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Learning from Failures in the Sharing Economy
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Download date:01. Oct. 2021 Learning from Failures in the Sharing Economy
Karl Täuscher
Bayreuth University
Prieserstraße 2, 95444 Bayreuth, Germany
Jan Kietzmann
Simon Fraser University
500 Granville Street, Vancouver, BC V6C 1W6, Canada
Täuscher, K., & Kietzmann, J. 2017. Learning from Failures in the Sharing Economy. Management Information Systems Quarterly Executive, 16(4): 253–263.
The publisher’s post-print is available at: http://misqe.org/ojs2/index.php/misqe/article/view/797
Acknowledgment:
We thank the participants in the Special Issue’s paper development workshop at the HICCS 2017 for their insights and expertise that greatly assisted the research. We are very grateful to Mary Lacity for her comments on an earlier version of the manuscript. We also thank the Special Issue’s Guest
Editors, Hope Koch, Iris Junglas, Arun Sundararajan, and Ping Wang for their helpful guidance and support. Abstract:
Firms eager to succeed in the sharing economy are encouraged to imitate the strategies and business models of successful businesses like Airbnb and Uber. Yet they often ignore the lessons from sharing economy firms that failed with similar business models. Our analysis of several failed firms has identified common causes of failure, and the associated risks, when competing in the sharing economy. An illustrative case study shows that a hybrid business model can significantly reduce the inherent risks and can lead to sustainable growth in the sharing economy.
Key words: Sharing economy, firm failure, business models, peer-to-peer marketplaces, scalability, network effects, hybrid business models
THE RISE OF THE SHARING ECONOMY
Fueled by the popularity of firms such as Airbnb and Uber, the ‘sharing economy’, otherwise referred as a collaborative economy or peer economy, has recently gained increasing attention among practitioners and academics. These terms refer to how new ventures develop and deploy digital platforms1 to enable peer-to-peer sharing of goods, services, and information.
The underlying proposition of sharing economy firms is they can add value by allowing owners of resources to make their idle personal assets (e.g., rooms or homes) available to those who need them (e.g., travelers)2. As direct alternatives to established firms (e.g., hotels), the resource optimization offered by sharing economy firms has become possible through recent technological advances in search, rating and matching algorithms, the spread of mobile
1 A good definition of the sharing economy is provided by: Hamari, J., Sjöklint, M., and Ukkonen, A. 2016. “The sharing economy: Why people participate in collaborative consumption,” Journal of the Association for Information Science and Technology (67:9), pp. 2047–2059. 2 For a comprehensive primer on the promises of the sharing economy, see: Schor, J. 2014. “Debating the Sharing Economy,” Great Transition Initiative (ed.).
consumer devices and the explosion of social media platforms3. Through the increased and improved data-flow opportunities, sharing economy firms have enabled innovative two-sided business models to transition from ownership-based to access-based consumption4, from individual to collaborative forms of consumption5 and from a corporation-centered economic model to a ‘crowd-based capitalism’6.
The principles of the sharing economy have been exemplified by technology platforms such as the abovementioned Airbnb’s peer-to-peer marketplace for accommodation, Uber and Lyft’s peer-to-peer ridesharing or peer-to-peer skill-sharing platforms like Udemy. And their successes are indeed impressive: After only seven years of operations, Airbnb had already surpassed the world’s largest hotel chains in the number of beds and bookings. Uber has even become the most valuable private firm in the world, valued currently at 60 billion USD. Udemy has attracted a community of over 10 million users and received a combined $173 million USD from its investors7. These success stories are undeniably impressive.
