The Shared Economy: Creating Value by Making Assets More Productive
This past year, we’ve seen many startups score enormous valuations. Airbnb was valued at $35B, Rent the Runway reached a $1B valuation with a $125M funding round, and Uber’s IPO valued the company at $80B+.
Thematically, these companies are very similar. They offer cheaper products or services on a per use basis and enable increased usage of underutilized assets – in these cases, real estate, cars, and clothes. The former generates demand and the latter provides a supply, together forming a marketplace.
Increased Utilization through P2P Marketplaces
Purchasing a car can be an expensive proposition, as it should be. It’s a complicated piece of machinery and is very valuable to customers! However, a car is not actively used much – it has quite a low utilization percentage. Most of its time is spent sitting in garages, driveways, or parking lots. In fact, suggested by Donald Shoup and sanity checked by Paul Barter, cars are parked 95% of the time. For such a large purchase, cost per use can be quite high.
Uber capitalizes on this in two ways:
(1) empowering car owners to more easily generate cash from their cars (supply)
(2) offering an alternative mode of transportation potentially cheaper on a cost per use basis (demand)
For many people, cars are an expensive, depreciating asset. Uber enables them productively utilize their car as a source of income. Together, car owners with time and a vehicle can provide a service to those that need a ride but have no means of transportation.
Similarly, a home is an expensive asset that may be under utilized. Consider an apartment owner who purchased a two bedroom for the case in which guests visit or someone on vacation. Airbnb gives them a way to generate more income from their asset and offers consumers more short term housing options.
Increased Utilization through B2C Marketplaces
Peer-peer-marketplaces are not needed to increase asset utilization. Traditional markets work too.
While Uber and Airbnb leverage the market to procure the supply side, other companies follow similar models but offer the product or services themselves. They are able to capture additional margin that the marketplace supplier would have otherwise benefited from, but this model is more capital intensive.
Like Uber, car rental companies like Zipcar aim to better utilize cars. They allow customers to rent a car when they need to drive - once their trip is complete, the car can be used for someone else’s journey. However, Zipcar owns its fleet of cars rather than letting the marketplace provide them.
Similarly, Rent the Runway aims to better utilizes clothes. They can be expensive and spend most of their time sitting in closets. The company purchases an inventory of clothes and rents it out to customers. They are able to turn a profit on their investment and customers are able to pay pennies on the dollar for a wardrobe of the same level.
What’s Next?
Whether it be activated through peer-to-peer or traditional marketplaces, the aforementioned businesses create value through the increased utilization of an asset. Since this increases efficiency and productivity, this business model framework will continue to be lucrative.
New companies will continue to adopt this model. As driving becomes a fully automated process, car owners will be able to offer this service without the need for their free time. The asset now has the possibility to realize near 100% utilization.
Computers and their hardware’s computing power are also underutilized assets. Companies could start to compensate computer owners for use of their hardware’s computing power. When not using their computer, such as overnight, people can put their asset to work. Bitcoin mining pools, such as Slush Pool, are allowing customers to increase computer utilization and video game companies like Google Stadia are better utilizing computer hardware as a shared resource for playing video games.
By thinking about how to take an expensive, personal asset and make it a shared resource, entrepreneurs can help run a more efficient economy. Companies that do so and pick the right go-to-market strategy will realize tremendous value.