Sharing Economy Services: Business Model Generation

The Evolving Sharing Economy

A 2010 book by Botsman and Rogers ¹⁸ described the vision of “sharing,” which was the main attraction behind the rise of the sharing economy movement. Since then, innumerable articles about the sharing economy have been published in the popular press and consulting company reports, ¹⁹ essentially painting a rosy picture of the movement. Most of those articles do not contain any hard-nosed analysis and often just reiterate the original vision about the benefits of sharing and the claims made by websites and promoters of SES companies. A report by Brookings India, ²⁰ however, provides an interesting insight into the emergence of the sharing economy in the other parts of the world. Since most customers in underdeveloped economies, such as India, cannot afford to acquire even moderately expensive assets, the opportunity to use those assets through the sharing economy concept is highly appealing. Thus, sharing economy companies are likely to have a very bright future in the underdeveloped economies of the world. A recent book by Sundararajan provides a thoughtful survey of the developments in the sharing economy in the United States and in Europe. ²¹

In the past few years, however, articles and blogs have started to raise red flags about the disconnect between the current reality and the original vision in the sharing economy. ²² Two recent books on the sharing economy, one by Hill ²³ and the other by Slee, ²⁴ argue that the business practices of some of the largest and most successful SES companies, such as Airbnb and Uber, have evolved into something different than that envisioned by the early SES firms. The leading companies have become large corporations themselves, and the profit-making motive now seems to be the only driver in carrying out transactions in an unregulated, free market sense. The researchers argue, with convincing evidence, that the success of SES companies stems primarily from their objectionable business practices, such as not following, to the extent possible, the rules and regulations under which their traditional competitors operate—thereby avoiding the associated expenses—and keeping the suppliers of the service (such as drivers of a ride-sharing service) off the payroll, treating them instead as independent contractors—thereby minimizing costs by not paying benefits such as pension obligations, vacation time, or worker insurance against injury.

Transaction Cost Economics

A basic assumption in neo-classical economics is that all economic agents have access to full information about the quantities and prices of all products and services, as well as about all production and consumption possibilities, and that the only costs to be considered are the costs associated with production and consumption. ²⁵ Coase changed this basic assumption by introducing the real-world view that economic agents only have access to limited information and that they incur many costs in transacting in markets. ²⁶ He argued that due to the existence of “transaction costs,” which can be quite large at times, economic agents find it beneficial to organize large economic entities (such as corporations) to produce goods and services and thereby lower transaction costs. Thus, Coase offered transaction costs as the primary explanation for the existence of large-scale enterprises. Were there no costs of transacting between the agents in markets, the structure of industries would be composed of individual buyers and sellers of goods and services.

Williamson further developed the concept of transaction cost economics by building on Simon’s bounded rationality hypothesis. ²⁷ Williamson argued that transaction costs are created due to the fact that all economic agents exhibit bounded rationality and act opportunistically, that assets have specificity in their use, that transactions are carried out with smaller or larger frequencies, and that uncertainties cannot be avoided.

Applying transaction cost economics to the sharing economy, Henten and Windekilde ²⁸ explain that the main innovations offered by SESs are the multisided platforms ²⁹ they provide that easily link buyers and sellers of services to significantly reduce transaction costs. This reduction in transaction costs is the main reason why there has been an explosion of innovative service economy enterprises in the United States.

The transaction costs have also been significantly reduced by SES companies that are taking advantage of a concept known as “service inventories.” This concept was first introduced by Chopra and Lariviere ³⁰ and subsequently expanded upon by Davis, Field, and Stavrulaki. ³¹ The goal in creating service inventories is to facilitate and/or reduce the steps (and time) in the service delivery process, which lowers transaction costs and creates customer value during a service encounter.

Another factor that has been facilitated by technology, especially cloud technology, is the ease of access to these SESs. Berry et al. ³² identified service innovations—in terms of how firms provide access to their core services—as opportunities for companies to either develop previously untapped markets, as with SESs, or gain a competitive advantage, exemplified by Amazon’s online book sales in contrast to Borders’ (which is now defunct) store-based retail sales.