Given the rapid growth and high valuations of firms like Airbnb, Lyft, and Udemy, hundreds of technology ventures emerged in the last years to develop similar business models.8 However, only a fraction has reached a substantial network size or significant funding. On Crunchbase, the world’s leading database of private technology firms, around 900 firms founded in the last decade are categorized as sharing economy firms. By mid-2017, two of these firms (Airbnb and Lyft9) had received more funding than the remaining firms combined, which suggests that
3 A thorough review of different Social Media offerings is provided by Kietzmann, J. H., et al. (2011). "Social media? Get serious! Understanding the functional building blocks of social media." Business Horizons 54(3): 241- 251. 4 On a discussion of access-based consumption, for instance: Bardhi, F., and Eckhardt, G. M. 2012. “Access- based consumption: The case of car sharing,” Journal of Consumer Research (39:4), pp. 881–898. 5 The concept of collaborative consumption is introduced by: Botsman, R., and Rogers, R. 2011. What's mine is yours: How collaborative consumption is changing the way we live, London: Collins. 6 For a comprehensive review of the sharing economy’s impact on society, consumers, the economic growth, the future of work and necessary regulations, see: Sundararajan, A. 2016. The sharing economy: The end of employment and the rise of crowd-based capitalism. 7 Throughout the paper, venture capital-related data are based on Crunchbase.com, the largest global startup database. 8 Angel.co, a marketplace for startups and investors, currently lists 948 startups in the sharing economy space. For an updated list, see: https://angel.co/sharing-economy-4. 9 Uber, which has received the largest funding in the space, is not categorized as a sharing economy firm in the Crunchbase database. maybe these highly referenced firms do not actually represent the prototypical sharing economy firm.
Granted, there is lots to learn from the accomplishments of firms like Airbnb, Lyft or Udemy.
However, imitating their business models in a different market clearly does not guarantee a similar success story, or else there would exist many more firms like Airbnb. Indeed, there are many categorically different reasons why most of the sharing economy firms are less successful, or even going out of business. Managers aspiring to compete in the sharing economy, it seems, often suffer from Survivorship Bias. They only concentrate on the strategies and business models of firms that were very successful and disregard those that were not. Such a logical error, vividly described as the Fallacy of Silent Evidence by Nassim Taleb10, lulls decision makers into the dangerous belief that the sharing economy offers high returns for all new entrants.
Worse yet, managers appear to search for instances that confirm their beliefs and desires, known as a Confirmation Bias, without looking for more critical, contradictory evidence that would teach them about the risks of operating in the sharing economy.11 Taken together, the phenomenon might be reminiscent of the dotcom boom of the 1990s. While the silent evidence of failures in the sharing economy rarely makes the popular press, it can offer important insights to managers. Accordingly, we ask: why did some sharing economy firms fail? Based on our findings, we propose that hybrid business models can help to mitigate the common sharing economy risks identified through these failure cases.
The presented insights are derived from two complimentary research approaches. We started our research by conducting 21 interviews with managers and investors of sharing economy firms about their perceived success drivers in the sharing economy. Over the course of 2 years, we additionally visited sharing economy firms like Airbnb, Lyft, Getaround, Udemy, or 99Designs, examined various business models conceptually12 and developed case studies.
10 Taleb, N. N. 2010. The black swan: The impact of the highly improbable, New York: Random House Trade Paperbacks. 11 Taleb, N. N. 2010. The black swan: The impact of the highly improbable, New York: Random House Trade Paperbacks. 12 A typology of ride-sharing business models, for instance, is provided by Cohen, B. and J. Kietzmann (2014). "Ride on! Mobility business models for the sharing economy." Organization & Environment 27(3): 279-296.
While the interviews and case studies help us identify what works, they did not provide much understanding about what doesn’t work. Towards gaining a more comprehensive understanding of failure in the sharing economy, we gathered a sample of all firms that fulfilled our definition of the sharing economy and had passed the initial startup phase. We analyzed the business models of each of these 73 firms and observed their performance in the subsequent quarters. As expected, some of these firms filed for bankruptcy during the observation period. Others are still operating, but have not shown any substantial growth.
These cases provided us important insights into sources of failure and under-performance in the sharing economy. For some failure cases, the firm’s entrepreneurs or managers have publicly reflected the reasons for the death of their firm. These reflections, known as postmortems in the startup world, further allowed us to integrate the first-hand perspective of the responsible decision makers into our understanding. We have distilled our key insights into a set of the most prominent failure factors, which we illustrate using mini-cases.
We proceed as follows: First, we summarize the current common wisdom about success in the sharing economy. Next, we present the mini-cases to illustrate common causes of failure in the sharing economy. Subsequently, we show how a successful firm like Udemy has mitigated the failure risks through business model innovation. The Udemy case demonstrates that successful sharing economy firms increasingly adapt hybrid business models to reduce their exposure to the identified risks. Finally, we draw conclusions on how managers can utilize our insights.
