On-Demand Economics: Causes of Homejoy Startup Failure

With the collapse of Homejoy, investors, the media and even consumers began to doubt the principles of the “economy on demand” model. And this is quite fair, given the volume of investment in the platform over the past few years (more than $ 4 billion in 2014).

From the point of view of investors, the model is quite decent: a scalable product that makes a profit from the first day and has a viral effect. Homejoy was no different from this description, but its story was different.
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Even the Homejoy mission was excellent: to provide a convenient way to purchase high-quality house cleaning services (later the service began to provide a much wider range of services) and at the same time to provide professionals (“pros”) with work, helping them to become entrepreneurs.

Excellent business model, excellent mission and a company worth $ 40 million.

But Homejoy failed. If you believe the headlines, the main reason for this was the lawsuits of those who disagree with their position of workers. Homejoy considered the professionals working in the project to be “independent contractors,” but in many cases the pros argued that, in terms of personnel classification, they should in fact be considered full-fledged “employees” and have appropriate privileges, rights and salary.

This proposed change would significantly increase Homejoy’s baseline costs and completely change the company's earnings profile.

Some felt that the reason for the collapse of Homejoy was too rapid growth, as the company started expanding too early towards Canada and Europe. Entering any market is financially costly, and rapid expansion requires serious funds. However, if there is an easy way to make profit more investment, then the expansion does not cause investors questions, as the company starts to bring even more money.

The truth is that Homejoy's earnings model was not viable in principle - even when employees were classified as contractors and even in the cities with the most clients. The reason for the collapse goes back to the basics of the market in which the company worked.

Unique and huge market

The home services market is huge. It is estimated at approximately $ 400- $ 800 billion - its open spaces attract the attention of many investors and entrepreneurs. Here it only develops according to completely different laws that differ from other markets for services (in particular, transportation, delivery, freelance journalism, and so on).

My home - my castle seems to be saying so. You sleep in it, you eat in it, and you love those who live with you. You must completely trust the person who works near or inside your home.

When you need to hire someone to do housework, then people first of all look for guarantees and qualities: you should feel safe if you are going to let a hefty plumber into your house. In order for the same cleaner to come to you every month, he must do his job well. You must be sure of the person who looks after your pet in order to leave him the keys to his house.

When you find professionals you trust, you don’t want to lose them - such relationships can last for decades, because the client is confident in the quality of the services provided (is everything with my house the way I want?), And the worker is confident that he has a steady income (how much money will I earn this month?).

The main trouble Homejoy

What Homejoy has succeeded in is that it has been able to give homeowners confidence in the person they are about to enter, and for newcomers and professionals who are eager to work - clients, and at the same time. The possible risks that both sides took on were eliminated with Homejoy.

But the stumbling block lies in the question of value for money. In order for a marketplace that provides on-demand services (especially homework services) to succeed, it must specialize in either extremely high quality services in order to guarantee the payment of salaries, or on quick and simple services that are done cheaply.

Homejoy is a company that hired workers with a modest level of training and quality standards. This structure provided competitive prices for customers, which turned out to be a plus for the homeowner, but only on paper.

The startup acted as an intermediary, so it took 25% of the transactions, which was completely unprofitable for professionals. For this reason, the service attracted inexperienced young people and non-professionals (sometimes even homeless), which led to a decrease in the quality of work. This is completely unacceptable for the average homeowner who wants his home to be clean. Therefore, customers left the platform.

Another option for Homejoy was the transition to hired labor. This would allow to train professionals before starting work with a client in order to ensure a level of quality and guarantee market wages and other advantages. The problem lies in the fact that if Homejoy had retained its percentage of intermediary, homeowners would start to overpay. It turned out that they would overpay for the quality of services that many other companies are able to provide.

Such a structure increases the chances of the so-called “platform leakage” - this is when a client, having found a qualified specialist, contacts him offline and directly agrees on a quality service already for a lower cost. The home services market is most vulnerable to this kind of leakage, since this is a customer-centered model based on trust, in which the client and the professional repeatedly come into contact with each other.

Loss of customers

For homeowners, not everything, however, was so bad. Homejoy provided them with skillful professionals and turned their relationships into a business. The problem is that they communicated with each other offline (that is, there was a leak from the platform).

As soon as you (as a landlord) found a specialist who you liked and began to trust him, it becomes unprofitable for you to look for a new person again and again - you cannot know for sure if you will find someone just as good. A huge number of personnel is leaking from the platform because of homeowners who hire professionals they like offline, where they don’t have to overpay (sometimes they even get discounts). Homejoy was a convenient platform, but trust and quality are much more valuable.

For professionals, working with an offline client immediately increases earnings (eliminating the middleman) and provides a constant flow of money, as well as its own client base, which is now not stored by third parties.

Homejoy eliminated the risk for professionals. But their wages were so low that it was more profitable for them to take this risk. The chance that someone would expose them was minimal, since in such conditions clients themselves want to communicate offline, and no one will “knock”.

Alternative Market Models

Homeowners who have had negative impressions of Homejoy have had many alternatives. Local marketplaces began to arise in an uncountable number. There are many different search engines for the services you need — Yelp and Thumbtack — one of many — and all target different types of services, work in different geographic areas and interact with users in different ways.

If a homeowner wants to hire a new experienced cleaner who can do his job well, he can use any of the many services that compete with Homejoy. But unlike Homejoy, many of these systems are more scalable because they provide greater liquidity, directing professionals directly to customers, allowing them to work together without interfering with their direct (and such important) relationships (this is one of the reasons why the Thumbtack project was waiting for such a resounding success ).

However, these models of marketplaces also faced leakage problems, in particular, in the provision of domestic services. As soon as you find a cleaner, a person who will walk your dog, or a landscape designer that suits you, you want him to always help you and be at your disposal at any time - so that you do not need to re-search someone on the site . Professionals know how important their long-term relationship with the client is.

findings

Platforms that provide a full range of on-demand services came to success along with many other, less complex types of services — transport services (Uber), food delivery services (Instacart), transportation of goods (Shyp) and others. Many of these platforms have succeeded, because in their case clients do not have to be 100% trusted by a specialist, and the quality of their services is not very different from competitors.

In these areas, there are also similar problems with the classification of employees and contractors, but many of these companies are able to cope with them effectively and cost-effectively, without stopping their work. Their basic model works, you just need to competently manage future earnings.

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