On-demand in small business: Four ideas for growth

Where is your place in the on-demand economy? Many workers and small businesses, including retailers, see the encroachment of Amazon, WalMart, and myriad other services as destructive. Yet media-enabled global brands are consistently challenged when engaging home- and office-based customers. The future of your business, whether a physical location or as an independent contractor, depends upon finding new niches where human expertise overwhelms online-only engagement.

Non-manufacturing businesses account for about 80 percent of the U.S. economy and are reported by the Institute for Supply Management as growing strongly for 97 consecutive months. Amazon, Uber, Lyft, TaskRabbit, Instacart and other services seem poised to steal business from local experts, but we think that by studying their approaches, small business and independent businesspeople will find greater revenue opportunities and a foundation for maintaining a trusted relationship with consumers. There are many new niches in the ever-specializing economy.

Last week, Uber announced beauty salon network bgX had become the first “business that has fully integrated with Uber for Business.” If you are seeking styling or a blow-out before an important meeting, “The platform will provide the convenience of having premium salon styling delivered directly to women at home, work or at a hotel.” The stylist comes to the customer if they happen to be in London, Paris, or Dubai. It’s a small footprint, but bgX could build geographic presence with time and marketing, adding cities with high concentrations of luxury styling customers.

Services consistently add greater value than other sectors of the U.S. economy

Uber’s head of Uber for Business in Europe told the Evening Standard that 65,000 businesses have begun to integrate Uber services. Health services and elder care home companies pioneered the gig-sourcing local drivers to bring patients to appointments and ferrying retirees to an from shopping, events, and around town. Westfield Malls set up Uber transit centers in 33 of its malls last Fall. Yet, a survey last year showed that the majority — 73 percent — of small businesses used no gig services.

Likewise, Amazon extended its Whole Foods home delivery service last week. Adding San Francisco and Atlanta, as well as adding a Prime discount of five percent on Whole Foods purchase, the once virtual giant is developing a physical footprint in local markets. With Amazon Go stores prepped to serve walk-in-walk-out shoppers, potentially as ubiquitously as 7-Eleven does today, the Bezos machine is targeting the consumer on the go while catering to their home and office needs with Prime and Prime for Business memberships.

As a small business or an independent worker thinking about how to compete against these global brands, focus on where the human-to-human gap has opened as a consequence of automation. Logistics have been improved dramatically, but feedback, recycling, and recirculation of products all remain stubbornly local in nature. A salesperson is still the best way to capture feedback because they bring the ability to ask questions and report back non-verbal signals. This is where a massive opportunity remains for individuals in the gig economy.

Scale, surprisingly, is the reason the Small Business opportunity is growing. The delivery of services and products-as-a-service require deep personalization. Mass personalization will remain a matter of demographic or psychographic templates that must be tuned in the last-mile to engage the specific customer’s values. 

The Minte, an apartment cleaning service in Chicago, demonstrates how small businesses can find and fill gaps by selecting a target market to serve better than national brands can today. The company identified apartment buildings as a market where it could rapidly lower the cost of service by increasing customer penetration in a single location. 

“Once you’re in one building, all the others start coming to you,” The Minte CEO Kathleen Wilson told BuiltInChicago. “It really just exploded.” Call it “share of locality” thinking. Instead of simply thinking of gaining more of a consumer’s wallet, look to expand a business’ relationship with customers’ neighbors.

Word-of-mouth and local selling of these services don’t happen entirely online. People make the sale and pass customers along based on their satisfaction with a service. The focus on increasing Share of Locality inverts the marketing challenge. Small promotional and direct-sales engagements can kickstart a local on-demand business. If you are looking at the on-demand economy as a looming threat that will wipe out your local services market, study the gaps opening between big brands and local buyers to find a new niche. 

