Chasing the Uber model is killing a lot of on-demand companies

Volatility in the on-demand economy has many citing a contraction. But is it all doom and gloom or is there another factor at play here?

On one hand, new startups are constantly launching in the space, capitalizing on the public’s growing need for instant gratification. On the other, VC money is drying up and down rounds in the on-demand arena are happening with increased regularity. From Instacart’s update to wages to the failure of the Zirx on-demand parking service and Zirtual’s uncontrollable burn, the viability of these companies is now in question.

Arguing that Uber was an anomaly and that similar companies are destined to fail might make for catchy headlines, but that doesn’t make it true. In fact, this implosion-opinion wrongly insinuates that “uberization” is synonymous with on-demand. The two are analogous, perhaps, but on-demand is bigger than Uber. The next generation of platforms are adapting in order to not just survive but thrive — first by entering new categories; second by evolving their business models; and third by enhancing and influencing a growing support ecosystem.

On-demand DNA

The on-demand economy is built on three foundational building blocks: immediacy of delivery, passivity of consumption (the buyer no longer chooses, rather a supplier is assigned), and fixed cost. It’s easy to say that Uber accomplished these three things by building a seamless ride-hailing experience for riders, but that’s just a fraction of the story. There are two other equally important factors that contributed to the company’s success: 1) the fact that the company operates in densely populated urban cities where there is sufficient liquidity to make the marketplace work, and 2) its target customer is already familiar with entrusting a stranger to take them places — taxi drivers. Uber built a better mousetrap by exploiting not just the weaknesses of the taxi industry, but also its strengths, by offering immediate procurement. So “uberization” is a very specific solution to a particular problem, not the solution to every problem.

Demystifying the Uber model

Uber works, in part, because most of us are indifferent to who drives us around. Passivity of consumption is already inherent in most forms of transportation; we have no choice in who commands the taxis, buses, trains, and planes we ride in every day. Other services can easily be optimized for immediacy of delivery, like a house cleaner, a valet, or a babysitter. However, “uberizing” these services simply by dispatching a service provider to a consumer doesn’t always work. (Just ask Homejoy, Zirx, and most recently, Shuddle.) The Uber model doesn’t take into account the intimacy aspect of the transaction and the threat of disintermediation it can create. Once I find someone I trust to clean my house, park my car, or watch my kids, what’s to stop me from hiring them directly? Here, the Uber model creates a constant threat of disintermediation and puts additional stress on both sides of the marketplace. Over time, this strain leads to increased churn, burn, and in many cases, extinction.

The strong will survive

Just because a segment can’t be mapped to the Uber model doesn’t mean it won’t work with the on-demand model. Just three months after Zirx announced it would be killing its on-demand parking service, competitor Luxe announced a $50 million Series B round. That’s a lot of money in today’s increasingly risk-averse VC environment. So why is Luxe thriving where Zirx failed?

Valet services aren’t as ubiquitous or commonplace as taxis. Both Zirx and Luxe figured out early on that they couldn’t rely on an Uber-like method to scale and attract customers. To adapt, each company evolved its model differently: Zirx went with a contract workforce and a focus on the enterprise market, while Luxe converted its valets to employees and diversified its distribution by teaming up with rental car company Hertz.

Luxe’s success (the company’s CEO, Curtis Lee, has claimed the company is profitable in two of the six cities it operates in) is, like Uber’s, based on a granular understanding of the economics at hand in its industry. On the demand-side, partnering with Hertz made it relatively easy for Luxe to infiltrate an engaged user base; rental car customers have an inherent need for easy parking solutions in unfamiliar cities. On the supply side, Luxe’s decision to hire full-time employees ensured balance: The cost of training supply-side providers and insuring the car owner was hard to justify if the valet pool wasn’t guaranteed to be available when demand spiked. Since Luxe doesn’t have the luxury of a robust supply-side network (unlike Uber), the company had to evolve its valets from independent contractors to employees. This shift has better enabled the company to ensure it is staffed up during peak hours and capable of fulfilling clients’ on-demand expectations.

Adaptive supply-side management

Luxe’s decision to evolve its supply side to an employee base was done not out of fear of regulatory backlash but to secure an operational advantage and better ensure the delivery of on-demand immediacy. This adaptive supply-side management was necessary to ensure supply-side liquidity on Luxe’s platform. Now, that’s not to say that every on-demand company should “luxify” its model and immediately flip to an employee-only model. Rather, companies in this space need to pay close attention to the factors that impede their ability to fulfill the promise of on-demand service, evolving their models as necessary to insulate themselves from things like disintermediation and churn.

Cultivating a supply-side ecosystem of supporting services, whether it’s within the platform (through integrations with small business services) or outside the platform’s experience (look at the ancillary market that sprung up to assist Airbnb hosts), will help fortify a company and provide a protective layer against supply-side churn. After all, if we’re talking survival of the fittest, the fittest company isn’t necessarily the one that makes it alone; oftentimes, it’s the one that works best with a community.

Brent Warrington is CEO of Hyperwallet, an outbound payments platform. He has more than 20 years of experience in the financial services industry building and leading high-growth companies. Prior to Hyperwallet, he served as the CEO of SecureNet Payment Systems (now Worldpay) and FundsXpress Inc. (now First Data).