The ease with which SES companies can collect payments from their customers and pay their service providers has had a significant positive impact on their growth and this can also be attributed to advances in technology. It is not a coincidence that online payment system companies such as Stripe (used by Lyft and TaskRabbit) and Braintree (used by Uber), among many others, emerged around the same time as the SES companies. The payment processing APIs (Application Programming Interfaces) of the payment system companies are easy to embed within the digital platforms of SES companies, and that has made it easier for the SES companies to receive payment from its customers and to pay their service providers, such as Uber drivers and Airbnb homeowners. Moreover, some of these online payment system companies are also able to split payments from customers. This ability enables services where a group of customers sharing a service (such as an Uber ride or an Airbnb home) can each pay for his or her use separately using their individual apps.

The Service Triads

Although a dyad consisting of a buyer and a seller of goods or services has been the focus of research in business and economics for a long time, the study of triads has gained considerable importance and momentum in the last two decades. Earlier work by Smith and Laage-Hellman described the importance of small networks as a basis for understanding particular aspects of network structure and processes. ³³ Subsequently, studies in manufacturing by Choi and Wu, ³⁴ informed by social network theory, brought the triad to the forefront as an object of investigation, while Li and Choi extended the study of triads to service settings. ³⁵ In their lead article in a special issue on service triads, Wynstra et al. provide a review of different strands of research and various theoretical frameworks that are useful for studying service triads. ³⁶ They find that service triads are currently studied in several fields including operations management, supply chain management, management and organization studies, and the social sciences. Another useful survey article by Sengupta et al. identifies ten themes of research in service triads. ³⁷

In service triads, the end customer contracts with an intermediary firm (exemplified by an SES company such as Airbnb), but the service is provided to the end customer by a subcontractor of the intermediary firm (such as a homeowner willing to rent a room in the case of Airbnb). Here, the service interaction takes place essentially between the service provider and the end customer. Figure 1 shows the basic structure of the service triad in the sharing economy. Since the intermediary firm does not provide the service, it needs to establish and nurture its relationship not only with the customer but also with the service provider. Thus, in a service triad, the intermediary firm faces what Eisenmann et al. call a two-sided market. ³⁸

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Figure 1.

Service triad with sharing economy service.

Li and Choi have examined the dynamics of service triads. ³⁹ Among a number of findings, they argued that the role of the service provider is potentially critical and that the ongoing interactions between the service provider and the customer, after service delivery begins, can undermine the relationship between the intermediary and the customer in the long run. Hence, unless the intermediary firm, that is, the SES company, offers a unique value, it can face a risk of disintermediation, whereby the customer establishes a direct relationship with the service provider in accessing the service in the future.

The service triad is a unique form of the service constellation concept that was introduced by Normann and Ramirez, ⁴⁰ who suggested that value creation in services is not linear as defined by Porter’s value chain, ⁴¹ but rather requires cocreation with several entities (including customers), which often occurs simultaneously. (The concept of value cocreation involving both producers and customers is one of the major components in the seminal work on Service Dominant Logic [SDL] that was introduced by Vargo and Lusch. ⁴² ) The recognition that the cocreation of value by both suppliers and customers is especially important for SES companies is demonstrated by the fact that both suppliers and customers often have the opportunity to evaluate each other through surveys.

As Kwan and Hottum point out, ⁴³ these triads are part of a larger service system that often involves many players. Thus, the multisided platforms that SES companies operate are designed to accommodate additional players. Examples of these additional players include credit card companies for payments and social media companies such as Facebook and Yelp that provide customers’ evaluations of the services. Multisided platforms and two-sided markets are key concepts associated with sharing economy companies in that they shape their economics of the industry and influence the competitive dynamics. It is important to keep in mind the relationship and differences between these key concepts. The two-sided markets represent an economic/actor perspective about actions taken, while multisided platforms are the organizations (and their products or services) that create value by linking and enabling direct interactions (between two or more sides) that improve the ease of conducting business and reduce the transaction costs.

SESs: A Classification

We identify three categories of SES companies based on the resources they offer to their customers.

The Evolution, Business Practices, Industry Economics, and Impact of SES Companies

The term sharing economy suggests two things that are somewhat contradictory to each other. ⁴⁶ On one hand, the idea of “sharing” suggests noncommercial, person-to-person or P2P exchanges that involve no money and that are driven by the desire to help others by sharing resources. On the other hand, the term “economy” suggests market transactions involving an exchange of goods or services for money. Interestingly, the contradiction between the first and the second words in the term sharing economy also reflects the evolution of the sharing economy itself.