  1. SMBs should position themselves as a local connector between global brands and customers. Uber, for example, has a massive local targeting investment that relies on its teams localizing and distributing marketing offers based on geotagging and artificial intelligence.SMBs have extensive insight into local demand and can tap into, for example, mobility services such as Lyft, Maven, and Uber, providing deeply contextualized local offers.One small business may offer Lyft rides to customers who want to shop at their location while another may choose to offer in-home delivery. Both, however, bring a local customer to the relationship with a mobility provider that can be mined for additional service opportunities. If a customer likes dinner delivered every evening, would they also like a housecleaner to come tidy up after the meal? Assembling these local services, consolidating them into a single point of contact and feedback for global brands, is a defensible position in the market.
  2.  Shopping destinations should consider aggregating delivery opportunities. Amazon has begun installing Amazon Lockers in Whole Foods stores, allowing shoppers to pick up online orders while at the store. Groups of retailers and service providers need to look at the businesses near them to understand where they can consolidate the delivery of goods and services. With improved logistics and retail management systems, a local store could become the destination for picking up a new product and receiving hands-on support and training for the consumer. Expertise is the rarest commodity. Small business is the most distributed approach to expertise delivery, which has been the foundation of consumer trust for generations. If your small business is isolated from others but draws regular customer traffic, can you use Uber or Lyft to “do the shopping” for a customer while they have their hair cut, their car serviced, or while they learn a new skill in a small training center attached to a local mall?
  3. SMBs and workers should focus on excellent service and enduring customer relationships. Today, gig work is treated as a commodity, and it results in lower wages as more workers join. However, consumers prefer trusted providers, especially for personal services. As the on-demand approach to work expands, small business and labor both need to leverage the trust they develop with local consumers in order to build their pricing power.Differentiation based on service level and trust will increase earnings. At the very least, a highly regarded local source of service or product expertise — the person who sold the customer their last three lawn and yard tools or the regular provider of the perfect massage — can earn more based on increased demand. Going further, the local expert service provider can follow the “breakage model” adopted by many companies, such as DropBox. They charge a little more for a lot more service on the bet that most of the services will not be consumed. A local SMB service provider, for example, could offer priority callback and service visits to “members” who pay a small monthly fee to jump to the front of the line when they need help. 
  4. Tie into the on-demand economy and push the limits. Uber for Business, for instance, has extensive information about the routes and timing for deliveries but does not have a personal relationship with local consumers outside the Uber app. Like salon company bgX, look at what your business, or you as a service provider, can deliver and seek to be the local partner for on-demand product manufacturers and local mobility providers. You will find that there is no local sales interface to collect feedback from potential customers and expertise is unevenly distributed.Your ability to use multiple on-demand services is critical to success, so mix and match aggressively. Attack the problem of how to get a product from point A to point B, to onboard a customer to a new service, such as home security DIY installers who need to train customers to manage their security systems, or the need to efficiently deliver for hands-on expertise, whether a doctor, lawyer, auto mechanic, or any other person-to-person service. Small business and individual workers can take a robust part in extending services revenue, by tying expertise to products, fulfilling delivery, service, and post-purchase support locally, and thinking systematically about where value can be added in the on-demand economy.

MIT Paper Suggests the Gig Economy Is An Illusion

The Massachusetts Institute of Technology’s Center for Energy and Environmental Policy Research has released a paper that purportedly blows a hole in the ship of the gig economy. The findings are already much contested, and I’ll lay out in this posting where more research is needed, the flaws in the paper’s methodology, and the policy implications of the MIT CEEPR report.

Here is the damning summary of the paper’s findings:

Results show that per hour worked, median profit from driving is $3.37/hour before taxes, and 74% of drivers earn less than the minimum wage in their state. 30% of drivers are actually losing money once vehicle expenses are included. On a per-mile basis, median gross driver revenue is $0.59/mile but vehicle operating expenses reduce real driver profit to a median of $0.29/mile. For tax purposes the $0.54/mile standard mileage deduction in 2016 means that nearly half of drivers can declare a loss on their taxes. If drivers are fully able to capitalize on these losses for tax purposes, 73.5% of an estimated U.S. market $4.8B in annual ride-hailing driver profit is untaxed.

There are several underlying problems with these findings, ranging from the way that the researchers characterized the share of earnings from driving to the research team’s conclusion that because drivers can take the standard mileage deduction when calculating their taxes the on-demand mobility business goes mostly untaxed. Uber’s chief economist, Johnathan Hall, examined the report’s findings in a Medium posting on Sunday, suggesting the estimated earnings are deeply flawed.

The authors fail to note that every transportation provider, from a Lyft driver and local taxi to a long-haul trucker or local salesperson, may take a $0.54 cents-per-mile deduction on every mile they drive. By extension, the MIT research is arguing that all mileage deductions are a form of subsidy rather than a recognized cost of doing business. There is a substantial debate to be had about the mileage deduction’s sustainability, but these research judges that policy debate with an emphatic assessment of its own that is not supported by the data or current law.

The full research report will not be available for six months, as it has been distributed to CEEPR’s sponsors and remains inaccessible to the public. We think that’s counter-productive, as it prevents a full assessment of the data gathering and findings.

What stands out for us is CEEPR’s comparison of Driving Costs and Driving Revenue without regard for the number of hours driven in the available data. Uber’s critique of the research revolves around how drivers characterized the share of revenue they earn from driving. CEEPR’s methodology uses qualitative expressions, e.g., “very little” or “around half” of the respondent’s income attributed to the share of income earned from driving both with and without distinctions between all income from on-demand work or any questions about the specific number of hours driving.

