Why a New Generation of On-Demand Businesses Is Rejecting the Uber Model

Models are evolving. In addition to the worker classification legal challenge that may continue for years, startups are finding that customers demand premium quality if they are going to charge premium prices (and in order to justify their valuations).

The result is that they are finding it is better to control more of the process in order to capture gains while delivering optimal service.

It's what some might call an old model - but it's one that technology can now enable.

Sarah Kessler reports in Fast Company:

Paying a premium for instant delivery is dubious beyond transportation and food delivery. You might be hungry right now, but for most goods and services, Amazon Prime’s one-day delivery works just fine. Instead of functioning only as a technology layer on top of other businessest's it's better for business to own more of the process, not less.
When Miguel Zabludovsky opened his first laundry delivery service, Slate, in 2005, he pitched customers convenience: He would pick up their unsorted laundry (literally: he was both CEO and courier), and his subcontracted eco-friendly dry cleaners would clean it however they saw fit. Two years later, he opened his own laundry facility, which for several years cleaned dresses for high-fashion rental service Rent the Runway. Two years after that, he added home cleaning to the business. It wasn’t until 10 years after starting the laundry service, in January 2015, that Zabludovsky repositioned Slate as a tech company.
At first glance, Slate looks a lot like other "on-demand" apps that leverage mobile technology in order to allow the masses (or, at least, the masses who have disposable income) to summon anything from a late-night taco to a home cleaner. Like these startups' workers, Slate’s cleaners—who visit every day to make beds, do light cleaning tasks, and tidy and pack up laundry for pick-up by Slate drivers—manage tasks and schedule through a mobile portal. Like these startups' customers, homeowners make requests about how and when they want tasks completed directly through a newly launched app.
But Slate’s business, which started with service operations and later added technology, has been built with almost an opposite business philosophy as startups like courier service Postmates, grocery delivery service Instacart, cleaning service Handy, errand marketplace TaskRabbit, and the many other startups that embrace an Uber-like business model. While those "Uber for X" startups seek to distance themselves from the driving, cleaning, and delivering they facilitate, instead functioning only as a technology layer on top of other businesses, Slate fully believes that it is a cleaning and laundry company. "We’re not techies," Zabludovsky says. "We’re cleaning 130, 140 houses every day."Zabludovsky, who over the years has both subcontracted and owned his laundry services, believes it's better for business to own more of the process, not less. "There is no doubt to us that if we want to be successful, and if we want to be in the cleaning of clothes business, then we have to own that business," he says. "It’s very difficult to get the kind of consistent quality that you need to provide to keep customers without doing it yourself."
Once promised as the future of "everything," the "Uber for X" model has recently come under scrutiny as startups in the category falter. Some, like on-demand parking services Luxe and Zirx, have pivoted. Others, like Instacart, have raised prices. And many others have struggled to live up to high valuations. Pundits have even gone so far as to forecast an "on-demand apocalypse."
But there is more than one way to coordinate and deliver conveniences through smartphones—even more than one way to do it for a lower price—and not all of them are dead. While the first generation of "on-demand" companies had a business model similar to the one made famous by Uber, many new service-sector startups are instead launching, or pivoting toward, a philosophy more aligned with Slate.
These entrepreneurs are not launching technology companies or even "on demand" companies. They are instead starting child-care companies, retail stores, restaurants, and laundry services that use mobile technology not only for delivery, but as a way to be more efficient at every step of their operations. "You’re seeing models evolve," says Ron Johnson, the former CEO of J.C. Penney and creator of the Apple Store, who nine months ago started a mobile-enabled electronics retailer called Enjoy. "And that’s what you’d expect in a new area of the economy."