COMMON WISDOM ABOUT SUCCESS IN THE SHARING ECONOMY
Sharing economy firms are commonly associated with exceptional business opportunities. In its essence, the high expectations about their future profitability are often based on two related characteristics: scalability and network effects. Scalability generally refers to a firm’s ability to flexibly offer its service to a large number of users without incurring proportional costs. Since many firms in the sharing economy offer a self-managed matchmaking service through a digital platform, additional users can be served at a marginal cost close to zero. Given the economics
of software, these firms can increase their profit margins as they serve more customers with their platform product. In addition, the increasing efficiency of cloud computing services like
Amazon Web Services allows firms to flexibly adjust their capacity to their customer demand.
As such, investors often emphasize (and expect) huge growth within a relatively short period of time.
Network effects describe how a firm’s offering becomes more attractive to users as the network grows. For instance, Airbnb becomes more attractive to travelers as more apartments are available on the platform. In turn, the service becomes more attractive to hosts as more people search and book accommodations on the site. This dynamic generally leads to a reinforcing attractiveness to both market sides in which everybody benefits from a platform’s increased network size. Business models that are both scalable and generate network effects are therefore expected to lead to a virtuous cycle of increased market share and profitability. In fact, many of these sharing economy markets are commonly expected to demonstrate winner- take-all dynamics, in which the market leader will eventually dominate the space13. Based on this perspective, it follows that new entrants will not be able to compete once the market leader has reached a substantial network size. If this common wisdom holds true, firms with strong network effects and high scalability should perform well in the sharing economy.
EXAMINING FAILURE IN THE SHARING ECONOMY
Our analyses, however, show that high scalability and network effects are no protection against failure in the sharing economy. In this section, we present five mini-cases of sharing economy firms that, despite impressive network growth in their early stages, had to cease operations or were acquired by competitors. Table 1 provides a descriptive overview of the five case firms.
It is noteworthy that firms in the sharing economy initially face similar challenges as startups in other markets. A number of firms that failed due to technological challenges, a lack of product-market fit, the inability to attract venture capital, or due to flaws in the organizational
13 Eisenmann, T. R. 2006. “Internet companies' growth strategies: Determinants of investment intensity and long-term performance,” Strategic Management Journal (27:12), pp. 1183–1204. design. Here, we focus on challenges that directly arise from the nature of these business models and markets.
Table 1: Overview of failure cases
Firm Country Description Founded Exited / Total acquired funding Homejoy USA Peer-to-peer home 2010 2015 $64.2M services Carpooling. Germany Long distance ride- 2001 2015 $10.0M com sharing Sidecar USA Ride-sharing 2011 2015 $ 45.5M Stayzilla India Accommodation sharing 2005 2017 $34.0M Beepi USA Marketplace for used cars 2013 2016 $148.9M
Low customer lock-in
Sharing economy firms benefit from low marginal costs as they are often not directly involved in delivery the service to customers. Rather, they provide value through the matching and facilitation of transactions. Monetizing such intangible benefits can, however, be challenging.
Take the example of Carpooling.com, a German firm founded in 2005 that had pioneered and dominated the peer-to-peer carpooling market in Europe. Carpooling.com allowed car drivers an efficient platform to find co-passengers to share costs when travelling from one city to another. The business model was highly scalable and generated strong network effects between drivers and passengers. In 2013, the firm introduced a revenue model that charged participants a small commission fee for rides organized via Carpooling.com’s platform. While passengers had previously paid drivers in person after the ride, Carpooling.com now asked all participants to register and pay their rides upfront via its digital platform. The change in the revenue model and the upfront payment was not received well by the customers, as evidenced by heated user comments on Carpooling.com’s social media sites. Users complained that they suddenly had to pay for a service that was previously free. Over the subsequent months, passengers started to use alternative carpooling sites. The reduction in passengers subsequently decreased the attractiveness to drivers. Within a few months, the virtuous cycle that had spurred previous growth turned into a vicious circle, with more drivers and passengers
leaving the platform every month. Within a short period of time, the firm had lost a large share of its network. Following a dramatic demise in size, Carpooling.com was acquired in 2015 by
French competitor BlaBlaCar.14
Low control over service quality
Sharing economy firms are often not physically involved in delivering the service to customers, have no formal obligations to supply-side users, and therefore enjoy beneficial taxation and regulation compared to incumbents. While it is easy to recognize how firms can build a competitive advantage against incumbents based on these features, they simultaneously present some challenges. As an example, consider the case of Homejoy. Founded in 2010 in
