What is the “sharing economy”? It’s an economic force to be reckoned with

Susan
By Susan October 27, 2015 22:14

What is the “sharing economy”? It’s an economic force to be reckoned with

 

How the rise of the consumer-to-consumer,

sharing economy is fuelled by the internet

and the latest technological advances in

frictionless payment systems.

 

For your next holiday, you’ve found a room on AirBnB. The last time you were in London, you used Uber to get from the airport to a meeting. You have an expensive pair of shoes you’ve only worn once and you don’t think you’ll wear them again: you are listing them on ThredUp. You have a wedding tomorrow and you haven’t time to pick up your dry cleaning, so you ask somebody on TaskRabbit to do it for you.

Many of us have used these services and we find them very convenient: we can save money by buying or renting from an individual, instead of a company, and we can add to the household purse by selling what we no longer need, and renting out what we are not using at the moment.

This trend is gaining momentum; it has been variously called the “sharing economy”, the “access economy”, “peer-to-peer economy” or “collaborative consumption”.

And it is set to grow – fast.

PwC predicts that the five main sharing economy sectors could be as large as $335 billion within a decade. The sharing economy makes up just 5% of total revenue generated by several sectors, but in some areas, this could grow to over 50% of overall sales. This has the potential to change, in a fundamental way, so many aspects of our daily lives.

Until now, “consumer-to-consumer” was a fringe phenomenon: we knew about “business to consumer” (B2C) and “business to business” (B2B) business models, but C2C is set for exponential growth since the Internet has given companies a tool to monetise informal exchanges by adding value: facilitating these exchanges and making them more efficient, quicker and more reliable. The structural re-organisation of how resources are used within our society is causing many to sit up and pay attention. The UK Government announced an independent review: the objective is to develop a route-map for the country to become the ‘global centre’ of this collaborative economy.

 

How the sharing economy has evolved

 

The consumer-to-consumer economy has grown significantly over the years with a greater number of opportunities. We used to have the Tupperware party, with several businesses using this sales model: Mary Kay, Ann Summers, Avon, Jamie at Home, etc. One person would host a party, invite their friends and generate commissions from the sales on the night; the party, as well as the opportunity for shopping desirable items that weren’t available through other retail channels, offered a reason for a group of people, particularly women, to come together.

The internet created many more ways for people to interact. Depending on the service or product bought or rented, this consumer-to-consumer exchange still retains a local element (Craigslist), but it can also transcend geographies (eBay). It can also make people more mobile by allowing them to take advantage of services for which they would otherwise have to pay a premium when they’re not in their own locality.

As people became more and more comfortable with buying online through portals like Amazon, eCommerce became more commonplace. Now, sites like eBay, donedeal, Taobao are like shopping centres where anybody can be a buyer or a seller. We are witnessing yet another change to the way in which we consume everyday products and services: from buying from traditional retailers and service providers, to renting from each other anything that you can rent.

 

The economics of the sharing economy

 

Society benefits significantly through the growth of this economy as it enables the “ordinary man or woman” to supplement their own salary and make a little extra, possibly disposable, income. This new model means the customer no longer needs to buy the product new and upfront before they can enjoy it.

As a result, resources are used more efficiently across society: most cars are totally under-used, given that they’re parked 96% of the time. It’s the same with an empty spare room, or any piece of equipment that is used a few days a year and only takes up space the rest of the time. In the sharing economy, the idle piece of equipment can become a source of income for its owner, and can prove extremely useful for another person who couldn’t afford it or wouldn’t need to buy it outright. In this economic model, more people are afforded the freedom to do more things and this reduces the gap between the haves and have nots.

An example is the gorgeous but very expensive hat or handbag that would be perfect for an upcoming wedding or other special occasion: many people couldn’t afford it, or couldn’t justify the expense for a single use. Rentoid, “the place to rent anything”, will allow you to rent the item and posits the following cost basis:

1 day = 1% of item’s value
1 Week or weekend = 5% of item’s value
1 month rental = 10% of item’s value

If the rented good can get to you reliably and on time, the above problem is solved.

But the sharing economy also frees up resources: take for example the economic impact of AirBnB.

I was speaking to one of my mentees some time ago and she told me about a week she had spent in New York, considering new opportunities and soaking in the “anything is possible” business atmosphere the city is famous for. I asked her if going to New York had made a serious dent in her finances: flights and accommodation alone can be a very significant investment. No, she said: AirBnB made it affordable.