Kessler pointed out that while sharing is a much-loved idea, the companies formed in the earlier years that were based on the idea of sharing in its purest form have been mostly unsuccessful. ⁴⁷ Consider, for example, SES companies based on sharing a power drill, which probably is used for only 15 minutes total in its entire lifetime. That being the case, why not rent a power drill or rent out your own power drill to other people and make a little money? The argument makes perfect sense. However, of the eight SES companies that were launched based on this idea, only one company, NeighborGoods, survived for a few years, and that too eventually folded. The reason behind these failures is the relatively high transaction cost. It seems that most customers who need a power drill prefer to simply buy it at a cost of, say, $30 and not spend an hour of their time to locate, pick up, and return the tool, plus pay a small rental fee. Hence, it is essential that even when the idea of sharing is highly attractive, an SES company must carefully evaluate and minimize the transaction cost involved in sharing.

Two companies that have become successful despite their primary focus on sharing have appealed to an inherent human tendency, as social creatures, to share with others what they have, while explicitly making clear that the company’s main aim is to help share and not make money. These companies are BlaBlaCar, a French SES company that helps passengers undertake inexpensive, long-distance, intercity travel, practically at cost, and CouchSurfing, which allows travelers to stay for free as guests with locals. Interestingly, CouchSurfing decided to change its status from a nonprofit to a for-profit company, and that move has led to serious objections by many members and to a string of ongoing problems for the company.

As is expected in any new industry, SES companies have experienced their share of failures. For example, FlightCar, a P2P airport car-rental company, was launched in 2013 to connect visitors interested in renting cars at the airport with locals looking to park their cars before flying out. The idea was promising, but the company was closed in 2016, primarily because it was focusing mainly on growth before putting in place a reasonable business process for achieving a good service-market fit, and due to its patchy and poor service quality. ⁴⁸ Another example is Sidecar, which started as a ride-share company in 2011. Being a late entry into this market, it struggled to compete with Uber and Lyft and ultimately closed in 2015 after trying to deliver groceries and food before its closure. The main reasons behind Sidecar’s failure were legal/regulatory problems, a lack of focus and perseverance, and an inability to achieve scale and efficiency in a reasonably short time.

Although it is true that the sharing economy is growing fast, and this growth is forecasted to continue, the sharing economy faces significant challenges going forward, which include the following ⁴⁹ :

Uber, Airbnb, and Taskrabbit are perhaps the best-known companies in the three categories of SES companies proposed earlier, and they represent a major portion of the total revenue and market valuation of the sharing economy. As mentioned earlier, all three companies have come under severe scrutiny concerning their questionable business practices in recent years. ⁵⁰

Uber has been highly successful in terms of its phenomenal growth in both market share and revenue, but what is not particularly well-known is that it also happens to be one of the largest loss-making private companies in the tech industry. As the Associated Press recently reported, in 2017, the company lost $4.5 billion on an annual gross revenue of $37 billion. ⁵¹ With the need to maintain a two-sided marketplace involving passengers and drivers, the company offers low fares to attract customers and sign-up bonuses to drivers to maintain a large enough pool of drivers. This has significantly hurt its profitability. Uber does have economies of scale in its operation, but evidently it has yet to reach a scale sufficient to start making a profit, raising the question of whether the company is ever going to make a profit.

Uber has also run afoul of livery regulations in almost all the cities in which it offers its services. Uber’s history of scandals and disregard for local rules finally caught up with it in September 2017 when London’s transportation authority ruled that Uber is not a “fit and proper” operator and declined to renew the company’s license to operate in the city, Uber’s largest European market. ⁵² The reasons cited by the authority when explaining its decision include the company’s questionable safety record, its bypassing of regulations that licensed taxi services have to follow (screening of drivers, inspection of vehicles, and employment laws), and its avoidance of tax payments by registering the company in another country. In addition, in December 2017, the European Union’s court ruled that Uber should be regulated like a taxi company and not a technology service, a decision that is likely to constrain Uber’s activities in European countries. ⁵³

Roose reported that, at present, most SES companies are small, are losing money, and are mainly surviving on venture capital. Dozens of “Uber for X” start-ups that raised millions of dollars to launch SES companies in industries such as laundry, parking, and grocery delivery have run out of capital before reaching the necessary break-even volumes. ⁵⁴ Since many SES companies face the same problems that Uber did—spending more than their revenues or subsidies, and marketing and sales to get additional customers and providers—a bumpy road is not necessarily out of the picture for the industry.