San Francisco, Homejoy was a pioneer in the market for peer-to-peer home services. On its matching platform, independent participants offer their skills for house cleaning and related tasks. Homejoy soon became the fastest growing venture backed by Y Combinator, one of the world's most elite start-up incubators. The firm had already expanded into 30 cities in North
America and Europe until flaws in its business model became apparent. First, Homejoy’s user acquisition strategy, financed by promotional prices below the firm’s cost, enabled rapid network and revenue growth but did not build a loyal customer base. Most customers never returned to pay the regular price after enjoying the promotional offer. At the same time, the firm encountered quality issues as the independent cleaners showed different levels of qualification. If Homejoy would have formally trained its cleaners, regulators would have questioned their legal classification as independent contributors. Thus, the firm faced a trade- off in which it had to decide between a higher service quality (through formal training and procedures) and much higher costs (through taxable formal employment). In addition, customers were hesitant with the idea of trusting their house to a different stranger every time they used Homejoy’s cleaning service. Further saving both sides the commission fee, satisfied customers started making cleaning arrangements outside the platform once they found a trusted cleaner via Homejoy. As Homejoy’s business model was thus financially unsustainable,
14 Source: https://techcrunch.com/2015/04/15/blablacar-acquires-its-biggest-competitor-carpooling-com-to- dominate-european-market/. the firm incurred increasing losses as it expanded. Given the lack of profitability and staggering costs, Homejoy had to shut down its business in 2015.15
High competition for ‘idle’ resources
A strength of sharing economy firms is that they utilize resources without owning them. Yet, as the sharing economy grows and more firms enter the market, access to these resources becomes increasingly difficult. The ridesharing market and the case of Sidecar provide a good illustration of the risk associated with leveraging resources that are seemingly idle and free.
Founded in 2011, Sidecar, a San Francisco-based ridesharing firm, provides a good example for the risks of the survivorship bias. Sidecar pioneered the on-demand peer-to-peer ridesharing, at a time when Uber pursued a limousine service (hiring drivers) and Lyft had not yet been founded. After 2012, the three firms applied nearly the identical business models.
Given that the market opportunity and business model enabled the success of Uber and Lyft, why did the firm announced to cease operations in late 2015? Over the last years, Uber and
Lyft had increasingly engaged in fierce competition to sign on new drivers and passengers. In cities like San Francisco, both firms offered new drivers a sign-up bonus of up to $750 as well as additional bonuses for drivers who switched from one platform to another. Thus, access to drivers and their assets was an increasingly sought-after resource. The strategy builds on the assumption that the firms can reap superior profitability once they have gained a superior market position and network size, an expectation that builds on the so-called winner-takes-all hypothesis. In a market with strong network effects and scalability, the market leader will become more powerful over time and eventually force its competitors to exit the market or pursue a niche strategy. The hypothesis explains why Uber is considered to be on a successful growth path despite having generated a loss of nearly $3 billion in 201616. While Sidecar had attracted $45 million in funding, the amount was only a small fraction of the funding of Uber
($12.5 billion) and Lyft ($1.8 billion). Hence, competing with a similar loss-making strategy as
Uber was not an option. As the management eventually realized that they could not
15 A good review of Homejoy’s failure is provided by: https://backchannel.com/why-homejoy-failed- bb0ab39d901a#.m3f6hzmq8. 16 Source: http://www.businessinsider.de/uber-2016-financial-numbers-revenue-losses-2017-4?r=US&IR=T successfully compete in such a competitive environment,17 they decided to pivot their business model to a peer-based delivery model in 2015. In the transportation market, however, Sidecar faced competition from firms that both larger financial resources and several years of experience in the market. Thus, management closed the business months later.
The case also illustrates the risk of inconsistent comparisons when assessing the potential of sharing economy firms. Network effects and scalability are often used as a narrative to convey the advantages of sharing economy firms – such as Uber, Lyft, and Sidecar – against traditional firms in the same industry (e.g., taxis). While such a comparison can emphasize the specifics of the business model, it often seems to provide an over-simplified and even misleading understanding of the firm’s commercial potential. The ridesharing industry demonstrates how sharing economy firms no longer compete only with traditional business models, but increasingly with each other. Moreover, even Uber’s large network size and presence around the world does not guarantee its success in key markets such as China or
India, where local competitors Ola and Didi Chuxing currently hold the largest market shares.18
Comparing these firms with each other reveals that network effects and scalability represent common attributes, rather than factors that can explain the success of individual firms. Hence, a business model with strong scalability and network effects does not lead to a competitive advantage within the sharing economy.