We need to see the full data set and the research paper. However, it appears that based on these qualitative assessments by drivers, the MIT team used hard statistical categories to discount reported earnings, apparently by 50 percent or more from what drivers said. Uber argues that the methodology builds in a 58.5 percent discount on actual earnings. We understand this is a conservative statistical approach to take. However, it seems to have reduced the real income reported because the number of hours driven to earn any income isn’t factored in. MIT CEEPR should release the full report so that others can review the methodology.

Drivers in Las Vegas responded to the report in this ABC15 news report. Admittedly, this is anectdotal feedback, but it does reflect the fact that drivers who treat their on-demand work as a business appear to be earning more than minimum wage. Infrequent drivers, who cannot expense much of their automotive financing and care costs, certainly don’t make as much after deductions as full-time drivers.

In more than 100 conversations with Lyft and Uber drivers, I’ve found that the drivers typically earn more than $18 an hour, and those who drive full-time or near that level do report having an economically satisfying experience in most cases. More drivers report that ride-sharing is their primary job, as well. That said, a significant minority of these drivers reported that they commuted 100 miles or more to major cities to work for three-to-five days straight, while sleeping in their cars, to earn a viable living for their family back home.

Gigging isn’t perfect, there is plenty of room for improvement. This paper adds to the controversy and requires full disclosure of the data to support the discussion about how the economy can evolve for fairness and prosperity among workers.

Every driver should be treating their ride-sharing work as a business, taking the maximum appropriate tax benefits for mileage, writing off car payments and repair to the extent that they are attributable to ride-sharing revenue.

Giggers should think twice before jumping in

CNBC explores the “greased slide” created by the new tax law, which encourages independent workers to embrace freelance work.  Now those small businesses run by individuals can “pass-through” 20 percent of revenue untaxed to the business owner. It appears to be a great time to become a gig worker. However, the lost benefits that come with traditional employment more than offset the tax savings, Miguel Centeno of Shared Economy CPA told CNBC.

The article details the cost of going gig and demonstrates that contingent work is the source of all growth in the economy since the Crash. Besides lost health and life insurance benefits, the gigger gives up paid leave, sick days, and employer contributions to Social Security, among other valuable aspects of a regular job.

It is sobering reading for potential giggers. More importantly, it is a wake-up call for companies who have viewed the On-Demand Economy as a way of cutting costs and obligations to workers. The formulae for loyalty used to lie in the job benefits society seems to be abandoning. Worker retention and job performance excellence are still the keys to good customer experience and valuable products and services.

On-Demand companies must tackle the problem of portable benefits and the establishment of a meaningful relationship with workers that allows them to identify with the brand they currently represent happily. A worker may rep multiple brands during a single workday, but they still need to feel the pride and opportunity provided by a satisfying living wage with a path to retirement.

If companies treat On-Demand solely has a cost-saving strategy, they will drain the economy of consumers. That will backfire on everyone.

On-Demand Economy Notes, February 12, 2018

Although Uber and Waymo settled there intellectual property case last week, the status of workers as independent contractors took a new twist in a California court. Worker payment, training, retention, and earnings drove much of this week’s on-demand news. During 2018, worker retention will be a major issue for on-demand companies.

Wirecard, a German payment card vendor, is bringing pre-paid cards for on-demand work to the United States, Payment Source reports. As we noted recently, payment cards are a lever for bringing the unbanked out of the gray economy.  The technology avoids engaging with the payee’s bank account. Direct-deposits add costs to payments while prepaid cards are easily distributed, Wirecard argues. Kate Fitzgerald writes: “Wirecard’s ability to function as both an issuer and acquirer enables customized disbursement programs ranging from reimbursements to rebates and rewards, is a positive, but not entirely unique.”

Waymo-Uber Settlement: After months of tense preparation, an appearance by former Uber CEO Travis Kalanick, and a couple days of courtroom testimony, the Battle of Autonomous Cars Case came to a close. Uber has agreed to transfer slightly more than one-third-of-one-percent of its shares to Alphabet, Waymo’s parent company, and to submit to ongoing reviews by Waymo of its autonomous car developments. That stock, valued at $244 million, based on Uber’s largely fictitous $72 billion valuation, which was deeply diluted by SoftBank’s recent investment, Uber settled for about a quarter of the damages Waymo had been seeking.

We believe the significant move in the case came from new Uber CEO Dara Khosrowshahi, who has made apologizing for, and improvement of, Uber’s behavior the hallmark of his leadership.“While I cannot erase the past, I can commit, on behalf of every Uber employee, that we will learn from it, and it will inform our actions going forward,” Khosrowshahi wrote in a statement. Again, this is Uber growing up.

Women see Uber pay gaps, despite algorithmic work assignments. The wage gap persists in the on-demand economy, partly due to the duration of their Uber driving career. Forbes’ Erik Sherman reports that researchers at Stanford University and the University of Chicago found in separate reports that women consistently earn seven percent less than men. Part of the difference is accounted for in shorter driving engagements by women generally — female drivers churn out of the fleet faster than men, reducing their compensation over their Uber earnings lifetime. However, the culprit appears to be in the cost and time involved in training to become a driver, use the Uber apps, and build a consistent practice of driving.

