwise, the LoadFox.) Traditionally, an inefficient mix time, effort, and expense of arranging a of telephone calls, emails, and even faxes sharing transaction will swamp the need. has been used to match carriers that have spare capacity with those that have excess In terms of demand, customers gravitate to- loads. LoadFox does this far more efficient- ward certain assets according to frequency ly with its online platform. of use, cost of ownership, and other factors. The price per use needs to make economic LoadFox extends MAN’s business beyond sense. For example, a customer might be manufacturing while providing a platform willing to rent a tool once at one-tenth of for additional services and visibility into the purchase price, but he or she would not usage patterns that can potentially influ- take frequent trips using Uber or Lyft at ence product design. Moreover, it helps one-tenth the cost of a car. small carriers not just increase profitability but also improve utilization and balance Shareable assets must be easy to use in the uneven demand. As a result, they are able sense that they allow consumers to avoid to compete more effectively against larger the direct and indirect costs of ownership. carriers that can solve those same challeng- For many, renting a Zipcar is simply easier es through scale. than maintaining and insuring an automo- bile, and renting camping equipment is easier than storing it in a small apartment The Risks and Rewards of the for an annual wilderness expedition. Sharing Economy Similar to e-commerce, the sharing econo- Finally, shareable assets often appeal to my is built on a foundation of radically the desire for product variety and special- lower transaction costs. In the physical ization. A consumer can own multiple jack- world, lending is time-consuming and inef- ets and trousers that he rarely wears—or ficient. The lessee often has far less infor- rent a designer suit for special occasions; mation than the lessor, but digital plat- she can buy a minivan—or own a sports forms flatten out the bumps and straighten car and rent a van for trips to the neighbor- the curves that prevent both from reaching hood recycling center. a deal.1 Value Chain. Companies need to under- In other words, a radically different eco- stand the vulnerabilities of their value nomic environment is driving the growth chain to the sharing phenomenon. For of sharing, rather than a change in consum- example, sharing can introduce an interme- er preferences on the part of millennials diate step, as when an Uber driver buys a and others. By viewing sharing through an car in order to transport passengers. If the economic lens, companies can understand intermediary—the ride-sharing platform— how to address it. negotiates or makes the purchase on behalf of the driver, what was formerly a Supply and Demand. The economics of B2C transaction in essence morphs into a supply and demand can help companies B2B transaction. The car maker loses some assess how vulnerable their industry might control of the customer relationship and, be to the threat posed by sharing. potentially, of its pricing power.

The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 2 Sharing can also replace a link in the value Fédérale de Lausanne, have theorized that chain, as ride-sharing platforms are doing sharing markets create incentives for by taking business away from taxi and consumers to spend more on products and black-car fleets, and as room-sharing ser- to seek out durability. Indeed, in our vices are doing by reducing overall demand consumer survey, 80% of respondents in for hotel rooms. India and the US reported that they are willing to pay a premium for products While both intermediation and replacement whose durability or other features make are disruptive, their impacts are vastly differ- them amenable to sharing. For example, ent. Thus, while car manufacturers and taxi Local Motion, a US company acquired by fleets both face challenges to their business Zipcar, is developing keyless entry and models in the age of sharing, the former are online fleet management tools that will in much better shape than the latter. facilitate sharing.

Create shareable business lines. Taking Harnessing the Sharing shareable products to the next level, compa- Economy nies can design new product lines, possibly Most businesses that are vulnerable to the in partnership with platforms, that are effects of sharing can still control their des- suitable for sharing. Mahindra, for example, tiny. But how can they turn sharing into a has announced a partnership with Ola Cabs, source of competitive advantage? Here are the leading ride-sharing platform in India, several options that will allow companies which it will supply with 450,000 vehicles. to flourish in the sharing economy. (For a set of practical suggestions to ensure suc- Be a buyer, not just a seller. Businesses can cess, see the sidebar “How to Enter the buy sharing services to improve their costs, Sharing Economy.”) efficiency, and flexibility. This option can help smaller outfits and startups improve Embrace the sharing model. Creating a their level of service and lower their sharing platform is a viable option for operating costs, as small carriers and companies that wish to expand into logistics providers in Germany are doing markets that were closed when ownership with LoadFox. was the primary option, or to diversify their product offering or compete with sharing startups. AccorHotels’ acquisition Buying Time by Playing Defense of onefinestay and Squarebreak, and its Companies that are more vulnerable to the proposed acquisition of Travel Keys, will sharing economy may want to offer creative expand its portfolio to include 8,500 alternatives as a way to buy time while they private rental properties, enabling the develop their own sharing strategy. hotel chain to compete against Airbnb and other sharing companies. As we mentioned Encourage product stickiness. Owners of in our first article, Mahindra & Mahindra, exclusive brands may have legitimate the equipment and vehicle arm of India’s concerns about maintaining the aura Mahindra Group conglomerate, has created surrounding their products, while other a standalone sharing subsidiary, Trringo, brand owners may simply want to retain which rents out tractors and other farming control of the overall user experience. equipment. (See the sidebar “Mahindra’s Measures such as access codes and double Sharing Strategy.”) authentication can tie products such as consumer electronics to their owner. Build durable products to be shared. In the Luxury brands may shift toward highly same way that beach houses often sell customized or bespoke products that meet above their intrinsic value because of their niche needs, making them less exchange- rental potential, shareable products com- able. If consumer backlash is a concern, mand a price premium. Economists such as such moves can be aimed at select custom- Thomas Weber, of École Polytechnique er segments and markets.

