The growth-consumption paradox is approaching its peak – the reality that we cannot grow infinitely in a finite world is setting in. While economists and politicians continue looking for opportunities to squeeze blood out of a stone, groups of consumers and businesses are beginning to experiment with new models of consumption in order to reinvent our economy. In this edition of Business Model Breakdown, we are going to analyze collaborative consumption and look at how business model innovation is helping to redefine the way we use resources.
“Now, the foundation of modern life is beginning to disintegrate. The institution which once drove men to ideological battles, revolutions, and wars is slowly dying out in the wake of a new constellation of economic realities that is moving society to rethink the kinds of bonds and boundaries that will define human relations in the coming century. In the new era, markets are making way for networks, and ownership is steadily being replaced by access.”
Jeremy Rifkin, The Age of Access (2000)
Access replacing ownership. It’s a simple idea that undermines one model of economics (crony capitalism) and underpins another (the sharing economy). Rather than individually aspiring to own property and accumulate assets, what would happen if we shifted our focus to sharing resources and prioritizing access over ownership? It is a question that has inspired the creation of an entirely new economic model, one known as collaborative consumption.
Collaborative consumption is a new economic model that revolves around sharing, where resource consumption is done collectively rather than individually, thereby maximizing efficiency. Imagine a car that sits dormant 90% of the time, or a house that is half empty. Thanks to technology, it is now possible to find people who will pay to use that unused resource for a fraction of time.
We stumbled upon the collaborative-consumption economy a few years ago while planning a business trip. In the midst of a search for accommodation in Seattle, it became clear that staying for a week in a hotel solo would be both extremely boring and excessively expensive. It was at that moment that Joel came across AirBNB, a website that allows travelers to stay in the homes of locals. After a little research and a few gut checks, he booked a room (at half the price of a hotel) and made the trip to Seattle – travelling has never been the same since.
AirBNB started 2008 when founders Brian Chesky and Joe Gebbia rented out a room in their San Francisco apartment to a couple of out-of-town conference attendees who were unable to book a hotel. It dawned on them they that they might be on to something – as it turns out, they were. The company raised $117 million dollars last year, and recently announced in June that they had reached the 10 million nights booked mark.
AirBNB, representative of room sharing, is perhaps the most notorious example of collaborative consumption. Car sharing, another popular category, is well known thanks to the likes of ZipCar, Car2Go and numerous other car-sharing platforms. Beyond accommodation and car sharing, a variety of new businesses are being launched in relation to collaborative consumption everyday, as entrepreneurs experiment with new models of access and ownership. The question is, how does the business model break down?
In the early stages, the business model is based on volume, as companies seek to get as many new people on the platform as possible. In the case of AirBNB, they make money as an intermediary between the two parties, the travelers and the locals, taking a percentage from both sides:
- 6-12% booking fee (traveler)
- 3% successful booking fee (local)
Car-sharing platforms, on the other hand, function as a hybrid between a subscriber/leasing business model and make their money on the margin between the revenues of ‘leasing’ the car and the costs of servicing it (fuel, insurance, etc.). The consumer renting the car becomes a member of the car-sharing service (usually for a fee) and then pays per use, usually per minute or hour. As an example, Car2Go’s Canada rates are listed below:
In it’s first iteration, the key to the business model is to drive the volume and build the brand. While platforms will move aggressively to get customers in the early stages, they will only be able to retain them through attention to detail and first-rate customer service.
As an example, Joel had his computer stolen during a house break-in while on a business trip in Toronto through AirBNB. After reporting the incident to the company, they were extremely responsive and reimbursed him for the full market value of the computer with little fuss. This type of event illustrates one of the potential challenges a business like AirBNB faces, but also shows how a commitment to customer service is the key to long-term customer retention and consequently profitability. While volume remains essential to be sustainable, a trustworthy brand is the key to overall success in a hyper-connected world.
While collaborative consumption is generating a lot of excitement in the early stages, the overall market goes much deeper and is part of a broader trend towards a more social and sharing-based economy. By thinking socially and focusing on peer-to-peer (P2P) collaboration, a whole new realm of possibilities emerges. Through business model innovation, the opportunity to exists to take collaborative consumption to a whole new level.
Business Model Innovation
The following are three examples of opportunities for business model innovation using examples we have seen in the marketplace:
While it is fun to book a room through AirBNB, or rent a car with your friends through a group car-sharing service, it’s only a fraction of the overall experience. If, for example, you go to a travel agent to book a vacation, they will typically present you with offers that combines various components to form a complete experience. In the same way, collaborative-consumption platforms need to find opportunities to work with other partners who offer complementary services.
As an example, Daimler, the owner of Car2Go, entered into a ‘cooperation agreement’ with German-based Intelligent Apps to further the companies vision of a ‘mobility concept.’ In other words, what they want to do is create an integrated platform for their customers to be able to find the best way of transportation in the moment they need it, whether that is via car sharing, taxi or public transportation.
If the goal is to replace access with ownership, then the focus becomes the experience rather than the asset itself. Giving people the ability to access a car or house is the first step, but much more can be offered. The benefits many people seek in these scenarios are social, and in certain cases cultural. To an extent, sites like AirBNB and Couchsurfing offer a form of social travel, but only at a basic level.
As an example, there is a new hotel in Berlin, called Plus One. Beyond just renting a room, hotel guests choose from one of thirty knowledgeable and enthusiastic locals to guide them around the city. Plus One focuses on giving guests the social experience of meeting locals and potentially making friends in the city; if the reviews are any indication, the new concept is being well received. The nightly rate is 120 Euros and includes a night in a ‘stylish, ecological apartment’ and one tour per stay.
With so many people travelling on a platform, patterns start to emerge and the link between common interests and motivations becomes apparent. If 5,000 people travel to a certain city to do the same thing, there is a good chance that at a fair number of them share similar travel and cultural interests; therefore, the possibility exists to create a community with people who share ‘collaborative’ ideals.
As an example, AirBNB had their biggest night in history on August 4th, 2012, when 60,000 peopl used the site to travel. They mined some data and came up with numbers to see both what people were doing when they travelled and where they were going. As you can see from the image below, there are several key themes that emerged, such as the fact that 1,000 people went to a music festival. The next step would be to find a way to create communities out of these users with common interests and experiment with new methods of collaborative consumption.
In addition to innovation of the business model, companies need to ensure that they tailor their offering to their respective local economies. Even global brands (ie. AirBNB, Couchsurfing, Car2Go, etc.) are implementing localized strategies to grow internationally; the most successful businesses in this emerging marketplace will be those who incorporate local intelligence to create unmatched social and cultural experiences.
In a recent trip through Spain, the emergence of the collaborative-consumption economy was evident, as services like AirBNB are growing rapidly while a host of new services have recently come to market (ie. SocialCar). What’s interesting is that while the overall trends are the same, the markets are vastly different – what works in Spain will not necessarily work in Canada or Brazil for example. Cultural factors play a huge role in how the markets develop; therefore, entrepreneurs need to be wary about trying to simply copycat an idea from a foreign market.
Overall, collaborative consumption is much more than just a trendy way of saying sharing. It’s a fundamental shift in the models we have structured our economy around that will inevitably change the way we view and consume resources. While the market is still in its infancy, and many challenges remain ahead, the opportunity to develop new business models and build on existing services is huge. Blue oceans ahead.
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