Grubhub gets Yum-y. The holding company that operates Kentucky Fried Chicken and Taco Bell, Yum Brands, is investing $200 million in Grubhub, by buying the stock on the open market. The company will also sign an agreement with Grubhub to deliver KFC and Taco Bell food from 5,000 locations in the United States. Yum will take a board seat. Grubhub shares shot up 27 percent on the news., and have given back much of the gain in the market correction.

Quartzy says hairstyling is all about relationships. In a piece that details the rise and fall of several on-demand beauty companies, Noël Duan details the travails of hair care in the jet set, suggesting it does not translate to the consumer needs of the average person needing a “blow out” at work or home.  She concludes that customers want to go to salons because it is a special occasion and that the relationsjip with the stylist is central to the perceived value of a beauty experience. That last element, the personal relationship is the deciding factor in most home and on-demand services: People want to know their preferences are understood.

Duan conflates in-salon experience, like the free glass of champagne proferred to guests, with the intimacy of the experience. The edge of the network is made of human relationships, not just the details of the engagements that justify an on-demand hairstyling that is twice the price of a salon. On-demand is poised to deliver the same experience as the salon for the same or a lower price, because there is no overhead for the A-list location of a high-end salong. But Duan is right that if the human connection is missing, the industry will fail.

Grubhub case points to worker classification as independent contractors. The U.S. District Court for Northern California ruled in Lawson v. Grubhub that the company satisfied the state’s Borello common law test when it treated Raef Lawson, a Deliveroo rider in Southern California, an independent contractor. Lawson’s behavior, such as setting his phone to airplane mode during work time, drove the decision. It is not clear this case will build a solid foundation for gig companies to treat all workers as contractors.

Deliveroo faces union showdown. The Independent Workers’ Union of Great Britain has requested a review of a November ruling that denied its riders holiday pay, the national living wage, and the right to bargain as a collective.  The case now revolves around a clause in the Deliveroo contract relating to the rider’s obligation to provide a substitute if they cannot make a delivery, which the union says was misinterpreted by the court last year. The disputed clause makes the rider responsible to vet the replacement’s right to work and conformity with health and safety laws, a role traditionally relegated to the employer. The outcome, along with the results of other British, European, and U.S. cases, continues the debate about the nature of work and employment.

Amazon’s attack on grocery stores ramps up. Building on its Whole Foods acquisition last year, Amazon has tapped the Dallas and Austin, Texas, Virginia Beach, Virginia, and Cincinnati markets for free two-hour delivery of groceries. Bloomberg Technology reports the twist is that the Whole Foods locations will provide the inventory instead of relying on a regional warehouse. Known as Prime Now (apps are available on Apple and Google devices), the service is the first to combine Amazon’s Prime program with grocery delivery. Philadelphia grocers are preparing for the Amazon Prime onslaught with Instacart partnerships, The Inquirer reports.

Shipping By Amazon, for Amazon. The news that Amazon will build its own in-sourced shipping capability shocked the shares of United Parcel Service and FedEx last week. This makes sense from a local perspective, as much of the last-mile delivery traffic is outsourced to the United States Postal Service, FedEx, and UPS today. However, Amazon’s inventory systems will be the ultimate driver of shipping strategy, and most inventory needs to be near big cities. Amazon’s extensive regional warehousing system is in place to support Prime two-day and other shipping. Getting inventory to the warehouses, however, if an inter-modal shipping problem that requires multiple carriers and alternative routes if one mode of shipping is unavailable. This is not the death knell for traditional shipping, but it does place the focus in traditional shipping on the longest hops in the supply chain.

Instacart ramps up its funding, again. On the heels of 150 percent year-over-year revenue growth, Instacart closed a new $200 million round last week. Now valued at $4.2 billion, the company has raised $874.8 million, according to Crunchbase.

Instacart is slashing delivery fees. The Buffalo News reports that Instacart drivers and shoppers in the region are seeing their compensation cut by more than 50 percent. Just six months after launching with a $10 payment for each order delivered, shopper/drivers now average $4.75 a delivery plus $0.40 per item. It would require an order of 13 items to reach the previous $10/delivery level. Instacart offered a rich bonus for early delivery staff, but has failed to explain why its fees to drivers appear to be falling. The company is hoping repeat orders will include more items, and that may be an erroneous assumption.

Facebook doles out $5 million to community leaders. The story of local markets, which Facebook would like to support through improved storytelling and local advertising, will get a big boost from its selection of as many as five people to receive $1-million grants to “bring people closer together.” We recomnmend starting with local news and that Facebook refrain from seven-figure contributions to kick-start community engagement; Instead, find 200 journalists in local markets who will cover those markets closely and with real engagement with the citizens, business, and government issues. Pay them $50,000 a year to launch local Facebook-hosted communities and the results will be better.

