Why The On-Demand Economy Is Revolutionizing Consumer Behavior? The On-Demand Economy is defined as the economic activity created by technology companies that fulfill consumer demand via the immediate provisioning of goods and services.
Supply is driven via an efficient, intuitive digital mesh layered on top of existing infrastructure networks. The On-Demand Economy is revolutionizing commercial behavior in cities around the world.
The number of companies, the categories represented, and the growth of the industry is expanding at an accelerating pace. The businesses in this new economy represent the manifestation of years of technological innovation and an evolution in consumer behavior.
Many ask: Is this a bubble? Is this a short-term trend? Is the hyper-growth we’re seeing going to slow soon? Categorically and unequivocally — the answer is no. The new on-demand models have opened the door to real-time fulfillment of goods and services, which consumers have embraced with a frequency that is unprecedented.
It is no longer a question of if the On-Demand Economy will revolutionize the way people transact or create thousands of jobs or move governments … this is all happening. The question is “when” the services offered in this economy will begin to be utilized by consumers outside of the tech-savvy, early adopters.
When it does, the On-Demand Economy will usher in a paradigm shift similar to what was seen with the advent of the internet in the late 1990s.
“The internet makes human desires more easily attainable. In other words, it offers convenience. Convenience on the internet is basically achieved by two things: speed, and cognitive ease. If you study what the really big things on the internet are, you realize they are masters at making things fast and not making people think.” – Ev Williams, Twitter co-founder
“The internet makes human desires more easily attainable. In other words, it offers convenience. Convenience on the internet is basically achieved by two things: speed, and cognitive ease. If you study what the really big things on the internet are, you realize they are masters at making things fast and not making people think.”
Why are we seeing such a rapid expansion of the On-Demand Economy?
Consumer behavior is changing. Immediate access to messaging, e-mail, media, and other online functionality through smartphones has generated a sense of entitlement to fast, simple, and efficient experiences. A survey of 250 Whole Foods and Trader Joe’s customers conducted by The On-Demand Economy highlights that the“convenience of delivery” was the overwhelming determinant in consumers’ decision to purchase groceries online.
Whether it be the ease of scheduled deliveries or the corresponding reduction in time required, the study shows that the on-demand economy’s growth is a product of its alignment to consumers’ growing appetite for greater convenience, speed, and simplicity.
The fast-moving technology companies competing in this arena have developed new models that are transforming industries which have historically been slow to innovate. The ground transportation, grocery, and restaurant industries are prime examples of hyper-growth categories in the on-demand world — growth that is in a large part a result of the application of new technology on top of existing infrastructure.
Put simply by Steve Schlafman of RRE, “Welcome to the uberification of our service economy.” A dramatic increase in the number of smartphone connected consumers, simple and secure purchase flows, and location-based services are a few of the market conditions and technological innovations propelling the explosion in on-demand services.
The on-demand concept is not new, with companies like Webvan and Kozmo attracting significant funding and valuations as far back as the late 1990s. However, today’s on-demand market leaders have created successful business models which can satisfy the needs of consumers in a far more cost-effective, scalable, and efficient manner than their predecessors.
The new on-demand businesses have more successfully leveraged technology while utilizing existing infrastructure. Semil Shah shared, “Every week, a new service seems to launch that aggregates and organizes freelance labor (those with excess time) to help those who have money but not time.”
Where there is a “surplus” of rooms, drivers, restaurants, or 1099 contractors – the on- demand economy takes this surplus and puts it to work for the benefit of the workers, consumers and the communities in which they reside.
The always on, always connected “smartphone revolution” has made convenience, efficiency, and simplicity critical ingredients in purchasing decisions. Smartphone usage first became popular via messaging services, news, and gaming, and now, mobile commerce is following suit.
Everyday purchasing driven through smartphones will result in one of the most transformational shifts in consumption patterns in history — never before has a consumer been able to buy anything they want at anytime with simply the tap of a button.
Despite the relative youth of on-demand businesses (most are less than 5 years old), the growth of the companies competing in this space (real revenue — not just “users” or “visits”) and the resulting influx in capital from institutional investors are an indication that the on-demand economy is going to be a force for years to come.
The institutional investor community’s belief in the on-demand economy is unequivocal. According to The On-Demand Economy, over $4.8 billion in capital has been invested in on-demand companies, with $2.2 billion invested in the last 12 months alone. The transportation industry alone has amassed over $2.1 billion in financing, including Uber ‘s most recent $1.2 billion financing round at a $18.2 billion valuation.
When Uber’s revenue figures leaked to ValleyWag in December 2013, the on-demand car service was pacing at a ~$1 billion gross revenue and $200 million net revenue run rate annually, compelling Matthew Panzarino of TechCrunch to comment, “Uber is doing significantly better than estimated.”
Fast forward to June 2014, CEO Travis Kalanick stated to the WSJ, “We’re at least doubling [revenue] every six months”, putting the company above a $2 billion gross and $400 million net revenue run rate just six months later. Uber’s current revenue in San Francisco is larger than the entire San Francisco taxi and limo industry revenue in 2009.
