What Is Collaborative Consumption?

Airbnb Nights BookedAirbnb Nights Booked (click to enlarge)

Photo: Company releases

Collaborative consumption, peer-to-peer marketplaces, the sharing economy—whatever you want to call it, a new business model that emphasises decentralized transactions between users within a network has gained traction over the past year.It is important to remember that collaborative consumption is still in its infancy—it really only began to attract attention when Airbnb took off last year (see chart to the right). To better understand the implications of the peer-to-peer model, how it is situated among larger macro trends, and what separates it from what came before, we talked with executives from three of the most exciting companies operating peer-to-peer marketplaces:  

  • Bo Fishback, CEO and co-founder of Zaarly
  • Jamie Viggiano, Director of Marketing at TaskRabbit
  • Vipin Goyal, CEO and co-founder of SideTour

What Is Collaborative Consumption?
Perhaps it is best to first illustrate collaborative consumption with an example. When we caught up with Bo Fishback he was at Austin’s South By Southwest staying in an Airbnb apartment, with a crib in the corner borrowed from a Zaarly user, and a bike downstairs rented for the week off another Zaarly member. 

Collaborative consumption is sharing, bartering, or renting access to goods, services, and even experiences between users in a marketplace. This is not a new idea—people have negotiated and traded for goods and services since the dawn of time after all—but peer-to-peer platforms enable and encourage this sort of behaviour in a new way peculiar to the digital age. Collaborative consumption, Fishback told us, “leverages online networking for in-person interaction.”

The peer-to-peer companies that have cropped up in the past year aren’t necessarily even the first to capitalise on this idea. eBay and Craigslist both operated on similar principles and can be thought of as proto peer-to-peer platforms. There are some key differences though. While they led the initial charge, their ambitions were constrained by a vastly different technological landscape—internet penetration was still low and the web was largely anonymous.

The near concurrent arrival of smartphones, social networking, and location-based services allowed for products and services far beyond what previous platforms were capable of. Jamie Viggiano says that these innovations let marketplaces offer near frictionless connection with other people’s goods and services. Because of limited internet penetration, Fishback pointed out, eBay necessarily had to ship goods around the world to survive. Zaarly, on the other hand, harnesses the power of mobile and social to operate a local meta-market that lets users instantaneously connect to one another—85 per cent of its traffic is mobile.

SideTour CEO Vipin Goval also points out that eBay and Craiglist had a fundamentally different philosophy from the current crop of collaborative consumption companies. Their platforms were still about bringing existing activities online—classifieds and garage sales, specifically. The new wave of collaborative consumption “is all about taking the things you do on a personal level with the people you know in the real world and opening that up to a broader audience. Friends often stay in your spare room, but now you can offer it to a paying guest. People lend their cars to their friends, but now they’re renting them to strangers.”

A New Business Model?
This gets more to the heart of the matter: collaborative consumption represents a fundamental challenge to the prevailing top-down consumption model. Both buyer and seller are “users”—the merchant, as we traditionally think about it (i.e. a corporation or small business), has been disintermediated. 

Airbnb Nights Booked GrowthAirbnb 2011 Nights Booked Growth(click to enlarge)

Photo: Company releases

This is the disruptive power of collaborative consumption—drawing what were thought to be safe industries into competition with the internet. Y Combinator founder Paul Graham argues that startups are now “competing in industries that people didn’t really think were susceptible to competition by startups.” Nobody thought hotels would have to directly compete with the internet, yet Airbnb has become a thorn in their side (see chart to the right). This is a perfect example of what Marc Andreessen calls “software eating the world.”When it comes down to it, however, this is ultimately about making money like any other business. The success of collaborative consumption depends on its ability to provide consumers the goods and services that they want in a cost-effective and efficient manner.

Anecdotally, it appears the peer-to-peer model is having some success on this front. The average Airbnb host in New York makes $21,000 a year according to founder Brian Chesky. This is emblematic of what Viggiano calls “micro-entrepreneurship”—enabling the consumer to use their platforms as a business. This is not just a feel-good byproduct of their business, but critical to understanding their business model.