Agency workers account for more of the British workforce, the Independent reports. The number of “agency workers,” or temps, has risen by 40 percent over the last decade to 800,000 people now serving permanently as temporary staff, according to a survey by the Resolution Foundation, a non-partisan think tank.

On-Demand Economy Notes, February 4, 2018

Every week sees a new “peak” or “maximally absurd” on-demand economy story, and this was no exception. As I rundown of recent news and data points of interest to on-demand companies, investors, and workers, I keep in mind that this transformation of our economy remains controversial.

It’s a commonplace to argue that “We get the society we’re born into,” but in this era, we can redesign society during our lifetimes. The vast majority of human generations have been stuck in their times because of the slow advance of knowledge and technology. The on-demand economy is only one aspect of a renegotiation of social value, and it can do far better than the first generation of companies if we keep worker retention based on fairness. We need to argue about this passionately and patiently to evolve a more sustainable and equitable economy in the era of technological acceleration.

Send your “Human Uber” instead of going yourself. New York Magazine points to the announcement that Japanese researchers have developed an iPad-based solution to sending someone in your stead. Dubbed a “human Uber” and announced at an MIT form, this may be the most ridiculous and dehumanizing gig economy idea yet, as proved by an Arrested Development running gag based on the idea during its first run on television.

Slapping an iPad over a person’s face to send them to be present for you is stupid and dehumanizing. The joke on Arrested Development revolved around a rich man sending a shlub to attend meetings while he was in prison. Telepresence, on the other hand, makes sense. Scott Hanselman, a former colleague at Microsoft, accomplished a proxy presence without subjecting a human to serving as a meat puppet. Scott worked remotely, sending “Hanselbot,” a rolling platform with a screen, to meetings in Redmond. We don’t need to subject people to this.

Doctors on-demand, that makes sense. Lexology has a good summary of the risks associated with on-demand approaches to healthcare. In addition to the employment risks, such as failing to validate citizenship of workers and changes to healthcare organizational structure, which the articles covers, the rigors of HIPAA compliance, medical privacy, and care standards for non-employee workers are critical to understanding this market. Accenture projected that healthcare investments in on-demand would eclipse $1 billion in 2017.

Josephine announced it will be shutting down in March. Founder Charley Wang, co-founder of the Oakland-based community cooking service, announced the move on the company’s blog Thursday. “We knew that Josephine was an ambitious idea from day one and, as you all know, there have been many highs and lows over the years,” Wang wrote. “At this point, our team has simply run out of the resources to continue to drive the legislative change, business innovation, and broader cultural shift needed to build this business.” Enabling neighbors to cook for one another, Josephine invested in changing California law to allow home-based cooks to sell their food. The site will operate for 60 days, free to the cooks. Wang also said Josephine will transfer cooks’ business information and recommendations for next steps to their members.

Centralized kitchens bets are growing. Kitchen United, a Pasadena kitchen designed to support restaurant delivery and catering services, raised additional funding this month, according to Pasadena Business Now. Combining food preparation with order and delivery infrastructure, the company offers kitchen space by the hour or month to restaurants.

For what it’s worth, the Global Online On-Demand Food Delivery Service Market Overview reports food delivery will grow 32 percent CAGR. 

Evernote CEO predicts multi-role software services for on-demand workers. In a short piece on Business News Daily, Chris O’Neill, CEO of Evernote, described an emerging software environment based on users with many work and organizational roles rather than one. He is betting his company on understanding small business’ use of services to establish networks of “products and services.” We wholeheartedly agree with this philosophy at Gig Economy Group. Integration of services will be essential to consumers, as well, because the prospect of managing multiple on-demand services through dedicated apps will be too complicated. “The biggest bid we’re making as a company is to make the product more powerful when you use it with other people, team settings, group settings, nonprofits,” O’Neill said.

African household labor market points to lower marketplace fees. Workclick, a U.S.-Nigerian startup said it will take only 20 percent of worker revenue as a fee for connecting them with customers. Workclick’s app is offered in the U.S., but the workers appear to be only in Nigeria, where it has about 5,000 people on the platform. Low-income countries may be where lower marketplace fees initially take hold in on-demand work. U.S. companies like Uber have taken between 25 percent and 30 percent of revenue. In an age when Amazon and Wal-Mart thrive on sub-10 percent margins, on-demand marketplaces should expect to see their share of revenue under pressure. In low-income countries, labor marketplaces will not support high fees. Workclick’s initial fee structure hasn’t gone that far, but it’s a step in an inevitable direction for on-demand companies.