The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 3 HOW TO ENTER THE SHARING ECONOMY

Here are six suggestions for how to join but will want to participate in a sharing the sharing economy effectively. They are business, as Mahindra is doing with Ola based on interviews with more than 25 Cabs in India. founders of startups in more than 15 countries, including China, Germany, Start right. First impressions matter. An India, Nigeria, Singapore, the UK, and early misstep can be fatal to a sharing the US. company’s brand and reputation. When Uber moved into new cities, it would pay Pick a business model. In our first drivers to drive around in empty cars so article, we laid out three business that passengers would not have to wait models—decentralized (Airbnb), central- long for a ride. Those early adopters ized (Zipcar), and hybrid (Uber)—distin- became brand ambassadors. Today, with guished by who owns the assets and who Uber’s reputation having taken a hit, sets the price. (See the exhibit below.) In Lyft—its smaller competitor—is present- creating Trringo, for example, Mahindra ing itself to potential drivers as a more opted for a combination of centralized welcoming alternative. Likewise, in its and decentralized models. Trringo rents early days, Airbnb sought hosts with and sets terms for its fleet of tractors especially distinctive apartments and (centralized), but also allows others to rooms. Over time, it expanded to a wider rent its equipment through the platform array of offerings but credits its early (decentralized). For manufacturers, the success to this deliberate choice. centralized and hybrid models allow greater control over the use of their Change behavior. Sharing platforms are brands. Other companies may not want not simply storefronts waiting for to create a sharing platform themselves customers. They actively convert users to

The Best Business Model Is a Function Who Owns the Asset and Who Controls the Offer

Individuals DECENTRALIZED HYBRID • Airbnb • Lyft • BlaBlaCar • Ola Cabs • Ravgo • Rentomojo • Peerby • Uber • Turo ASSET • Xiaozhu OWNERSHIP Who owns the asset

CENTRALIZED • DriveNow • Zipcar • Rent the Runway

Ease of building a crowd-sourced asset base Ease of building a crowd-sourced Platform Individuals Platform CONTROL OF OFFER Who determines the price and the terms and conditions

Degree of product/service consistency and platform control

Source: BCG analysis.

The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 4 HOW TO ENTER THE SHARING ECONOMY (continued)

new behaviors. For example, Xiaozhu, a Plan each battle. Not all markets are Chinese apartment rental platform, gives created equal, and they need to be property owners remote-control locks for managed differently. Many markets are their front doors to simplify check-in for primarily revenue generators, while guests. others have different strategic purposes. Airbnb’s push in China, where it faces a Scale, scale, scale. The larger a sharing strong local competitor, is partly aimed network grows, the greater its value. With at building awareness among outbound scale comes greater convenience and Chinese travelers and capturing their choice for customers and greater profits bookings. Other markets may not be for the owners of the largely fixed-cost highly profitable but are strategically platform. Companies need to plan how important in terms of forestalling local they will achieve scale as they expand competition and improving the compa- into new markets, new products, and ny’s negotiating position with regulators. new customer segments. They must also understand the investments required to Prepare for tomorrow. The sharing build the business to reach scale. For economy is not static. Self-driving cars example, Uber benefits financially from will fundamentally change the econom- surge pricing—its practice of increasing ics of the ride-sharing business. Drones fares when demand is high. And since could radically alter logistics. Blockchain customers expect both reliable pricing has the potential to remove intermediar- and fast availability, they tend to choose ies altogether by uniting lessor and Uber because its scale offers both. To lessee in a binding relationship. Sharing offset the potential negative effect on companies keep their eye on all these consumers’ perceptions, the company developments. tries to minimize surge pricing by ensuring large networks of drivers.