Low transaction frequency
Even with lower acquisition costs for the supply side, it can be challenging to develop a profitable business model if transactions occur on infrequently. Take the example of Beepi, a marketplace for used car sales. Founded in 2013, the firm provided an algorithm that effectively matched buyers and sellers of used cars by leveraging big data to find the adequate price. In comparison to other sharing economy firms, Beepi’s employees were more involved in the transaction as they inspected and delivered each car, and completed the related paperwork.
Yet, the business model had one key challenge: selling or purchasing a car is an event that,
17 For the postmortem of Sidecar’s Co-founder & CEO, Sunil Paul, see: https://www.side.cr/why-we-sold-to-gm/ 18 https://venturebeat.com/2016/08/08/uber-targets-ola-in-india-after-losing-to-didi-in-china/ for each buyer, usually occurs only every few years. Even when customers were highly satisfied with the service, they had no need to become customers more frequently. As such, the customer acquisition cost may only amortize after several years. Yet, over the short run, the firm’s $149 million in funding were not sufficient to survive until the firm could capture sufficient value from the established customer relationships. While different organizational challenges might have contributed to the failure of Beepi19, the case illustrates the risk of operating in markets with low transaction frequency in which costs occur before the firm can generate revenues from recurring transactions.
High costs of developing two market sides
To successfully operate a multi-sided business model, sharing economy firms need to attract a critical mass of users on the demand and supply side. Developing both market sides can be a challenging task, particularly when the market environment is not (yet) accustomed to principles of the sharing economy. With more than 50,000 homestay options, Stayzilla was one of the leading accommodation sharing platforms in India. Stayzilla’s business model was similar to Airbnb in that the firm charged a commission fee for every successful booking on its platform. With cutting edge technology, the firm could forecast demand, prices, and predict booking confirmation rates. Despite the large domestic market potential, the firm announced its closure in early 2017. Reflecting on the reasons why Stayzilla failed, co-founder Yogendra
Vasupal emphasized the high costs of developing the market in India. “The demand and supply for homestays was non-existent 18 months back, excluding a few small pockets. As a result, we had to invest extensively in both sides of the marketplace, creating homestays as well as guests who would choose a homestay across the country. […] we could not even recoup what we put in, necessitating very large capital requirement simply to sustain growth.”20 The firm’s heavy investment in market development had resulted in rapid network growth until early 2015.
Ever since, the number of users had declined steadily21 and caused losses of US$14 million
19 For a discussion of these issues, see: https://techcrunch.com/2017/02/16/car-startup-beepi-sold-for-parts- after-potential-exits-to-fair-and-then-dgdg-broke-down/ 20 The full reflection on the firm’s failure was published on the firm’s blog. 21 Data for monthly users are derived from: https://mattermark.com/app/companies/194104. in the subsequent financial year (against revenues of US$2 million). Moreover, once Stayzilla had familiarized Indians with the concept of private accommodation sharing, Airbnb entered the market. Given its large brand recognition and financial means, Airbnb soon forced Stayzilla into a small market niche.22 The case demonstrates that whether a sharing-based business model succeeds further depends on the specific market environment. In addition, it shows that even if the firm succeeds in developing the market, the initial costs and efforts might not pay off if competitors can leverage their network size across markets.
22 Source: Velayanikal, M. (2017). India’s largest homestay startup Stayzilla shuts down. URL https://www.techinasia.com/stayzilla-likely-shut-down.
Unexpected changes in legal environment
Sharing economy firms often develop a competitive advantage as they operate outside their industry’s formal regulatory and taxation system. Yet, with increased professionalization of sharing economy services – i.e. participants earning their living through the sharing economy
–, public perception and legal treatment of these firms started to shift. Legal battles of ride- and accommodation sharing firms in cities around the world demonstrate the dependence of these business models to their legal environment. For instance, authorities in Airbnb’s home market,
San Francisco, have implemented legislation that limits short-term rentals and requires participants to officially register with the city and pay a hotel tax. Most importantly, the legislation shifts the responsibility of violations to the accommodation sharing platforms, who have to pay fines of up to $1,000 per day for each listing on their platforms that is not registered with the city. As only around 25% of Airbnb’s San Francisco were registered when the law was introduced, it represents a large financial risk to the firm and forces Airbnb to actively remove listings from its platform.23 In addition, public opinion about these firms has shifted as people start to gain more awareness about the working conditions in ride sharing or the impact of accommodation sharing on the nature neighborhood communities. In some cases, new legislation has even destroyed the viability of a business model. The startup Flytenow entered the market as the first ride-sharing platform for aircrafts, connecting local pilots with aviation enthusiasts. After the venture had successfully grown for two years, authorities decided to ban flight-sharing websites.