Although the current size of the sharing economy, relative to the total economy, is small, SES companies have had a measurable impact in the service sectors where they have established themselves. For example, a study that examined hotel revenues in Texas showed that in those areas where Airbnb had a major market penetration, the revenues of hotels had significantly reduced in comparison to no decrease in revenues in similar hotels in areas where Airbnb had not established a presence, with economy or budget hotels being the most affected. ⁵⁵ Another study in the hotel industry, as reported by Gerdeman, ⁵⁶ confirms that in those geographical areas where Airbnb had significant market penetration, hotel room bookings and revenues had decreased. This is attributed to the fact that during peak periods, hotels typically charge a premium for rooms, but individuals, through Airbnb, seeing the opportunity to make higher than normal income from renting out their rooms and apartments during these peak periods, make them available when they otherwise would not. This is one of the major advantages that SES firms have over traditional services: the costs that are fixed for traditional services (i.e., for rooms, cars) are variable costs for SES firms. An increase in rates, be it for a room or a ride, increases the available capacity for SES firms.

As another example, consider the impact of Uber on the taxi industry in New York City. There has been a drop in the average price of a taxi medallion in New York City from $1.3 million in 2013 to $900,000 in March 2017. ⁵⁷

Common Characteristics of SES Companies

The SES companies we studied had several common characteristics:

Business Model for SES Companies

A business model is defined by Teece as “a design or architecture of the value creation, delivery and capture mechanism.” ⁵⁹ Over the past two decades, business models have received increased attention among practitioners and researchers. However, as Foss and Saebi state in their survey article, ⁶⁰ “emerging business model innovation literature lacks theoretical underpinning and empirical inquiry is not cumulative.” Since developing a proposed set of business model building blocks for SES companies is a goal of this empirical study, we had an opportunity to address these gaps. Accordingly, we selected the business model by Osterwalder and Pigneur ⁶¹ as a starting point in developing the proposed business model. The Osterwalder and Pigneur model, well-known in the practitioner world, consists of nine basic building blocks: Customer Segments, Value Proposition, Channels, Customer Relationships, Key Resources, Key Activities, Partnerships, Revenue Streams, and Cost Structure. In addition, we also referred to a survey of business models of e-businesses by Zott et al. to become familiar with the building blocks proposed by researchers. ⁶²

Proposed business model building blocks

To investigate whether Osterwalder and Pigneur’s business model building blocks are suitable for adequately describing the business models of SES companies, we applied those building blocks to several SES companies we had studied. This exercise made it clear to us that to properly describe the way SES companies create, deliver, and capture value, the best approach would be to add two new building blocks and make slight adjustments to the original set of building blocks in Osterwalder and Pigneur’s model.

The primary business of SES companies is to create a match between customers and suppliers of a service. Hence, we suggest using “suppliers” as a new building block, which was not explicitly included in the original set. In addition, because SES companies typically enter existing markets with entirely new business models in terms of how they operate, analyzing traditional competitors and defining competitive priorities for these companies become highly important. Hence, we introduce “competitive priorities” as the second new building block. Furthermore, since we invariably found it easier to think through “customer relationships” while defining the “customers” building block, we decided to merge these two to create a single modified building block having the same name, “customers.” With the same consideration, we also merged “key resources” with “key activities” into a single modified building block titled “key resources and activities.” Thus, we believe that using all the original building blocks by Osterwalder and Pigneur, albeit in terms of seven as opposed to nine blocks, along with two new building blocks added to the set, will be suitable for describing the business models of SES companies. To confirm the validity of this assertion, we used our modified set of nine building blocks to describe the business models of all the SES companies in our study. We found that the set was indeed sufficient and suitable. We emphasize that this is an empirical finding and to that extent, the set of building blocks we propose is perhaps not the only way to describe the business models of SES companies, but what we propose was perfectly suitable for describing the SES companies we studied. Figure 2 presents a schematic diagram of the proposed business model building blocks, which is then followed by their short descriptions:

Competitive priorities: There are several well-known frameworks for determining an organization’s competitive priorities. Two of the more popular frameworks developed by Porter and by Treacy and Wiersema offer a low-cost alternative as a specific strategy that firms can adopt. ⁶³ Low cost appears to be the strategy, at least initially, that SES firms typically adopt. The low-cost approach is also the preferred alternative for new businesses with a novel approach for creating customer value in a vast array of industries, ⁶⁴ primarily because the technology adopted by SES companies readily supports this strategy.