Collaborative consumption companies generally make money by charging a flat percentage fee on transactions. Airbnb, for example, takes a 6 to 12 per cent booking fee on the total bill. This is an incredibly capital-efficient business model because it has no inventory or fixed costs—the primary role is to operate the marketplace. Furthermore, because they rely on network effects, they have enormous upside potential.

However, this model ultimately relies on building the trust level among consumers necessary for the success of peer-to-peer platforms.

Identification Verification
Critical to the rise of collaborative consumption has been identification verification. According to Goval, in collaborative consumption “trust and verification come down to authentication.” Everyone has heard a Craigslist horror story—identification verification is meant to alleviate the fear of fraud endemic to the original peer-to-peer platforms.

The record has not been flawless, however. Airbnb had a major PR disaster last year when a host’s apartment was trashed and ransacked by a guest, and the company was perceived as being indifferent. Nonetheless, everyone we talked to was emphatic about the importance of identification verification to their company’s growth—TaskRabbit even has a proprietary reputation engine for users.

Social networking has undoubtedly played some role in this—almost all of the sites allow you to create a profile and log-in through a social network. However, everyone stressed that it was far from perfect and that they encourage users to be even more forthcoming in order to build the trust level critical to their platform’s success. Zaarly, for example, found that user engagement increased when users share more information about themselves.

The Players

sidetour homepageSideTour’s home page

Photo: SideTour

While collaborative consumption companies vary in scope and focus, they all operate platforms that engender peer-to-peer transactions. Most the companies in the peer-to-peer space offer services, but a few do offer goods as well. Let’s take a look at some of the companies in the space:

  • Airbnb: The most prominent of the current wave of collaborative consumption companies, Airbnb offers peer-to-peer housing rentals. Most users use Airbnb as an alternative to hotels while travelling—usually cheaper and frequently a unique experience (in both a bad and good sense). The listings can range from a Frank Lloyd Wright house to a spare bed in someone’s apartment. Airbnb raised $112 million last summer at a $1 billion valuation.
  • GetAround: GetAround is like Airbnb for cars, offering peer-to-peer car rentals. It is similar to the idea of ZipCar, but does not own its own fleet of cars so is theoretically accessible anywhere. According to co-founder Jessica Scorpio, the average car owner makes $300 a month renting their car.
  • SideTour: SideTour operates a curated experience marketplace (see screenshot above). Recent listings include “Learn to DJ with the Inventor of the Scratch” and “See the Metropolitan Museum of Art from an Artist’s Perspective.” It offers unique experiences for guests and an opportunity for hosts to share their passion (and make a little money)—all facilitated by the SideTour platform and staff.
  • TaskRabbit: TaskRabbit is a marketplace connecting people to perform errands and tasks.  According to Viggiano, a lot of the errands are your standard fare—cleaning, doing laundry, grocery shopping—but it has also been used to help rebuild WordPress blogs and one user even paid a TaskRabbit to surprise his wife on the Brooklyn Bridge with flowers and a sign that read “I love you”. The top TaskRabbits can make up to $5,000 a month according to founder Leah Busque.
  • Zaarly: Operates a local meta-marketplace. Users can log-in and buy and sell goods or services for just about anything—recent listings around New York include someone looking for a Kindle Fire and another asking to deliver a birthday gift to a friend. Zaarly is 85 per cent mobile according to Fishback, and even the web traffic is often driven by mobile. Zaarly raised $14 million in October and took on Meg Whitman as a board member.   

THE BOTTOM LINE

  • Collaborative consumption utilizes online platforms to induce offline behaviour.
  • The new wave of peer-to-peer platforms embrace and harness the power of social, mobile, and location-based services in a way that wasn’t possible 5 years ago.
  • Peer-to-peer is a new way of thinking about business that empowers micro-entrepreneurship and disintermediates the merchant as we have traditionally thought about it.
  • Industries previously thought impervious to the internet are slowly being drawn into competition with startups by collaborative consumption.

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