These examples provide some counter-evidence to the common wisdom about success in the sharing economy. While they shouldn’t discourage managers from pursuing business opportunities in the sharing economy, they highlight that even business models with high scalability and network effects are no guarantee for sustained performance. In addition, the cases can help managers in understanding the specific challenges for competing in the sharing economy. Table 2 summarizes the identified causes of failure and describes the related risks.
23 After a year-long lawsuit, Airbnb settled in May 2017. For the story behind the settlement, see: https://www.wired.com/2017/05/airbnbs-san-francisco-deal-puts-storyline-bottom-line/.
Table 2: Causes of failure in the sharing economy
Causes of failure Related risk for sharing economy firms Low customer lock-in The transaction-centered nature of sharing economy business models generally provides low switching costs between platforms. Hence, a firm can rapidly loose its demand- and supply side participants. Low control over service Inability of sharing platform to provide a consistent customer quality experience as the firm has no formal control over its contributors. Competition for ‘idle’ New entrants can threaten the business model of the resources dominant platform by aggressively competing for its supply- side participants. Low transaction Firms face difficult economics if customers only have highly frequency infrequent need for the shared good. High cost of developing Pioneering firms need to invest in legitimizing sharing two market sides activities and developing the networks of demand- and supply-side participants. Unexpected changes in Regulatory changes threaten the firm’s business model or legal environment impose expensive lawsuits.
The identified sources of failure and the revealed fallacies show that sharing economy business models can become highly rewarding, yet are faced with certain risks. When designing their business model, managers eager to maximize growth, should not lose sight of these sources of failure. Over the course of our case studies, we observed how several peer- to-peer sharing platforms had transformed their business models towards greater resilience against these risks. Based on an in-depth case study, the next section describes how Udemy, a peer-to-peer marketplace for skill sharing, developed a hybrid business model to combat the risks of the failure factors inherent in the sharing economy.
TOWARDS A HYBRID BUSINESS MODEL: THE CASE OF UDEMY
Udemy and the market for skill-sharing
With new technological advances, new opportunities exist to match individuals with specific skills to learn from each other. As such, several firms have developed business models around skill-sharing services. Among them, Udemy, a San Francisco-based firm, set out in
2010 to develop an online platform on which individuals would share their unique knowledge
and skills by creating short online courses and selling them to other individuals.24 More than
10 million people learn with the 55,000 courses created by individual experts on Udemy’s platform. Udemy’s primary product is a web-based learning platform (www.Udemy.com) that offers self-paced online courses on a broad variety of topics, ranging from business and marketing skills, to design skills, language courses, or courses for developing skills in specific hobbies. Each course generally consists of a series of videos, additional multimedia files, or short quizzes.
Against this background, the empirical case study aimed to discover how Udemy’s business model originally enabled the firm’s sustained growth. Udemy’s applied a typical sharing economy business model, providing a peer-to-peer marketplace. Udemy applied a commission model in which it captures a percentage of the price paid for each course. Prices for courses were freely set by the course instructors within the range of US$9 to US$300 per course. Udemy’s value creating activities were rather similar to those of other peer-to-peer marketplaces like Airbnb or Uber. By early 2016, Udemy employed 270 employees, with its largest teams focusing on engineering, instructor development, and user growth (marketing).
As other sharing economy firms, the business model did not engender substantial marginal costs and was therefore considered as highly scalable. The platform becomes more attractive to learners when more people create online courses – and more attractive to instructors when more people buy their courses. Hence, the business model also inherently generates network effects.
Udemy faced several of the identified risks and addressed them with different solutions.
