Setting the stage

Since well before the economic crisis of 2008, American consumers have been making purchase decisions under an evolving value system. The Google “Walk score” became popular among young people looking for apartments, indicating that urban density and efficiency were rising as criteria for where we lived. In 2007, Toyota Prius sales surpassed Ford Explorer sales, demonstrating increased eco-conscious consumers.  “Carbon neutral” was the Oxford University Press columnist’s word of the year in 2006, and “locavore” in 2007. After 2008, however, the attention shifted to economics. There was structural financial insecurity, and big, once highly-trusted institutions in the private sector were suddenly shrinking, going out of business, and permanently changing. While this changed the tone of the conversation around values, it helped the values among consumers move permanently away from hyperconsumption. Collaborative consumption rests squarely on this shifting value set – an old idea of sharing ideas, resources, and a peer economy, updated for the smartphone era.

Macroeconomic Drivers

There are important economic drivers to consider alongside this shift, and important challenges to acknowledge. In the United States, 17% of young people are unemployed. In Europe, that number is over 25%. Including underemployment, a full third of young people aren’t meeting their economic obligations with traditional work. The supply-side of collaborative consumption is being driven by the trend of underemployed youth around the United States and Europe. Opportunities to earn part or all of one’s living by working in the collaborative economy abound. One can rent out his room, sell handmade goods directly to others online, drive people in the city around for pay, and more.

But the same thing that makes this a driving force for collaborative consumption makes this a cause for concern. While being a Lyft driver, or AirBnB host, is certainly a great source of income, work, especially for young people, is not only an economic consideration, but also a way to form weak ties, gain valuable skills in a trade, and learn how to create a vocation. Unless people want to be professional drivers or operate hotels, is this type of work sustainable? What do we lose in training and preparing our young people for adulthood?

The efficiency case is another important economic driver that makes collaborative consumption appealing. There is millions of square feet of unused residential real estate in the United States that can be put to more efficient use using the likes of AirBnB and HotelTonight. In fact, there are billions of dollars of unused assets of all types which can be traded on and shared.

But not all sharing is created equal. While the ridesharing industry has been hugely viral and grows at an accelerating rate around the world, the car-sharing industry has been much more challenging. RelayRides recently acquired a young competitor who was struggling to increase their transaction volume, and Getaround has been growing steadily, but finding it’s a challenging road ahead. A number of companies have built horizontal peer-to-peer rental marketplaces around tools, appliances, clothing that have struggled. A few things to consider that represent the distinctions between the successes and the failures in collaborative consumption:

Microeconomic Drivers

– High transaction volume: ThredUP, a p2p clothing sharing marketplace, has grown quite effectively in part because they do an excellent job of maintaining inventory (creating an incentive for the supply side), but a big part of their early success is that they were dealing with an asset – kids clothing – that has a very short half-life for any individual consumer. Kids grow fast, and constantly need new sizes. As they outgrow clothing, it is unusable and available to be shared. Adult clothing sharing marketplaces have to rely on evolving taste preferences, which is less of an economic necessity.

– Appreciating assets: When an individual stays in my home, the value of my home doesn’t change, assuming they are a suitable guest. In fact, if you take a snapshot of housing prices over the last 50 years, or rental prices in major cities over the last 5 years, my home is undoubtedly an appreciating asset. Along those lines, making better use of the asset only helps me economically, whereas when I let someone use my car, it accelerates its depreciation (which is primarily a function of years I’ve owned it), meaning I have to get significant economic value out of sharing it for the experience to be worthwhile.

– Capitalizing on existing behaviors: Collaborative consumption is being largely driven by young people, who naturally share everything on the internet, are less concerned about privacy and safety than older generations, and are constantly on their smartphones. But for collaborative economy to be sustainable and for these marketplaces to reach liquidity, they have to extend far beyond early adopters. In certain cases of collaborative consumption, like ridesharing, new behaviors have taken hold in the zeitgeist and taken off as a result, but for the majority of the early successes, either the supply or the demand side of the marketplace is a very well-understood paradigm, which lowers friction for adoption.

– Overinvesting in trust, safety, and community Again, for collaborative marketplaces to take off, they have to appeal to non-early adopters, who are less likely to be comfortable with transaction with strangers. The marketplaces that have succeeded have overinvested in trust, safety, and community. Lyft has created an experience that my fiancee feels safe using, despite it being getting into the car with anonymous strangers, because they go out of their way to filter for warmth, personality, and develop a community among drivers. AirBnB has built significant trust tools, now including offline identity verification. RelayRides pioneered peer-to-peer insurance models which provide liability protection for up to $1M for drivers of cars on their marketplace. These tools are all critical.