Photo: Flickr user John Floyd

Why The Uber Model Fails

Katie Shea, cofounder of the relaunched Slate, experienced the flaws of the Uber model firsthand. As the former New York City GM for home-cleaning company Homejoy, she managed an operation that matched house cleaners with customers. Because Homejoy added a 20% fee for coordinating the setup, customers expected it to be better than a service they could arrange by themselves.
That meant the service had to be perfect, Shea says, especially "in a city like New York or any other big city, where at one mess-up, you just go back to the downstairs laundromat, or the cleaning lady that you paid cash from a friend."
Because all of the cleaners were classified as contractors rather than employees, and Homejoy was just playing matchmaker, Shea wasn’t legally allowed to provide much training or guidance. "We had to be very indirect about it," she says. "We had to be like, we can’t tell you what to do, but we can tell you that other cleaners who have done this have gotten five stars." That made near-perfect performance hard to achieve. It turns out that—unlike shuttling a passenger from point A to point B—there are a lot of varied expectations regarding what constitutes a "clean" house. And dissatisfaction showed: According to one report, only about 15% to 20% of first-time Homejoy customers booked again within a month.
Amid worker misclassification lawsuits, Homejoy shut down in July 2015.
Homejoy wasn’t the only company that found providing good service as a technology-only company to be difficult. At first glance, grocery shopping seems simple enough. But knowing how to identify a beefsteak tomato and when an avocado is ripe isn't entirely intuitive. So in June, Instacart hired some of its in-store workers as employees. "This is not something you can just enable with technology," Instacart founder and CEO Apoorva Mehta told me about the decision. "This is something that people need to be trained on and coached on, on a regular basis. And that’s how we succeed as a company, by making sure that it’s a business that customers want to use over and over again."
Shyp, a company that picks up, packages, and ships items for its users, made a similar transition to hiring employees for some roles in July. In a blog post, Shyp CEO Kevin Gibbon explained that the change was "an investment in a longer-term relationship with
our couriers, which we believe will ultimately create the best experience for our customers."
Uber has scaled to the point where it can beat the price of alternative options, but "Uber for X" has struggled to accomplish the same. And the appeal of paying a premium for instant delivery is dubious beyond transportation and food delivery. You might be hungry right now, or need to get somewhere right now, and are willing to pay a premium to fill that need now, but for most goods and services, chances are that Amazon Prime’s one-day delivery works just fine. Most people would rather wait a day for an order of paper towels than pay an $8 delivery fee to have them in an hour. Ditto for a sweater, a coffee grinder, or laundry service. Companies like Starbucks, McDonalds, and Target have partnered with on-demand companies because it is an easy way to shift their delivery costs onto customers—who pay hefty, often obscured fees for the convenience—but, as GrubHub’s CEO argued in one particularly brutal takedown of the on-demand food trend, "transferring costs from one party to another is not ‘innovative.’"
For a $7 delivery fee and a 55¢ service fee, Postmates will hire a courier to bring me an $11 burger from my favorite restaurant in New York City. For a $9.50 delivery fee and a $19 service fee, it will bring me an iPad from the Apple Store. Startups that have stepped outside of Uber's business model, however, will bring me lunch or an iPad for free.
One of these startups, Maple, is a restaurant. It uses mobile apps not only to coordinate the delivery of its food, but also to make the entire process more efficient by adding tiny efficiencies throughout its entire operation, contributing to a pace of sales almost three times faster than Chipotle. Meals typically cost around $12, including delivery.Enjoy, the service that will deliver an iPad for free, is a store that trains the employees who deliver products to help install them and answer customers' questions. Instead of a delivery fee, Enjoy makes its profit the same way any retailer would make a profit: on product margins. Because it uses mobile phones to bring products to customers, it doesn't need a storefront, which makes its margins better than traditional retailers. It also charges a fee to some partners, like AT&T, who offer Enjoy as a delivery option on their websites. "What we’re doing is really hard," says Johnson, Enjoy's founder and CEO. "There are a lot of companies that can do delivery, but there’s not a lot of value-add. It’s just logistics. What we’re adding is a human connection. That’s really hard to do. That’s the missing link in a digital world." Johnson says that in Enjoy’s first nine months of business, it has received five-star reviews 97% of the time. Many of them mentioned an Enjoy’s employee by name.
Trusted, a new on-demand babysitter app based in San Francisco, is another example of a startup that has chosen to create a mobile-enabled service business rather than just a technology layer. While competitors like Care.com match parents and caregivers through a portal, Trusted decided quality in a category like child care mattered enough that parents would pay more if guaranteed highly vetted babysitters. The startup, which charges $25 per hour, hires employees after an extensive in-person interview, three reference calls, and two-hour training about how to use the app, which manages schedules and payments. "Our North Star metric is how often parents come back to use our service, and that comes back to if they have a five-star experience very time," says CEO Anand Iyer. "It’s not like, let’s just try to do the best job we can in matching people."
Slate’s founders also aim for customers who are willing to pay slightly more for a high-quality daily service than they would for a weekly clean. "At the end of the day, any home service is a person business," says Shea. "We’re dealing with people. And people are imperfect. That’s something that a lot of people forget when they’re launching these businesses. They’re like, here’s my tech
platform, I’m going to revolutionize this industry."
The "Uber for X" model is certainly not dead. Soothe, an on-demand massage app, for instance, raised $35 million earlier this month. And owning the entire operation is not an instant success maker: Spoonrocket, a restaurant that cooked and delivered food, recently shut down. There’s not yet a runaway success story for the model that can compare to Uber itself.
But the appearance of other models is promising for the "on-demand" space, whatever that term might come to encompass. The idea that technology could not only fix anything, but the same technology could fix anything, in many cases proved arrogant. Just as an app’s interface may seem stupidly simple to someone with no knowledge of code or product design, every service industry—cleaning, delivery, grocery shopping, caring for kids—is complicated in its own ways, and often in ways that technology alone cannot improve.