Businesses that specialise in connection like Uber and Airbnb disrupt existing business models by introducing intelligent technology that delivers success. We take a closer look.
Quick takeaways if you’re in a hurry
- Businesses that specialise in connection create a link between a provider and a user with technology, and don’t actually deliver the desired product or service themselves
- Businesses that provide connection services tend to disrupt the set up of the industry because they are not constrained by the same regulations
- The starting point for building a connection business is through insight into a customer’s need that is not being met.
Read on: Insights into the connection business model
(estimated reading time: 8 minutes)
New businesses are disrupting traditional business models and changing the definitions of success. The key change? Instead of providing a service or product themselves, these businesses specialise in connecting customers with what they’re looking for.
Really it’s comparable with a dating service. But instead of bringing together two people looking for love, the company connects someone who has something to sell, with someone who wants to buy it. In the early days the model was well represented by eBay: an online buying and selling platform that connected people with something to sell with people who wanted to buy.
The principle tool that these businesses use is technology. Clever websites and mobile functionality through apps, allows the business to create an interface between their two groups of customers (users and providers). These businesses specialise in connection rather than the product offering and so are able to dedicate their resources to developing smart, appealing and effective technology.
Ratings not responsibility
For consumers who expect a level of responsibility, working with a connection business can be a different experience than dealing with a business that provides the actual service (reading the small print can prove to be an exercise in disclaimers). eBay is well known for making it clear it accepts no responsibility for the quality of products sold through its site. New connection models like Uber and Airbnb issue Standards, but the compliance is down to the providers themselves.
One of the fallbacks for both the users and the companies themselves, is their strong reliance on a Rating System. While the businesses may not enforce the standards and behaviours they expect, both their users and providers are able to rate their counterparts for their ability to comply. Fail to clean your house for your Airbnb guests and your ratings will reflect your cleanliness issues. Act like an idiot in an Uber cab and your driver can let other drivers know the risks of accepting your business.
The regulations that govern the industries within which these companies operate present a greater challenge to their success. For Airbnb they exist outside the legacy of heavy zoning and health and safety regulation. The regulation that exists has shaped the current industry from both an infrastructure and a cost perspective. Airbnb exists outside the regulations and is therefore unaffected by the associated cost structure. It’s no surprise then that existing players react strongly against the connection model when they see themselves undercut on price and location.
The unsurprising fallout from so much industry angst is a wealth of legal claims as the established traditional companies attempt to level the playing field. Uber is infamous for the high levels of legal battles with taxi companies it has and is facing. Their reaction has been to attempt to position Uber as a ride-sharing business rather than a taxi company. This has however been unsuccessful on the whole, and in November 2015 Uber was involved in over 173 lawsuits.
The connection model has its own unique set of challenges, but it also has a number of strengths. Connecting customers without the cost of providing the actual service, is a very lucrative business model. Uber is valued at over US$51 billion and Airbnb was valued at US$28.5 billion in June 2015.
What lessons are available for entrepreneurs who are keen to play in a similar space?
The success of a connecting business arises from the ability to bring together two groups of ‘customers’ who can benefit each other. Successful businesses have identified an unserviced need that is strong enough to build a business upon. They then match that need to a provider who is looking for a customer. It’s no surprise that founders often directly experience that customer need and it is their subsequent lightbulb moment that forms the foundations of their business success.
The founders of Airbnb were unable to afford their rent and decided to hire out some air mattresses in their flat in order to generate some funds. It didn’t take them long to discover that the market for their product was bigger than they could service, and their website grew into airbedandbreakfast.com. Uber founders were sick of suffering the taxi shortage in San Francisco so decided to put solutions in place to deal with their frustrations. The alternative solutions they created were the model upon which the business was based.
A direct insight into a market opportunity is a winning point to begin any business from. It can be uncovered through customer feedback or through the founder’s own experience. Or alternatively it’s possible to identify a preferred industry and explore deeply with customers to identify an opportunity that presents a unique challenge.
Unless they provide an entirely unique product, many connecting businesses create a disruptive influence on an existing market. But the definition of business success is constantly evolving, and the connection business model is demonstrating new and different ways to create success. Born from customer insight and grown by connecting unexpected providers with a growing audience, connecting businesses use technology to make accessibility simple. They may not don’t suit every customer, but they are perfectly designed for a new wave of users who are convenience and price focused, and are willing to use customer ratings to guarantee their purchase.
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