Value propositions (for customers, suppliers, and partners): For the long-term success of an SES company, it is important to use its competitive priorities as the basis to clearly define its value propositions to customers, service providers, and partners, and ultimately to deliver them in practice. The primary value that SES companies create for their customers is the company’s ability to quickly link customers seeking a specific service to a supplier that can provide the desired service. Value to the customer is therefore measured along several dimensions, including convenience in locating a suitable supplier, response speed (whether it is to an inquiry for a house rental or a request for transportation), and variety of offerings (which, with respect to rental properties, can be location and types of properties; for labor it can be the different skill levels that can be provided).

Customers: For SES companies, customer demand is obviously created through the cloud. Consequently, one could argue that the customers for SES companies are segmented by their ability to use technology in one form or another. The way an SES company manages its relationships with its customers through the digital platform to increase trust and loyalty of customers is very important for the company’s long-term success.

Suppliers: Since the SES companies do not create and deliver the service themselves, it is critical that they recruit, monitor, and nurture the best set of suppliers who are responsible for the creation and delivery of the service. The business development activities toward that end are therefore very important. Managing relationships with suppliers is also critically important.

Partners: For SES companies, a partner refers to an organization that plays a supportive role in the service creation and delivery process. Typical SES partner companies are payment systems companies, credit card companies, insurance companies, and rating services such as Yelp and Trip Advisor that provide feedback on previous customer experiences.

Delivery channel: Creating the best possible match between the customer and the service provider is the fundamental value-add of SES companies. Accordingly, the use of internet and mobile app software platforms for that purpose is the distinguishing characteristic of SES companies. It is therefore critical that this software platform be carefully developed and continually improved to offer the best service and value to customers and service providers.

Key resources and activities: An SES company should acquire all the needed resources, such as information technology assets, so that it is able to perform the activities required for its business models to work. The key activities in the delivery process must be designed to maximize efficiency and minimize transaction costs for the customers, deliver on value propositions, and create and nurture a network of customers, suppliers, and partners. Key activities common to almost all SES companies are the development and maintenance of a software platform that can suitably match customers and suppliers in a timely manner, the maintenance of a database of customers and suppliers, and the establishment of performance monitoring systems by seeking feedback from customers and suppliers.

Revenue stream: As is true for all companies, generating revenues and profits are the primary goals of SES companies. Hence, understanding the revenue stream that an SES company can generate—through such means as transaction-based commissions, membership fees, rental or advertising fees, and profit margins on suppliers used in service creation—is important.

Cost structure: SES firms provide the networks that link customers wanting specific services to individuals or firms that provide them. Consequently, their primary costs are the fixed costs associated with creating the digital platform and the variable costs associated with maintaining the platform, increasing the number of customers, and enlarging the supplier base. This results in economies of scale in operation.

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Figure 2.

Business model building blocks for SES companies.

As mentioned earlier, we used the proposed set of building blocks to describe the business models of 43 SES companies that were in operation at the time of our study. We found that the business models of SES companies offering the same type of service were highly similar. For example, Getaround and Turo are both P2P car-rental companies that allow private car owners to rent out their vehicles to individual customers via their digital platforms. The business models of these two companies are essentially the same. Hence, we felt that illustrating the business model of only one of these two companies was sufficient for the purpose of this article. Applying the same logic, we present in Table 1 the business models of 25 selected SES companies as a sample that represents a large number of companies across all service types included in the study. The remaining 18 SES companies belonged to several service types (the number of companies studied for each service type is shown in parenthesis): transportation (3), delivery (1), dog walking (1), parking (1), laundry (2), miscellaneous trades (5), and professional services (5).

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Table 1.

Business Models of Selected SES Companies.

