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Why Are Sharing Economy Companies So Successful?

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Since the introduction of the sharing economy, traditional industries have been in a frenzy, governments have been scrambling to change their legislations, and venture capitalists have invested more in startups than ever before.

It’s changing the entire economic landscape. Sharing economy businesses are becoming increasingly abundant and valuable, and traditional businesses are struggling to keep up.

Sharing economy businesses utilize a platform business model, which expands capabilities while minimizing cost. These are the top reasons these sharing economy platforms are doing so well.

Supply and Demand
The optimal level of economic output occurs where supply meets demand. It’s the first thing we learn in Econ 1. It sounds straightforward, but it’s something traditional businesses struggle with.

Demand is always changing. Week by week, day by day, hour by hour. But with traditional businesses, supply is fixed. To become a taxi driver, for example, you have to submit a bunch of paperwork, complete hours of training, and pass several tests. So taxi companies can’t add more drivers to accommodate spikes in demand.

For sharing economy companies like Uber, however, this isn’t the case. It’s much easier to become an Uber driver, so the company can easily increase demand. In the past two years alone, Uber has seen 400% in growth.

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Percent growth of driving-based industries, courtesy of Uber.com

Because of this, Uber can better match long-run demand, while the taxi industry remains stagnant.

And even if Uber’s supply outmatches user demand, the company doesn’t lose any money. Taxi companies, on the other hand, would lose profit by hiring too many drivers.

This also applies in the short run. For example, when the subway system in London shut down a few weeks ago, thousands of people suddenly needed a new way to get to work. And while all the taxis quickly filled up, Uber responded by tripling its fares.

This may have seemed like a cheap way to take advantage of a desperate situation, but in reality it was a strategy to pull more drivers to the roads where they were most needed. And it worked like a charm.

Efficiency
The sharing economy minimizes “waste.” It goes beyond matching supply and demand. It creates supply and provides it to unmet demand. The sharing economy incentivizes people to offer services they otherwise would never have offered.

For example, imagine you are trying to find parking in San Francisco. You’ll typically have two options: pay an outrageous sum of money at a parking lot, or go on a desperate hunt for an open spot on the street, which will most likely be a good distance away.

Meanwhile, hundreds of parking spots in garages all across the city are sitting idle while people are at work or out of town. This is where the sharing economy comes in. With platforms like JustPark, these idle parking spots can be offered to those who need them.

Without a platform to facilitate this, people would never bother to rent out their parking spots. But the sharing economy makes it easy. It’s making our society more efficient.

Producer Benefits
It’s easy becoming a producer in the sharing economy. There’s no long hiring process, no submitting resumes, no stressful interviews.

Being a producer in the sharing economy also doesn’t require any major commitments. It’s incredibly flexible. For some, it’s an easy way to earn a few quick bucks. For others, it’s a full-time job. There’s a huge range of possibilities, and that’s great for gig economy workers.

Consumer Benefits
The benefits will differ from platform to platform, but one that is mostly standard across all sharing economy businesses is convenience. A huge portion of what is being “shared” is services, which consumers would otherwise be doing themselves. With the sharing economy, there’s on-demand everything: grocery shopping, home-cleaning, laundry services, you name it. By essentially “outsourcing” these services via the sharing economy, consumers can save a great deal of time. And after all, time is money.

There’s also more variety with the sharing economy, both in price and product. The producer spectrum is incredibly diverse: it doesn’t consist of uniformed workers strictly following policies of a large corporation; it’s people providing services through the sharing economy, but essentially on their own accord. Producer diversity inevitably leads to consumer variety.

Technology and Innovation
People value efficiency now more than ever before. The sharing economy offers that efficiency, and technology is what makes it all happen.

Uber’s location technology is the foundation of its platform. OpenTable’s technology makes restaurant reservation data easily available. Instacart’s shopper app provides guidelines and tools that help the shoppers be as efficient and accurate as possible.

Sharing economy platforms also take advantage of mobile apps. These apps are often what take care of the entire core transaction. It’s all in the infrastructure. With platform businesses, apps do all the work, which in turn makes it easy for sharing economy companies to scale.

Scaling
Platform businesses are absolute rockstars when it comes to scaling. They don’t need to invest in physical capital to scale. This is because sharing economy platforms manage relationships between two groups, and they sit back and relax as these groups continue to scale.

Because of the platform business model, sharing economy companies have the ability to scale at zero marginal cost. Airbnb, with roughly 2000 employees, is worth more than Marriott, which is 123,500 strong. Marriott and other hotels have to invest huge sums of capital to expand, while it costs Airbnb nothing to expand its offerings. Linear businesses just can’t keep up.

The traditional industries can protest as much as they want, but the sharing economy is the wave of the future. And it’s here to stay.

This article was written by Erik Zambrano and Andy Hsu.

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