Bend the economics. Sharing makes sense payment methods, without actually sharing when per-use charges are small compared assets. Arro in the US and mytaxi in with the overall cost of ownership. By Europe are apps that allow traditional taxi creating a line of lower-cost products, fleets to mimic the user experience of manufacturers can shift demand toward ride-sharing services. ownership and away from sharing.

Play the regulatory card. Where the assets The Meta-Lessons of Sharing being shared are not regulated, incumbents Even when companies do not face the dis- may seek intervention from regulators, as ruptive risks of sharing, they can adopt taxi fleet operators and hoteliers have many of the practices that have made shar- done, albeit with mixed success. While the ing services popular. argument may be strong that regulation is needed to ensure a level playing field, it Generate and analyze customer data. On also cuts against choice, convenience, and sharing platforms, each transaction gener- access, which risks having a negative effect ates identity, location, time-of-day, and on consumer perceptions of the company. behavioral data. Companies mine this data to improve the service. By emulating the Co-opt the model. Incumbents can adopt near-real-time data collection of sharing- the popular characteristics of sharing economy companies, incumbents can platforms, such as transparency and easy tighten their relationship with customers

The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 5 MAHINDRA’S SHARING STRATEGY

Mahindra & Mahindra sells more equipment is either owned by a Trringo tractors than Deere & Company or any franchise or by a nearby farmer. Mahin- other manufacturer. But in its home dra chose this open approach to encour- market, only about 15% of India’s 120 age usage, build scale, and improve the million farmers use mechanical equip- livelihood of farmers, even though it ment, either because they cannot afford means that customers can rent equip- the cost of ownership or because they ment made by Mahindra’s competitors. find existing rental businesses to be inefficient and costly. Mahindra made Trringo a separately managed subsidiary staffed with outside To reach these farmers, Mahindra hires in order to maintain its indepen- created the Trringo sharing platform. dence and startup culture. Trringo Farmers can rent a tractor (plus driver) currently operates only in India, but and other farming equipment by the Mahindra anticipates expanding into hour through their smartphone. (To other countries. At $175 billion in annual accommodate users without mobile sales, the global agricultural-equipment internet access or a smartphone, Trringo market should offer plenty of opportuni- operates call centers staffed with agents ties. fluent in several local languages.) The

and generate insights into their behavior enables users to rent on platforms like and preferences. Customers themselves car2Go without ever worrying about keys often enjoy receiving updates and self- or agency opening hours. Incumbents service options for the products and should carefully watch as changes to services they use. products, platforms, and logistics affect the shareability of their own products. Identify the key customer benefits. Auto- makers were caught off-guard by Uber in part because of a failure of imagination. he sharing economy shifts rather They viewed themselves as vehicle manu- Tthan upends traditional notions of facturers (even when selling to fleet own- competitive advantage. In a world of shar- ers) and did not anticipate the rapid rise of ing and declining transaction costs, scale transportation as a service or the possibili- arguably matters even more than before. ty that individual car ownership might B2C companies that sell goods to sharing decline precipitously. This failure repre- platforms may suddenly find that they sented an opportunity cost, with automak- have also become B2B companies. Compa- ers now planning to sell to ride-sharing nies that fail to consider their exposure to fleets or to otherwise participate in the sharing, both positive and negative, will be sharing economy. at a competitive disadvantage.

By viewing the benefits that their products provide and thinking of other ways in Note which those benefits might be delivered, 1. For an academic discussion of transaction costs and the economics of the sharing economy, see John manufacturers can anticipate potential dis- J. Horton and Richard J. Zeckhauser, “Owning, Using ruptions in their industry before they occur. and Renting: Some Simple Economics of the ‘Sharing Economy,’” February 10, 2016, http://john-joseph- horton.com/papers/sharing.pdf. Monitor transaction costs. Any develop- ment that lowers transaction costs is a potential game changer. Smartphone-based remote access technology, for example,

The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 6 About the Authors Judith Wallenstein is a senior partner and managing director in the Munich office of The Boston Consulting Group and the leader of the BCG Henderson Institute in Europe. She is also a BCG Fellow analyzing the sharing economy and the future of work. You may contact her by email at wallenstein. [email protected].

Urvesh Shelat is a senior venture architect for BCG Digital Ventures in Berlin. He recently completed an ambassadorship at the BCG Henderson Institute, where he analyzed the sharing economy. You may contact him by email at [email protected].

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The Boston Consulting Group | Learning to Love (or Live with) the Sharing Economy 7