Why Many On-Demand Platforms Fail
This is a pretty naive look at how services in this space work from someone who wants to build one.<p>Uber is fundamentally unlike all of these other &quot;Uber for X&quot; startups. First of all, @paulsutter made a great point: the CAC is &gt; LTV. How many times in your life are you ever going to have to hire a...home decorator or something? A painter? The reason why Geico advertisements are on all media literally all the time (they have like five completely different mascot strategies!) is because you almost never make a choice about car insurance, and when you do, they need to be top-of-mind. This is the same problem that affects a huge swathe of terrible startup ideas, not just on-demand services: the whole category of travel management, niche social networks, event-oriented tools, and yes, most &quot;Uber for X&quot; products.  It works for Geico because the LTV of a Geico customer is high enough, because Warren Buffet is an amazing capital allocator and amazing at identifying and retaining operational talent, so Geico runs at roughly break-even on the insurance product, but frees up a large chunk of float for BH to deploy and earn high returns. That business requires doing like 10,000 impossible things right and they do it.  An app that lets you summon a guy who trims trees to your house the one time you realize you need a tree trimmed has none of these qualities.<p>A lot of comments here are about how &#x27;the jury is still out on Uber&#x27; because it loses money. But cabs don&#x27;t lose money, collectively. Uber&#x27;s aggressive money-weaponization growth strategy is certainly high-risk, but there have been tons of businesses that direct requests-for-transit-via-car to independent contractors and clip a fee: virtually every taxi dispatch company, say (contractor vs. employee depends heavily on the history and regulatory structure in a given market).  The idea of having for-hire cars distributed through the city and used on an on-demand basis is also profitable for zillions of people. The idea of adding on an app that summons the cars more efficiently, handles payment, and clips a fee is not that hard to believe in.<p>OP frames the issue about the lack of variance in quality of an uber ride vs...what? Hiring a plumber? Do any of us have the ability to identify a quality plumbing job vs. not quality? I mean, the toilet flushes now, or it doesn&#x27;t. I think this is _close_ to the issue, but the issue is more about &#x27;what adds value&#x27;: being close to me right now, and able to get to me immediately, on a pre-determined price schedule trumps everything in ride-hailing most of the time (sometimes you want a limo, or something special, and maybe you won&#x27;t use Uber. Maybe you want to hire a driver for a month while you are in India. You probably won&#x27;t use Uber. Different parts of the value equation are changing value). Most of these on-demand apps operate in markets that don&#x27;t have this quality.  Other things are important.<p>The post also goes into the &#x27;Trust&#x27; question. This is a classic trap for technology entrepreneurs, right up there with &#x27;building tools that makes it easier for non-technical people to build apps&#x27;.  So many zillions of dollars and hours of smart-people-work have gone down the drain building web of trust, chain of trust, and other trust management products, and they basically don&#x27;t work at all.  What works is &quot;Does this thing have a lot of five-out-of-five star ratings from real-seeming people compared to how many one-out-of-five-star ratings it has?&quot;<p>This is essentially &#x27;word of mouth&#x27; online. The ratio of 5:1 star ratings over a threshold. This is basically how all real-world functional trust systems work: ebay, amazon, yelp, etc. Yes they have enormous problems. Yes they are really stupid. Yes they can be gamed. Yes it weights all sorts of idiots equally. But guess what? It works well enough for most people to make purchase decisions.  Every fancy smart thing we&#x27;ve ever come up with that&#x27;s more sophisticated than this is basically useless (e.g. the global tls cert web of trust, the various pkis, every product that builds a FOAF trust web underneath arbitrary objects).<p>Afaik, on-demand &#x27;uber for x&#x27; products work one of two ways, mainly:
 - as a marketplace, where they fail because of all the normal chicken&#x2F;egg problems, but basically because the ltv of a customer is very low and the cac is very high (once you run out of VC cash to subsidize the service to extremely low prices.)
 - as an ONO service with employees, where the unit economics supposedly become good with crazy scale, but it&#x27;s extremely difficult to get there again when you run out of subsidy cash . The classic example here is Kozmo. I&#x27;m sure Kozmo&#x27;s model predicted that eventually, when a delivery person was delivering a candy bar to five people in the same building, the unit economics turn the corner, but it consumes insane volumes of cash to get there, if there&#x27;s even a &#x27;there&#x27; (I&#x27;m not aware of any company who has ever gotten to this point. It is possible that Postmates will be the first, if they survive).<p>Postmates is an interesting play because unlike most of these on-demand services, there&#x27;s at least a world in which like you could _imagine_ if there was a small but positive way to get the unit economics to work, the LTV outstrips CAC because people need to order food and stuff all the time. Many times a day possibly. Even if Postmates made a penny&#x2F;order on each active user, you could have a very high order volume over a very long time that would eventually get over the CAC cost. BUT the idea of the unit economics getting there is...hard to see.  I have a friend who orders coffee from postmates _every morning_ instead of making it or going out. He just has a postmate drive up the hill to his house from starbucks. Starbucks! It&#x27;s not even like a fancy coffee place. It&#x27;s interesting to think about a world in which that postmate is running like, a hundred starbucks orders on an optimized loop, and they&#x27;re still able to charge $5 or whatever for the delivery. That starts to look _possible_ but insane.  As it is, it&#x27;s twenty minutes up the hill, twenty minutes down, never mind the starbucks time.<p>The other world of on-demand stuff I think is interesting to think about is grocery delivery because I think grocery delivery is basically doing something different than what it thinks its doing: the on-demand delivery aspect of it is a vehicle for grocery price discrimination.<p>It&#x27;s an old joke that rich people don&#x27;t know how much food costs: George Bush Senior at the checkout counter, Lucille Bluth saying, &quot;it&#x27;s one banana, michael, what could it cost? Ten dollars?&quot; That 30 rock episode where Jack Donaghy says something about the &quot;grocery concierge&quot; telling you a sack of potatoes is four hundred dollars.<p>But groceries remain an insanely low margin business. Grocery chains operate at around 2-3% margin. Independent grocery resellers in immigrant neighborhoods are even tighter. Costco&#x27;s grocery business is run near break-even (they make money on the membership fees. This is also why, long run, Amazon&#x27;s non-AWS business best comp is Costco.)<p>I&#x27;ve shopped for groceries on amazon pantry. Sometimes I&#x27;ll type something in like &quot;soy sauce&quot; or &quot;rice&quot;. Is that a good price? I sometimes literally don&#x27;t know if its 2x the normal price or .5x. There are things I know the price of well: avocados, milk, liquor, coffee. But there are tons of things I don&#x27;t know, and i&#x27;ve been buying these staples for years!<p>Grocery stores have very little power to raise prices, but if they could segment the market to provide a service like delivery to a price-insensitive consumer that allows them to charge 20-30% more for certain staples, the excess margin in the groceries completely dominates the cost of the delivery business.<p>This is the Instacart strategy. It&#x27;s very interesting. A lot of the unit economics problems of these businesses go away if you just...make things expensive. What if coffee was $30? Sure, postmates would work fine, if anyone would pay. But groceries have larger tickets where a 20-30% increase in price might not be objected to by wealthier price-insensitive consumers. Instacart basically is selling coffee for $30.<p>I&#x27;m very curious to see if this works.  I mean, it seems insane, but less insane than say HomeJoy, Rinse, Washio, Homee, Handy, the &#x27;uber for kids&#x27;, Lugg (this has gotta be the worst idea of the bunch), the one that parks your car, the one that washes your car, the one that fills your car up with gas, the (multiple!) ones for private jets, the massage one, etc.