Excerpted from Connor McEwen:
1. Behaviour Change
“For many of the early adopters in the sharing economy, the experience of a peer to peer interaction is significantly better due to their unique characteristics. They like meeting a new person, or the fact that they’re reducing their environmental footprint, and therefore are willing to use a new platform.
However, for the mainstream user, these issues aren’t often a factor in motivation. To get the mainstream, P2P services need to offer something much better than the current solution. New users must have way to make (a significant amount of) money where none existed before, a much cheaper alternative to a current product or service, or a much more convenient solution to an existing problem. The big names in the space fit at least one of these categories.
The challenge is that it’s very difficult to create a situation in which the experience is an order of magnitude better for the mainstream. Making a few extra dollars just isn’t worth it for many people, especially if the P2P method is equally convenient or potentially even less convenient than how people are currently behaving. It’s even harder at the start, because new marketplaces lack…
Liquidity is the answer to the question “When I try to use a P2P service, can I find what I’m looking for?” For new two-sided services, it’s often no. The chance that someone in your geographical area has exactly what you want on the day/time you want it is just pretty slim if there are only 100 or 1000 users on a service. It’s known as the “double coincidence of wants”. Bo Fishback of Zaarly talks about how this was a problem for them in their original model here.
It’s possible to “hack” your way to liquidity with either a huge marketing budget, by focusing on single user utility, or by starting with a local or very targeted niche. If you don’t have a huge marketing budget (like every startup I can think of), your service has to be valuable to those first few users who sign up, so that they will continue to use it and even recruit more. If you decide to focus on a local niche too, you need some way of spreading beyond that locality. That’s an even harder challenge than picking something which will give your users a much better experience at scale.
On top of getting to liquidity, there’s an additional problem of competing with existing liquid services like eBay and Craigslist. Once a service reaches liquidity (most people showing up get what they want), it’s very hard to “beat” them. Your users aren’t likely to spend any effort on a new “risky” service when they know they can get exactly what they want somewhere else.
3. Transaction Volume
All of the services mentioned in the first paragraph happen to have some sort of venture funding. While some may debate the merits of this choice, the fact is that they all had plans to make a large amount of money.
Since most of the peer to peer services we’ve seen use a simple transaction fee as a way to make money, let’s do a little math (see more here). Let’s say you have 5 people on your team, and everyone makes $60,000 a year. That’s $300,000 a year you need to make, and since you only get to keep 10% of the value of transactions, there has to be $3 million going through your platform every year. Unless you’re dealing with high value assets (cars and houses), or very frequent transactions (shared transportation), it’s pretty tough to get to that number.
You need many more users than a company who makes $300 a year each off of 1,000 customers on a one time sale, for example. So while some marketplaces may see some traction and have a small core of users, they can’t return money to their investors unless they hit that “hockey-stick” growth.”