According to a study conducted by HafenCity University Hamburg and the dwifConsulting GmbH, people who use AirBnb funnel the money they saved on accommodation into the local economy by availing of other services: “Over the past twelve months Airbnb had a total economic impact of more than €100 million in Berlin”. The study also points out that Airbnb guests stay an average of 6.3 nights and spend €845 over the course of their trip, compared to hotel guests who stay an average of 2.3 nights and spend €471.

From a business point of view, it reflects a structural change. Hotels used to compete against each other and other forms of accommodation: self-catering, B&Bs, hostels. Now, there is a growing entrant in the market in the form of people’s spare rooms. This forces hotels to compete on their points of differentiation instead of just cost, to sharpen their game and re-evaluate their pricing and pricing models.

 

These underlying influences mean that

the sharing economy is here to stay

 

The key things that have helped this to happen online include:

Between 2000 and 2015, world internet usage rose by 806%. This is due to smartphone technology, greater broadband facilities and a global cause and effect momentum: the more businesses there are online, the more it makes sense to go online to consume. Equally, the more consumers there are online, the more it makes sense for businesses to have an online shop.

As of June 2015, 45% of the world’s population is online, with levels as high as 87.9% in North America and so much potential yet with just 27% in Africa.

We are becoming more and more accustomed to buying online and this trend is set to continue. In 2014, eCommerce accounted for 5.9% of the total retail market worldwide: that was $1.316 trillion. By 2018, this figure is predicted to rise to 8.8%, representing $2.5 trillion. Currently, the US and China make up the lion’s share, comprising 55% of this total between them, but China is set to top the list by 2018, surpassing $1 trillion and accounting for 40% of global eCommerce alone, followed by the US at $500 million and the UK at $125 million. 50% of transactions in China are in the C2C space: eCommerce and C2C can work in parallel in this country to turbo-boost the collaborative economy.

  • The rise of FinTech in the form of payment systems and infrastructure technology

It’s becoming very easy and instant now to transact payment: the hassle of exchanging bank details and the security worries of setting up transfers are becoming a thing of the past.

I needed to print a boarding pass quickly at an airport recently and I used an internet kiosk to do so. The machine kept swallowing credit as I had to try three times to print off what I needed. I called the helpline and after solving the issue, they finished the call by checking how much I had spent and immediately credited the amount to PayPal using my e-mail address. It was instant! In the most recent Irish budget, the government signed off on an increase to the transaction limit on contactless payment cards: from €15 to €30.

Currently, $500 billion dollars are transferred internationally on an annual basis. With the rise and rise of payments companies, the cost of foreign exchange rate transactions and of the transfer itself is falling dramatically due to different business models and greater competition. The growth of PayPal is a good proxy to measure the rise of the digital wallet: the company has grown its average active account size by approximately 9% per annum from $851 in 2008 to $1,411 in 2014. In Ireland this year, Realex was sold for €115 million; Realex is one of the fastest growing online payment businesses in Europe, processing about €28 billion worth of transactions a year, on behalf of its 12,500 clients.

Moreover, every phone can now act as a POS (point of sale) terminal. Square offers customers a tiny gadget to attach to their phone, to enable them to take payment there and then using an app, even without signal. I was at DevLearn two years ago and I was speaking to a woman at an exhibition stand. Another person joined our conversation and the subject of agile working practices came up. The woman at the stand recommended a book and the visitor said “Oh, I should get that”. The exhibitor said “I can sell this one to you right now. It costs $22.95 to buy it new, so how about 10 bucks?” The visitor handed over her card, the exhibitor whipped out her phone with the Square attachement and thirty seconds later the transaction was done.

This has forced a rethink of the fundamental way in which we pay for everything. For example, Poynt’s $299 smart terminal accepts every form of payment, from the traditional plastic and cash to the newer digital wallet media like Apple Pay. This facility has the obvious card reader and receipt printer but also works as a beacon, has a GPS tracker, can connect to the internet through Ethernet, Wi-Fi, or 3G wireless data signal, and has two programmable touch displays so the transaction can be personalized to the retailer.

 

Can you share in the sharing economy?

 

You too could make money by taking advantage of this new economic trend. Take a moment to think about what you have to offer:

  • carsharing, carpooling or Uber-like car services: drive somebody to a place they want to go; you could also rent out your car, and simultaneously rent the car parking space it normally takes up;
  • accommodation: offer a room or a property that you own for rent;
  • services: you can take care of dogs, you can run errands or do odd jobs and maintenance work;
  • lending: you can lease your bike, you can lend money, you can share your clothes,
  • selling your surplus: you can make money out of leftovers or you can sell your unused phone wi-fi allowance
  • and many, many more: anything else you can think of.