Car services, the most explosive sector within the on-demand economy, are re-shaping people’s understanding of the sector’s market size and potential. Uber’s growth is even more remarkable considering the awareness level of the on-demand car service. The On-Demand Economy conducted a survey of eight thousand smartphone users in 5 major urban markets where Uber’s services were live in November 2013, and the findings indicated that Uber’s brand awareness was slightly higher than 20.6%
This data shows that Uber still has a significant opportunity for growth, and that it’s value today is being created primarily from a relatively small population of “tech-savvy consumers”. The unsatiated demand for on-demand transportation should only continue as awareness of these services spreads to the next wave of adopters.
Shervin Pishevar elaborated on the grand ambitions of Uber in Inc., “Uber is building a digital mesh — a grid that goes over the cities. Once you have that grid running, in everyone’s pockets, there is a lot of potential for what you can build as a platform. Uber is in the empire-building phase.”
Simultaneously, on-demand food delivery services are attacking the $683 billion US restaurant industry with considerable success. On-demand delivery services have expanded a restaurant’s potential customer base far beyond the physical location.
Led by GrubHub, which is on-pace to generate more than $1.6 billion in revenue in 2014 from over 3.8 million monthly active users in 700 cities, on-demand platforms are capturing an increasing slice of this enormous pie. GrubHub has found success by targeting primarily independent restaurants, a $204 billion segment in 2012, over a third of which is spent on takeout.
Fast-followers have quickly capitalized on opportunities in this marketplace by extending to new geographies and through tailored service offerings. Regional clones (DeliveryHero, Just Eat, FoodPanda), specialty food providers (Blue Apron, HelloFresh, Sprig), and up-and-coming delivery services (DoorDash, Caviar, SpoonRocket) are opening up new fronts in the food delivery market to the benefit of consumers.
Moving forward, “The On-Demand Economy” will undergo significant change spurred by the following events:
1/ Larger, more established on-demand businesses, flush with capital, will expand their concepts to new markets while differentiated service providers will seek to target specific customer segments in more mature markets.
2/ Aided by the playbook of GrubHub/Seamless, Uber, and Airbnb, service providers in newer categories are anticipated to reach scale rapidly. In a survey conducted by The On-Demand Economy of 18 high-profile industry “Influencers” grocery, home services, and local events were the most likely to experience explosive growth over the next three years.
3/ As evidenced by the mergers of GrubHub/Seamless in food delivery and Handybook/Exec in home services, consolidation will accelerate as competition grows. This trend is underscored in The On-Demand Economy survey industry leaders, who cited “new competition” as their largest concern.
4/ Collaboration of complementary, non-competitive businesses will become commonplace as a means to collectively educate consumers about the benefits of on-demand services, increase awareness, and provide added value to core users. These range from cross-promotions similar to that of Instacart/Washio to close partnerships such as that of WunWun/Gett.
5/ Expect to see legacy providers in hospitality, transportation, and other Fortune 500s attempt to “partner with” or “acquire” more innovative on- demand companies. Ken Chenault, Chairman and CEO of American Express, conceded in their annual report, “Our industry is being redefined by many forces, including the continued revolution in online and mobile technologies, which is transforming commerce and society.” Given the emerging influence of on-demand services, Amex launched a partnership with Uber earlier this year. American Express was able to get a foot in the door by allowing customers to earn 2x points for their spend on Uber with an American Express credit card.
6/ As on-demand businesses solve for the current technological and logistical challenges, design will increasingly become one of the most meaningful forms of competitive advantage. Creating a memorable, frictionless user interface is the next battleground for addressing consumers’ insatiable appetite for greater simplicity and convenience. Scott Belsky points out, “A new cohort of design-driven companies are adding a layer of convenience between us and the underlying services and utilities that improve our lives. This could change everything.”
The On-Demand Economy is here to stay. It will represent the fastest and most significant shift in spending since the advent of internet commerce. Bezos claims “it’s still Day 1” for eCommerce — and the on-demand economy represents the most sophisticated application of “eCommerce” seen to date.
This new industry, and its ability to satisfy consumers increasing demand for simplicity, efficiency, and convenience is novel today. Tomorrow, it will be the expectation. Mobile technology, the remote controls we use to navigate our daily lives, are transaction engines that never leave our pocket. Never before have consumers had this simple of a way to transact — and never before have businesses been equipped to satisfy this mounting demand.
“I feel like so many existing experiences can be reinvented with the right simple gestures on mobile, and the needs and wants of Generation T (Generation Touch) are going to become the foundation of many massive companies of the future.” – Josh Elman, partner, Greylock Partners
The On-Demand Economy and the businesses within it are empowering a revolution. The “magic” of Uber, the amazement with WunWun, the dependence on Seamless … this is just the beginning. It isn’t a long way out for Josh Elman’s prophetic post to become a reality … soon every need we have, every car we take, every purchase we make will be available at the tap of a button. Get ready.