To reduce the burden of developing both a demand and supply side, the firm initially focused on attracting supply-side participants (instructors) with an innovative technological solution that allowed to upload videos, blog posts, presentations, and engage with an online audience. In addition, Udemy partnered with other learning platforms to link existing online courses to their
24 The Udemy case is based on a series of six interviews with board members and executives from Udemy (Marketing, User Growth, International, Supply Side, and Communications), a visit to the headquarters of Udemy in San Francisco (California) and its lead investor (Norwest Venture Partners) in Palo Alto (California), as well as 8 interviews with managers of competing online learning platforms and experts in the Education Technology (EdTech) market. platform and even produced proprietary content. The firm only started to attract demand-side customers after it had attracted a substantial network of experts and learning content. To reduce the risk of participants taking their transactions outside the platform, Udemy developed comprehensive technical and social features that provide learners with additional benefits of taking courses on Udemy’s platform. These continuously engage (and retain) students, rather than suggesting they simply purchase the course content. Udemy effectively serves as a cloud- based learning library, in which students discuss the content with each other and with the course creator. Thus, Udemy’s service provides a natural lock-in mechanism as users need to return to the platform in order to consume the content. To ensure a certain quality level, Udemy provided instructors with detailed design guidelines and a design platform. Yet, with thousands of courses created every year, the firm could not prevent some instructors from offering low- quality lectures.
While the business model’s characteristics allowed to rapidly grow the network size and revenues, the firm yet to become profitable. In particular, it was not clear whether and when the business model would redeem the high costs of rapid market development, as well as whether it could sustainably fend off aggressive competitors. While the online skill-sharing market itself was growing at significant rates every year, market saturation would eventually increase the competition between these firms. Hence, Udemy’s managers faced an important strategic decision. On the one hand, they could focus their entire resources on scaling the platform at the highest speed possible to further strengthen their size-based advantage. On the other hand, the management gained awareness of the risks associated with the pure peer- to-peer sharing business model.
Towards a hybrid business model
Knowing about the short-sightedness of focusing on scalability only, the management decided to transform towards a hybrid business model. In this context, hybrid refers to a business model that combines a network-based with a hierarchical coordination approach for creating and delivering value. Hybrid business models provide the growth benefits of a peer- to-peer sharing platform while ensuring financial stability through recurring revenues from a
contractual business-to-business (B2B) model. In the B2B model, Udemy bundles the most popular courses – created by individuals on Udemy’s platform – and offers them as a corporate training solution to other firms. In the model, Udemy curates the best courses that fulfill the quality expectations of business customers. The courses are provided via a customized version of Udemy’s online learning platform, in which the corporate customers can integrate their existing content with the courses already created by Udemy’s instructors. Udemy charges business customers a monthly subscription fee for its services, which included the learning platform, content, technical support and other personalized services. The price for business customers depended on the number of employees.
The hybrid business model addresses several of the identified risks. Selecting courses with high quality allows Udemy to take greater control over the ultimate quality of the service.
Also, the nature of the customer relationship shifts. In the sharing business model, learners interact mostly with instructors. In the B2B model, Udemy provides a customer support service as a primary point of customer contact. In addition, the B2B model provides a much more predictable stream of revenues as customers pay the monthly subscription fee. Also, the hybrid model can increase customer retention. While it requires more time in resources to acquire the business customers, they have a much higher retention rate. Once a firm decided to use
Udemy’s service as its primary source of employee training, it would incur substantial costs to reverse this decision since it had already invested substantial effort in customizing and integrating Udemy’s platform with their other learning resources. Also, the hybrid business model is less vulnerable to changes in legislation would still allow a sustainable income stream if instructors would leave Udemy to share their skills on a competing platform.
As the B2B model incurs higher marginal costs per customers – given the customization and the customer support – the hybrid business model is likely less scalable as the pure sharing business model. However, apart from network effects, the hybrid business model can
engender an additional virtuous cycle between the two customer groups. Such virtuous cycles have been identified as one of the most important features of effective business models.25
In a first virtuous cycle, Udemy actively uses its popularity in the consumer market as a competitive advantage in the corporate market by communicating its services on its website as: “Business relevant, professional-grade online training vetted by 12M people around the world”. Hence, the network of individual learners represents a valuable resource to business customers, and vice versa. Thus, the more individual customers the platform attracts, the more legitimacy it gains among business customers. In turn, attracting well-known brands as business customers allows Udemy to gain further legitimacy in the consumer market. At the same time, a hybrid business model often also engenders a virtuous cycle between business customers and the supply-side participants. In the case of Udemy, instructors benefit from increased revenue opportunities. An increased engagement of instructors, in turn, leads to larger supply and thus increased value to customers. Overall, the hybrid business model can provide Udemy with a much more stable path towards profitability and reduce its vulnerability to several of the risks associated with peer-to-peer sharing business models.