Resource Shared	Service Type	SES Company	Traditional Competitors	Selected Business Model Building Blocks
				Value Proposition	Customers	Suppliers	Partners	Revenue Streams	Cost Structure
Asset	Lodging	Airbnb	Hotels, inns, B&Bs, and so on	Less expensive room/apartment rental, extra income for property owner, convenience	Customers in need of short-term lodging	Homeowners willing to rent rooms/houses	Credit card companies	Transaction-based revenue (commission and credit card processing fee)	Fixed corporate overhead, economies of scale
		HomeAway	Hotels, listing of homes by owners	Less expensive home rental for customer, extra income for property owner, convenience	Travelers in need of vacation home for short-term rental	Owners willing to rent house	Credit card companies, companies affiliated with HomeAway	Transaction-based revenue	Fixed corporate overhead, economies of scale
		CouchSurfing	Hotels, B&B, Airbnb, and so on	Free lodging as a guest with locals for customers, host travelers, make new friends for property	Stay as a guest at no cost with locals and make new friends	Homeowners willing to host travelers for free	Credit card companies	User fee for members	Fixed corporate overhead, economies of scale
	Transportation	Getaround	Car rental companies (Hertz, Avis, etc.)	Less expensive car rental for customers, extra income for car owners	Drivers interested in renting cars	Car owners interested in lending their cars for rent	Credit card companies	One time fee ($99) for digital key, transaction-based revenue	Fixed corporate overhead, economies of scale
		Boatsetter (Boatbound)	Boat renting companies, Private boat owners	Easy boat renting, ability to hire a captain for customers, extra income for boat owners	Customers interested in short-term rental of boats	Private boat owners	Credit card companies	Transaction-based revenue (commission and credit card processing fee)	Fixed corporate overhead, economies of scale
	Storage	Roost	Companies offering storage space	Less expensive rental of storage space, extra income for property owners	Customers in need of storing household goods, cars, boats, and so on	Owners willing to rent storage space	Credit card companies	Transaction-based revenue	Fixed corporate overhead, economies of scale
Asset & Labor	Transportation	Uber	Taxi companies	Convenience plus time/cost saving in transportation, income for drivers	Customers in need of rides within a city	Drivers with cars willing to drive (as contractors)	Credit card companies	Dynamic pricing, transaction-based revenue	Incentives for drivers, fixed corporate overhead, economies of scale
		Lyft	Taxi companies	Convenience plus time/cost saving in transportation, income for drivers	Customers in need of rides within a city	Drivers with cars willing to drive (as contractors)	Credit card companies	Dynamic pricing, transaction-based revenue (commission)	Incentives for drivers, fixed corporate overhead, economies of scale
		BlaBlaCar	Intercity mass transit	Inexpensive intercity transport at cost for passengers, reduced cost for drivers	Passengers in need of long-distance intercity rides	Drivers willing to share a ride with passengers	Automobile companies	Membership fee	Fixed corporate overhead, economies of scale
	Delivery	Postmates	e_Commerce companies	Convenience in ordering goods, extra income for merchants and drivers	Customers in need of delivered goods	Drivers	Merchants, credit card companies	Transaction-based revenue	Fixed corporate overhead, economies of scale
		UberEats	Restaurants that deliver	Convenience in ordering food, extra income for restaurants and drivers	Customers in need of delivered food	Drivers	Restaurants, credit card companies	Transaction-based revenue plus delivery charge	Fixed corporate overhead, economies of scale
Labor	Dog walking	Wag	Individual dog walkers	Dog walking	Dog owners in need of dog walking	Individual dog walkers (as contractors)	Credit card companies	Transaction-based revenue (commission: 40%)	Fixed corporate overhead, economies of scale
		DogVacay	Dog kennels, dog walkers	Dog boarding/sitting	Dog owners in need of dog sitters	Dog lovers willing to serve as dog sitter	Credit card companies	Transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
		Rover	Dog kennels, dog walkers	Dog boarding/walking	Dog owners in need of dog boarding and/or walking	Dog boarders/walkers	Credit card companies	Transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
	Handyman	Handy	Companies/individual handymen offering various home maintenance/cleaning	Convenience in locating handyman, fixed, reasonable prices, guaranteed work	Customers in need of a handyman	Individual handymen (contractors)—plumbers, electricians, janitors	Credit card companies	Fixed prices for jobs, commissions	Fixed compensation to workers for jobs
		TaskRabbit	Companies/individual handymen offering various home maintenance services	Convenience in locating a handyman, negotiate to get low prices, guaranteed work	Customers in need of a handyman	Individual Taskers—plumbers, electricians, and so on	Credit card companies	Transaction-based revenue (15%-20% commission)	Fixed corporate overhead, economies of scale
		Angie’s List	Companies offering home maintenance and other services	Home services	Customers in need of a home maintenance service	Companies performing the service	Credit card companies	Transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
		homeadvisor	Companies offering a range of home improvement services	House remodeling	Customers in need of a home improvement	Companies performing the home improvement service	Credit card companies	Transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
	Professional	bestdoctors	Clinics, hospitals	Diagnosis by expert physicians, second opinions	Individual patients, organizations	Physicians	Employers, insurers	Transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
		heal	Clinics, hospitals	On-demand home visits, flat price	Patients	Physicians	Employers, insurers such as Anthem/Blue Shield	Visit fee, transaction-based revenue (commission)	Fixed corporate overhead, economies of scale
		zocdoc	Clinics, hospitals	Convenience in selecting physician, checking availability	Patients	Physicians	Employers, insurers	Subscription fees by health care providers	Fixed corporate overhead, economies of scale
		vetpronto	Veterinary clinics	Convenient, house calls on appointment by vets, fixed low price	Pet owners in need of veterinary service	Veterinarians	Credit card companies	Commissions	Fixed corporate overhead, economies of scale
		avvo	Firms offering legal advice	Offer inexpensive legal advice (15 minutes for $39)	Customers/lawyers needing answers to legal questions	Lawyers	Credit card companies	Revenue from ads, subscription fee for AvvoPro	Fixed corporate overhead, economies of scale
		yourmechanic	Auto repair shops and dealers	Auto repair	Customers needing car repair service	Mechanics able to fix the car	Auto parts suppliers	Profit margins on parts used in the car repair	Fixed corporate overhead, economies of scale
		Tutor.com	Individual tutors and small tutoring companies	Online immediate access, easily and quickly find tutors on a wide range of subjects	Students in need of a tutor	Tutors	Military, libraries, corporations	Commissions from hourly fees charged to students	Fixed corporate overhead, economies of scale