Careem, the Dubai-based competitor of Uber, Didi Chuxing, and Ola, among others, is profiled by Bloomberg Businessweek. Of note: Careem, currently worth $1.2 billion, is active in 80 cities across 13 countries. Four out of five Saudi Arabian women have used the service, which is training female drivers in the country. The story does a good job of exposing the difficulties of social transformation in the Arab World.

Ford takes Chariot to London. Engadget reports on the expansion of the carmaker’s first on-demand van service to the U.K. Focusing on South London, which is less well served by the Tube, with fares for daily rides between $3.41 and $2.27 after an initial two-week free offer.

Allygator Shuttle, a Berlin on-demand van service, has launched. Smart Cities World describes the service as a partnership between door2door and the Allgemeiner Deutscher Automil-Club, the German auto club and driver services company. The trial will consist of 25 vans running on Fridays and Saturdays only.

Speaking of auto clubs, Jrop wants to obsolete the monthly membership in favor of on-demand tow and roadside repair services. TechStartups.com has a summary. We think

Another flavor of robot. They are already wandering the sidewalk in many cities, and delivery robots are evolving into specialized breeds that will take to the streets. Robomart has a concept design for a fruit-and-vegetable delivery service that brings the produce department to the consumer’s door. Robomart’s concept is a problematic model for two reasons: 1.) It depends on the customer being at home and willing to walk to a van, rain or shine, to select their produce. On-demand services will not monopolize the customer’s time like this. 2.) The produce robot will suffer from the same problem consumers identify at the store, a lack of selection if the van has been picked over by previous customers. Optimizing routes to provide stock refreshment during a day will be challenging.

Crypto your tip? Finally, WIRED’s Zohar Lazar asks why Kudos, a blockchain-based system created by “Uber for buses” company Skedaddle to replace traditional tipping, makes any sense. With so many newly minted crypto billionaires, the solution to tipping isn’t to create a new currency to solve the problem, because the billionaires have a troubling habit of taking their cut first.

Solve the unbanked Americans problem at work, not at retail

Engadget today examined the question “Can Amazon Go help the unbanked go digital?” Writer Andrew Tarantola argues passionately that paper currency is on the way out:

As our economy embraces digital transactions while shunning cash, it’s the poor that will be most harmed.

Cash is not in retreat today. There is twice as much U.S. currency in circulation today than ten years ago. The St. Louis Federal Reserve bank tracks currency in circulation (see above). In fact, there is more cash in circulation now than at any time in U.S. history. Moreover, except for the months after the Web Bubble burst in 2000 and post-Financial Crash of 2008, the amount of money in circulation has not decreased at any time since the early 1980s. 

In the on-demand economy, cash transactions remain the primary challenger to home services marketplaces that offer to connect employer and worker. Homejoy, the defunct home cleaning service, for example, battled under-the-table arrangements between its maids and customers. Local maids willing to work for a few bucks less in cash payments often hijacked Homejoy’s national marketing to take the company’s customers away.

The unbanked — people without a bank account or credit cards — represent an important population whose participation in the economy will be someday be limited by digital-only currencies or a ban on cash at stores. We should all be thinking about their access to information, healthcare, or any purchase that is restricted to digital customers as an issue of economic growth and fairness. But cash is doing great. A total transition to digital transactions doesn’t appear to be imminent during the next decade (I could be wrong). As long as cash is accepted, it will be used. That will decide when and how the unbanked face a crisis.

There’s no doubt handling money digitally — in any form, not just the cryptocurrencies — is less expensive for banks and speeds many business processes. But consumers face ever-rising costs for digital banking services.  I imagine that if we asked an unbanked person to pay $2.90 in ATM fees to get $50 or $100 out of their bank that they would laugh at the suckers who cough up such fees. See what they think of the national average ATM fees for non-customer banks, which reached $4.57 in 2017, as an alternative to holding and using cash.

All an Amazon, Apple, Google, or Samsung can do is improve the perceived value of digital alternatives to cash. They cannot force anyone to use their payment systems. 

Treating cash as inherently less useful than digital money is a mistake because the anonymity of cash and the convenience of paying with money rather than by transferring bits remains attractive to ordinary people. We believe digital cash alternatives will rise with the adoption of on-demand work. An on-demand job will more than likely come with a digital payment solution. 

The unbanked consumer does face challenges, as Engadget concludes, pointing to the need to convert cash to use digital services as an inconvenience. The unbanked are also workers, and work is where the opportunity to bring them into the digital economy on fair terms lives. But marketers tend to drift to dreams of retail sales when they think about digital transactions because that is where marketers earn their pay. 

Think work-first to solve the unbanked Americans problem. On-demand companies can drive the adoption of digital payment systems more efficiently than Amazon because jobs pay people. On-demand workers should be studied as a subset of the economy to understand how to introduce digital payment models. Already, Uber, Lyft, and many other marketplaces are shifting to same-day payment via direct deposit or stored value card.