CONCLUDING THOUGHTS AND RECOMMENDATIONS
Driven by the success of few sharing economy firms, investors and entrepreneurs alike are interested in exploiting sharing economy opportunities. With their eyes on success factors, many oversee the inherent risks in sustainably operating a business that does not own key resources, depends on the voluntary contributions of independent actors, and operates in an environment with high regulatory uncertainty. Indeed, the last years have seen several sharing economy firms fail with business models that applied the same factors that seemingly explain the success of Airbnb or Uber. Scalability and network effects are necessary characteristics of successful sharing economy business models. Yet, the tales of Carpooling, Homejoy, Sidecar,
Stayzilla, and Beepi have shown that they are far from sufficient to develop a sustainable
25 For a conceptual understanding of how virtuous cycles enable sustainable business model design, see: Abdelkafi, N., and Täuscher, K. 2016. “Business Models for Sustainability From a System Dynamics Perspective,” Organization & Environment (29:1), pp. 74–96.
business model. In fact, these characteristics can equally turn a virtuous cycle into a vicious cycle. To assess the economic potential of a sharing economy firm, it is time to start comparing sharing economy business models with each other, rather than only with traditional ownership- based business models in the same industry.
The cases revealed six causes of failure that reveal insights into the risks of competing in the sharing economy. First, sharing economy firms often struggle to retain customers on their platform, as customers encounter low switching costs between competitors. In sharing economy markets where transactions are not highly time and location sensitive, customers often aim to bring transactions outside the platform once they founded a trusted sharing partner. Second, these firms have lower control over service quality as they are not involved in delivering the good or service. Third, we observed an increasing competing for the access to participants and their contributed resources. As sharing economy markets become more competitive, the rising demand for these ‘idle’ resources increases their indirect costs. Fourth, we observe that some markets are less suited to achieve profitable growth when transactions typically occur on a rather infrequent basis. A fifth challenge relates to the high costs of pioneering a sharing economy business model in a market that is not (yet) accustomed to sharing principles. Finally, sharing economy firms across several markets face increasing legal challenges that might increase their costs, or even threaten the validity of their business models. Without denying the strong growth and profitability potential of peer-to-peer sharing models, the identified challenges should alert managers to focus not only on success cases but also consider the silent evidence.
The article hopefully helps managers to learn from past failures by recognizing key risks. Table
3 summarizes the findings by providing questions that allow managers of sharing economy firms to reflect upon their current business model and generate ideas for a potential hybrid business model.26
26 An overview of tactics and practices to design and manage business models based on independent participants is presented in: Täuscher, K. 2016. “Leveraging collective intelligence: How to design and manage crowd-based business models,” Business Horizons.
Table 3: Summarizing questions for reflection
Approach Questions for reflection Evaluate risks and ▪ How likely are demand and supply-side participants to change to recognize potential competitors? Do they have sufficient incentives to conduct transaction via sources of failure on our platform? ▪ Can we ensure a consistent quality level in the work of our sharing participants? ▪ How much will it cost us to attract new supply-side participants once more competitors enter the market? ▪ How frequent will participants return to the platform for subsequent transactions? ▪ Can we at least attract one market side without incurring large costs? ▪ Which regulatory changes would threaten our current business model? Develop a hybrid ▪ How can we leverage the shared assets to target a new customer business model segment? ▪ How can we develop a stable revenue model that is less vulnerable to market fluctuations? ▪ Is the new business model complementary with the peer-to-peer sharing model? Does it create any virtuous cycles?
We hope that this article inspires managers to think about business models with the objective of reducing risk in the long run rather than maximizing growth over the short run. In investment theory, it has become common practice to build investment portfolios with the objective of risk diversification and mutual risk mitigation. Similarly, a hybrid business model can mitigate the inherent risks of the sharing economy by combining a sharing- and a hierarchical business model.
To successfully develop such hybrid business models, managers can start by reflecting on how they can leverage their firm’s key assets in different markets and generate more stable revenue streams by adding additional services. Once they have generated some ideas, they should critically examine whether the new business model is complementary with the existing sharing model. Ultimately, only a sustainable business model allows sharing economy firms to substantially contribute to social and ecological goals. Over the next years, we expect that several new hybrid forms will emerge and further blur the boundaries between the sharing economy and traditional economies. In such a transformative environment, managers can find countless opportunities to succeed in the sharing economy if they can learn from early failures, mitigate common risks, and build business models that are not only scalable, but also financially sustainable.