Note: For brevity, three building blocks—competitive priorities, delivery channel, and key activities—are not shown in this table. SES = sharing economy service.

It should be noted that for the sake of brevity, we have not presented information about three building blocks in Table 1: competitive priorities (since most SES companies seem to use low cost as the main competitive strategy), delivery channel (internet and mobile apps were invariably the main delivery channel), and key resources and activities (based on our understanding of the industry and service operations we did prepare lists of key resources and activities, but those lists were rather detailed and long).

Managing Growth Is Critical

As an intermediary in the service triad, the SES companies operate in a “two-sided marketplace.” Consider, for example, the experience of Uber. As mentioned earlier, the more riders there are on Uber’s platform, the better it is for drivers because they can earn more money. Conversely, the more available drivers there are, the better it is for riders because they can obtain rides in shorter times at lower prices. This positive feedback cycle implies not only first mover advantages but also the potential for winner-take-all dynamics. Kick-starting this positive feedback cycle is a primary challenge for any SES company. Uber seems to have met this challenge by raising huge sums of money from venture capitalists and using it to nurture its two-sided marketplace and growing rapidly in over 60 cities around the world. However, this has also led to continued, significant losses for Uber.

In managing growth, an SES company should carefully evaluate whether the industry it operates in and the competitive situation it faces are favorable for a winner-take-all outcome, in which only one platform survives. In general, a networked market will be served by the single platform only when the costs of enrolling in multiple platforms are too high for both sides of the market. ⁶⁵ In the case of a ride-sharing service, the cost of switching from Uber to, say, Lyft is rather low for customers, and it is not particularly high for drivers either. Hence, the ride-sharing service is not conducive to a winner-take-all outcome, and it is likely that several platforms will survive and thrive in that market. In addition, as discussed earlier in the ride-sharing service, the network effects are weak. SES companies are well-advised to take calculated, measured steps in growing their businesses versus burning large amounts of capital to grow very rapidly in service markets where multiple platforms are likely to survive.

The final consideration in managing growth is the need to reach a sufficiently large volume of business in a reasonably short time. Essentially, all start-ups must reach a financial break-even volume before they burn all their start-up capital. Otherwise, their fate will be like that of many start-ups that went bust in the dot-com era of the late 1990s and early 2000s.

First Develop a Supplier Base and Then Attract Customers

SES companies focus on connecting customers with service providers, but they themselves do not create and deliver these services. Hence, the process for selecting and managing the supplier base that provides these services is critical to ensure a consistently high level of service quality. This is a major factor in the long-term success of SES firms (as it is for all firms). As we have found in our case studies, and as Andruss ⁶⁶ and Blanding ⁶⁷ argue, the first ideal step is to develop a reliable set of suppliers for the service that the SES company plans to provide; the next step is to then focus on attracting the right customers for these suppliers.