The workplace is where digital payments will rise to change the economy; then retail will benefit from its current investments in digital convenience. In the meantime, cash remains king.

SoftBank’s $300M dog-walking bet

SoftBank put $300 million into dog-walking services provider Wag! today. It barks like the go-go 90s investing SoftBank when people frequently asked, “Is Masayoshi Son nuts?” The Wag deal isn’t as ludicrous as it looks, though the valuation drove venture giants Kleiner Perkins and NEA away in recent weeks, according to TechCrunch.

Why might this make sense? First, Americans spent an estimated $69.3 billion on pets and pet supplies in 2017. The Bureau of Labor Statistics estimates that households spend $528 on pets annually, or about one percent of income. SoftBank’s Vision Fund invests for international growth, which is far off in Wag’s case. The company will be made or broken in the U.S. market.

An on-demand service must have an audience that can afford additional services, as well as need for those services. One of the reasons to own a dog is to walk it, to play with it. So, most dog owners are not candidates for Wag! They play with their dogs instead of paying others to do it. At an average price of $20 for 30 minutes, Wag’s service is priced for urban professionals and not the typical dog owner.

The second factor in Wag’s success is the ability to win and keep a repeat customer. The company has struggled with quality issues. Dogs are more like family than a car; they are not handed over casually to a walker.

The entire professional workforce in the U.S. included approximately 61.6 million people in 2017, according to AFL-CIO’s Department for Professional Employees. The number of Young professionals, 17.2 million in 2017, is growing by 350,000 workers annually. There is substantial growth among people likely to mix dog ownership, work, and an urban location. Several million people can afford to send their dogs on 3o minute walks three times a week, at the cost of $4,680 a year.

A $4,600/year price point is difficult and expensive online consumer branding challenge. We expect to see more services like Wag bundled and delivered by local intermediaries, as a benefit offered by companies seeking to attract and keep talent, or by concierge brands that span service categories. For example, Wag offers conveniences such as lockboxes to allow the walker into the home, but how many lockboxes are necessary for the customer? Some form of service interface consolidation is required.

Wag is currently recruiting walkers in 56 U.S. cities. Using 56 service locales as the basis for estimating how long it will take Wag to recoup the investment in topline revenue, it would require every city to see 733.8 walks per day delivered for a year. The actual distribution will vary. However, the 7.5 million walks delivered in a year gives us a basis for understanding how much Wag must grow just to earn back SoftBank’s investment. 

For purposes of this back-of-the-envelope calculation, if a walker averages two one-hour walks and four half-hour walks — a highly efficient pace — for a total of $120 in revenue, each city needs only  122 walkers to realize ~$300 million in revenue in a year. That is the ideal scenario, and it looks tractable.

The problem is Wag’s share of that revenue. The company pays walkers $16 for a half hour, retaining only $4 net for each half-hour walk.

In fact, Wag needs ~600 walkers in each of 56 cities delivering ~3,600 walks per day to reach $300 million in annual net revenue. Out of that share of revenue, the company must build software, recruit and screen walkers, provide transaction services, perform marketing functions, and pay its full-time employees.

That is a long walk to profitability. Wag! had raised $61.5 million before SoftBank’s investment. With a well-funded competitor, Rover.com, which has raised $155 million to date, Wag is a big bet by SoftBank that Wag can figure out and optimize the dog-walking market faster than Rover.

This is Uber growing up: Khosrowshahi calls for portable benefits

It will be surprising to many, but Uber is poised to become a mature and responsible company. CEO Dara Khosrowshahi today signed on to a letter from the Service Employees International Union (SEIU) and others asking Congress to create a portable benefits system for on-demand workers. The Hill reports that Khosrowshahi, investor Nick Hanauer, and the SEIU were strongly endorsed by Virginia Democrat Senator Mark Warner.

Ultimately, business and government will work together to address the vast changes to work, employment relationships, and the social safety net that allows the kind of labor mobility required in the emerging economy.

On-Demand Economy Notes, January 24, 2018

Lots of short notable goodness for your on-demand economy appetite today. News and thoughts follow.

ADP gets serious about on-demand. ADP, the Paterson, N.J. payment processing and payroll provider, acquired WorkMarket, a freelance management platform. The startup’s Work OS supports on-demand and full-time employee relationships that is integrated with Salesforce, among others. This marks the beginning of a serious experimentation phase for on-demand work models. 

Amazon isn’t perfect. Amazon Restaurants, the retail giant’s food delivery service, has laid off 50 staff in Seattle. It is not clear that means the group is under the knife, but it shows that food delivery services are still wide open markets.