You name it, there is an app for it, like Uber, Airbnb, DogVacay, Justpark, RelayRides, TaskRabbit, Spinlister, LendingClub, Fon, ThredUP, ShareYourMeal and Rentoid. In fact, a quick glance on Rentoid shows that I can rent a Prada handbag, a Harley Davidson motorbike and even a private jet!

 

The sharing economy - Jeremiah Owyang Flickr

The sharing economy – Jeremiah Owyang Flickr (click on image for full size)

 

What do I need to consider before I participate?

 

It’s easy to join and become part of this community, but there isn’t any free lunch. If you rent something, it means you can’t use it yourself (obviously). If you agree to provide a service for somebody through Uber, Rentoid or Dog Vacay, then you need to put your time into it. It’s just like any other type of “job”, you need to commit and deliver.

As the sharing economy relies on trust, customer service matters hugely. Remember: these online portals are, as the name suggests, online and hence a click away from social media. They all, or almost all, include a way for the buyer to review the seller’s performance and leave comments, positive or negative.

A first-time purchaser, for example, is roughly 50 percent more likely to turn to social media than a repeat buyer. In the case of travel, 40 to 50 percent of consumers looked to social recommendations. If you have a vocal fanbase, they can do all of the marketing for you; but if your digital reputation is damaged, this will hamper your ability to find new clients. It’s crucial that you find ways to invite people to review and share their positive recommendations, as well as reward them for it.

This is a growing market, so you need to be ready for more and more competition. By now, there is a significant amount of people offering their products and services for rent, but the bigger companies are starting to get in on this new paradigm. For example, Avis bought Zipcar in 2013 at a 49% premium to the stock price for a total of $500 million. DriveNow is BMW’s car sharing arm: it has been successful in its pilot cities and is now being rolled out in several new international urban hubs. If you can build a base now and get a headstart on building credibility, with real people willing to tell others, you’re going to have a great advantage over the followers who are set to join this community in their millions.

The connecting sites are designed to bring people together, but the liability lies between the parties. In some cases, the company picks up the tab if something goes wrong: Spinlister promises that “If your ride is damaged or stolen during a rental period, we’ll make sure that you are properly compensated”. In other cases, the company that puts you in contact with your buyer or seller doesn’t oversee the transactions: it’s up to the transacting parties to act ethically in terms of product care and making the payment. Social media can act as a strong motivator to play within the rules, but the company may not act on your behalf if something goes wrong.

 

What are the costs of participating?

 

Before assuming this is easy money, it’s important to examine the costs of generating such an income. Here is a checklist of the questions you need to ask:

  • Is there a cost/what is the cost of registering and listing my offering?

In the case of Rentoid, it costs $4 to list an item for rent, or $30 for a one year membership where you can list as many items as you want.

  • What is the cost of creating and delivering my offering?

If you’re going to deliver something for somebody who hired you through TaskRabbit, then you need to consider the fuel or public transport, the possibility of being caught in traffic, tolls, etc.

  • What are the payment processing fees?

A typical Uber X and Uber Black driver makes about $19 an hour after paying Uber’s 20 percent commission. (This is in comparison to $12.90 in average hourly wages for cab drivers, based on Occupational Employment Statistics data)

  • What support do I need to offer and how?

WeChat is one of China’s fastest growing apps that connects mobile messaging to health tech to interactive toys. It’s positioned itself to be the communication method of choice within the sharing economy and poised to overtake texting in the years to come.

 

What practical steps should I take to succeed?

 

Take some time to really think about the goals you have. Is this to supplement your income or so that you can reduce your hours in your full time job eventually? Are you testing an offering and planning to leave the platform or upgrade to a premium or pro membership on the same platform? How much does that represent after tax? What is going to be one-off versus sustainable?

Examine the results you’re getting and treat them as you would any business data. What is your revenue? What are your costs? How can you maximise the former and minimize the latter?

Many of these companies have articles about how to succeed using their platform. ThredUp have a very active blog to help you “Rent the Runway”

It’s four times easier to sell to somebody who has bought or rented from you before than a new customer, so consider making an investment into a “Customer Relationship Management” system, and send your database regular updates with new offers and useful information.

There is a reason that Airbnb now rivals Marriott with its capacity of 1,000,000 rooms worldwide and that’s because it built a very good, strong business that matched a huge cross section of society with a huge variety of accommodation: there’s something for everyone. It’s your role to fit into your renting ecosystem by offering the most personalized experience that you can. Emulate and learn from the best.

 

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Susan
By Susan October 27, 2015 22:14