For example, consider Uber, whose process for screening drivers has recently come under severe fire in a CNN investigation that reported that a large number of Uber drivers have been accused of sexual assault or abuse of female passengers. ⁶⁸ At the other end of the spectrum is Rover, a dog boarding and walking service that connects dog owners with a network of dog lovers for hire. Rover is known for its rigorous screening and training program for its service providers. ⁶⁹ Rover uses an extensive review process that involves checking references, conducting background checks, and verifying social media accounts. The company also conducts online training and a review to ensure that every supplier applicant interested in providing the service has the personality, experience, and environment suitable for the dog-sitting or walking service. We believe that undertaking such a rigorous screening of suppliers to eliminate undesirable service providers must be viewed as a critical success factor by an SES company; otherwise, the company risks unfavorable press concerning poor service quality immediately after the launch of the service.

Design the Service Delivery Process to Add Value to Customers and Reduce Transaction Costs

In our study, the successful SES companies were those that were able to make the service delivery process as efficient as possible. The design and development of the software is of paramount importance in this regard, but there are several other factors to consider in designing the operational processes:

Ensure Service Quality, Create Good Customer Experience, and Foster Trust

Ensuring a high and consistent level of service quality is very challenging because it is highly subjective, being primarily dependent on the perceptions of the customer. Parasuraman, Zeithaml, and Berry, in their seminal research project, identified five dimensions of service quality: reliability, tangibles, responsiveness, assurance, and empathy. ⁷⁰ They also introduced the Service Quality Gap Model, which provides service practitioners with a viable framework for improving the service quality of their offerings. ⁷¹

SES companies that are able to perform well on these dimensions are more likely to be successful in the marketplace. In addition, tangibles are particularly important for certain SES companies when physical assets are involved, such as rooms, apartments, or vehicles. Hence, proper maintenance and care of such physical assets is important for those SES companies. As discussed earlier, the research in service triads indicates that SES companies run the risk of being disintermediated. Given this finding, we believe that it is all the more important for an SES company to consistently deliver high-quality service and ensure long-term customer loyalty.

Another challenge for these thin stack companies is ensuring the quality and consistency of the experience received by the customers. Each of the suppliers typically operates independently of the other suppliers in the network, and often, these suppliers are relative novices, such as residential owners offering their homes/apartments for rent for short periods of time. Consequently, these suppliers may not have had the proper training necessary to create great customer experiences. Some firms, such as HomeAway and Airbnb, provide reviews by previous customers, but many suppliers do not have any reviews, and those that do typically have only a small number of reviews available, which are not necessarily highly reliable. Therefore, SES companies should ideally provide a certain degree of training to suppliers and make customer reviews available to their suppliers to ensure that a high and consistent level of service quality is provided to all customers.

Offering great customer experiences goes hand-in-hand with fostering trust. But building trust with customers can be somewhat difficult for an SES company because it primarily interacts with its customers via an online digital platform, and not via face-to-face contact. However, an online platform also offers the capability to show customers photos or videos of the service delivery in action, which can be used to foster trust. For example, Rover offers the ability to share photos of dog sitters interacting with dogs. In addition, it offers 24/7 veterinarian consultations to ease dog owners’ worries about their pets, thereby fostering trust among its customers.

Recommendations for Traditional Service Firms That Compete with SES Companies

For traditional firms to successfully compete with the SES companies, Cusumano offers a few suggestions, ⁷² including the following: work with local governments to level the playing field with respect to rules and regulations by ensuring that these are not being violated by SES companies; provide a significantly higher level of service and greater standardization across locations that, at least in the short run, the SES firms will not be able to match because their suppliers are typically inexperienced independent operators; and continue to segment the market, focusing on those segments where SES firms cannot compete, like large groups and conferences in the hotel industry.

Traditional service companies also need to recognize that SES companies are not a passing fad; rather, in many cases, they represent the future direction of business in terms of emerging business models and new market segments, often cannibalizing the business of existing traditional firms. The traditional businesses do, however, have some options, as noted above, for competing with these SES firms, but they must be willing to adapt, be flexible, and adjust their businesses accordingly.