The Institute for the Future released an important on-demand economy white paper, “Designing positive platforms: a guide for a governance-based approach” to on-demand marketplaces. Their focus on governance, the rules of engagement between a platform and worker, as well as the way the platform ensures representative and transparent practices to minimize information asymmetries in their markets, is critically important. As a former Chaordic Commons trustee, I can attest to the difficulty in creating governing documents like the IFTF advocates. The IFTF framework is an invaluable contribution to this dialogue. Read it for yourself. Summaries won’t do it justice.  And there is a useful list of companies studied for the report.

Gig worker payments are shifting to day-of-delivery and direct deposit. Lots of interesting data points in this PYMNTS.com article. PayPal is the conduit for 35 percent of gig workers’ payments and 54 percent of workers use direct deposit.  Drivers use direct deposit far more than other categories. I imagine we will see a day when a job contract is a debit card.

Amazon may not have cashiers in its Go convenience stores, but Bolt, a San Francisco startup just coming out of stealth mode, according to TechCrunch, is angling to help the rest of the stores on Main Street catch up. The initial services focus on online commerce, from check-out to fraud and business intelligence. Transaction platforms like this will survive and thrive based on customer engagement. Bolt looks ready to attack the cart abandonment problem today.

Omnicom, the ad conglomerate, incubated Spry, an on-demand public relations firm, which launched this week. The business idea turns on the idea that editors make the press release professional, and freelancers can be called on to generate drafts quickly and cheaply. Content.ly for press releases is a wedge, but the agency faces competition from full service firms that can amplify the messages they create. Omnicom’s spin-out, Cision, and PRNewswire businesses will eventually play a part in Spry’s success.

Mastercard launched the Inclusive Futures Project to address on-demand transactions, government services, and smart cities experiments. Here is the plan and partner projects announced today, with this explanation of the focus: “Two commercially viable segments surfaced as areas in need of more dedicated focus and research: Struggling Middle Income consumers and Gig Economy workers. The reality is: all too many of these individuals and their families fight to achieve and maintain financial stability; and as such, consistently find themselves excluded, unable to reap the benefits of a growing economy.”

Drones are coming with your stuff. Dorado, a European on-demand delivery service says drones are two to six times cheaper and 1o times faster than current options. What is Dorado’s play? To raise $55 million through a ICO to fund its go-to-market strategy for home and business deliveries in Europe. The firm has raised $r million from Goldfish Fund, an ICO-centric institutional fund.

Fiverr tells Crunchbase News it acquired AND CO, a SaaS platform for freelancers and self-employed workers. A video release explains the deal. The company suggests this deal indicates consolidation is underway in the on-demand economy. It’s just the first wave. AND CO had previously raised $2.5 million.

GoDaddy doubles down on SMB social commerce

GoDaddy has acquired Main Street Hub, a social marketing tools and services company, for $125 million in cash with $50 million in  performance incentives, according to TechCrunch. This is interesting for several reasons:

  • SMB marketing must evolve to support on-demand and in-home engagement.
  • SMBs generally favor Do-It-With-Me and Do-It-For-Me (DIFM) models over Do-It-Yourself marketing services. Only 22.5 percent of respondents to the latest BIA/Kelsey survey of SMBs preferred DIFM services.
  • Scale in services is difficult to achieve, and at 10,000 SMB customers Main Street is at a tipping point that will determine if it can grow.

GoDaddy’s 17 million U.S. small business customers must appear a ripe target for Main Street. GoDaddy, too, has searched for additional revenue from SMB customers. At some point in the negotiations, someone at the table must have said “Pitch [Main Street} to the 28 million SMBs in the United States, and we’re sure to generate a billion dollars or more in fees.” In fact, it would take 333,000 customers at Main Street’s current entry price to make that goal.

However, scaling up a services-centric business is much more complicated than automated services, such as website hosting or email marketing delivery. The cost of delivering marketing services rises with each client as that client adds services, scaling linearly, at best, or producing lower margins in many circumstances. When I worked on web hosting at hibu a few years back, the only viable way to deliver web sites was outsourcing to the Philippines, and even that was challenging.

The other factor to consider is SMBs’ tendency to bring services in-house once they feel they have a process they can reproduce. Main Street’s best customers are likely to migrate to automation and in-house resources if they succeed.

The next phase of marketing requires local familiarity, not simply marketing competence. This means people must be familiar with the culture they are marketing into, and that points to lots of U.S.-based consultants. That is not cheap, yet TechCrunch calls this acquisition a “perfect match.”

Main Street assigns an account manager to each small business client, with pricing starting in the $250/mo. range, or $3,000 a year. That’s a small market, representing a few million U.S. businesses, at most. Meanwhile, Salesforce, Oracle, Amazon, and others continue to move their services down-market, into direct competition for these companies.

GoDaddy is taking a big bet in an intensely competitive sector. It isn’t a sure thing, and requires additional features and local expertise that will be hard to scale.