learning from failures in the sharing economy
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Learning from Failures in the Sharing Economy
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Learning from Failures in the Sharing Economy
Karl Täuscher
Bayreuth University
Prieserstraße 2, 95444 Bayreuth, Germany
Jan Kietzmann
Simon Fraser University
500 Granville Street, Vancouver, BC V6C 1W6, Canada
Täuscher, K., & Kietzmann, J. 2017. Learning from Failures in the Sharing Economy.
Management Information Systems Quarterly Executive, 16(4): 253–263.
The publisher’s post-print is available at:
http://misqe.org/ojs2/index.php/misqe/article/view/797
Acknowledgment:
We thank the participants in the Special Issue’s paper development workshop at the HICCS 2017
for their insights and expertise that greatly assisted the research. We are very grateful to Mary Lacity
for her comments on an earlier version of the manuscript. We also thank the Special Issue’s Guest
Editors, Hope Koch, Iris Junglas, Arun Sundararajan, and Ping Wang for their helpful guidance and
support.
Abstract:
Firms eager to succeed in the sharing economy are encouraged to imitate the strategies and
business models of successful businesses like Airbnb and Uber. Yet they often ignore the
lessons from sharing economy firms that failed with similar business models. Our analysis of
several failed firms has identified common causes of failure, and the associated risks, when
competing in the sharing economy. An illustrative case study shows that a hybrid business
model can significantly reduce the inherent risks and can lead to sustainable growth in the
sharing economy.
Key words: Sharing economy, firm failure, business models, peer-to-peer marketplaces,
scalability, network effects, hybrid business models
THE RISE OF THE SHARING ECONOMY
Fueled by the popularity of firms such as Airbnb and Uber, the ‘sharing economy’, otherwise
referred as a collaborative economy or peer economy, has recently gained increasing attention
among practitioners and academics. These terms refer to how new ventures develop and
deploy digital platforms1 to enable peer-to-peer sharing of goods, services, and information.
The underlying proposition of sharing economy firms is they can add value by allowing owners
of resources to make their idle personal assets (e.g., rooms or homes) available to those who
need them (e.g., travelers)2. As direct alternatives to established firms (e.g., hotels), the
resource optimization offered by sharing economy firms has become possible through recent
technological advances in search, rating and matching algorithms, the spread of mobile
1 A good definition of the sharing economy is provided by: Hamari, J., Sjöklint, M., and Ukkonen, A. 2016. “The
sharing economy: Why people participate in collaborative consumption,” Journal of the Association for Information
Science and Technology (67:9), pp. 2047–2059.
2 For a comprehensive primer on the promises of the sharing economy, see: Schor, J. 2014. “Debating the
Sharing Economy,” Great Transition Initiative (ed.).
consumer devices and the explosion of social media platforms3. Through the increased and
improved data-flow opportunities, sharing economy firms have enabled innovative two-sided
business models to transition from ownership-based to access-based consumption4, from
individual to collaborative forms of consumption5 and from a corporation-centered economic
model to a ‘crowd-based capitalism’6.
The principles of the sharing economy have been exemplified by technology platforms such
as the abovementioned Airbnb’s peer-to-peer marketplace for accommodation, Uber and Lyft’s
peer-to-peer ridesharing or peer-to-peer skill-sharing platforms like Udemy. And their
successes are indeed impressive: After only seven years of operations, Airbnb had already
surpassed the world’s largest hotel chains in the number of beds and bookings. Uber has even
become the most valuable private firm in the world, valued currently at 60 billion USD. Udemy
has attracted a community of over 10 million users and received a combined $173 million USD
from its investors7. These success stories are undeniably impressive.
Given the rapid growth and high valuations of firms like Airbnb, Lyft, and Udemy, hundreds of
technology ventures emerged in the last years to develop similar business models.8 However,
only a fraction has reached a substantial network size or significant funding. On Crunchbase,
the world’s leading database of private technology firms, around 900 firms founded in the last
decade are categorized as sharing economy firms. By mid-2017, two of these firms (Airbnb
and Lyft9) had received more funding than the remaining firms combined, which suggests that
3 A thorough review of different Social Media offerings is provided by Kietzmann, J. H., et al. (2011). "Social media? Get serious! Understanding the functional building blocks of social media." Business Horizons 54(3): 241-251. 4 On a discussion of access-based consumption, for instance: Bardhi, F., and Eckhardt, G. M. 2012. “Access-
based consumption: The case of car sharing,” Journal of Consumer Research (39:4), pp. 881–898.
5 The concept of collaborative consumption is introduced by: Botsman, R., and Rogers, R. 2011. What's mine is
yours: How collaborative consumption is changing the way we live, London: Collins.
6 For a comprehensive review of the sharing economy’s impact on society, consumers, the economic growth, the
future of work and necessary regulations, see: Sundararajan, A. 2016. The sharing economy: The end of
employment and the rise of crowd-based capitalism.
7 Throughout the paper, venture capital-related data are based on Crunchbase.com, the largest global startup database. 8 Angel.co, a marketplace for startups and investors, currently lists 948 startups in the sharing economy space. For an updated list, see: https://angel.co/sharing-economy-4. 9 Uber, which has received the largest funding in the space, is not categorized as a sharing economy firm in the Crunchbase database.
maybe these highly referenced firms do not actually represent the prototypical sharing
economy firm.
Granted, there is lots to learn from the accomplishments of firms like Airbnb, Lyft or Udemy.
However, imitating their business models in a different market clearly does not guarantee a
similar success story, or else there would exist many more firms like Airbnb. Indeed, there are
many categorically different reasons why most of the sharing economy firms are less
successful, or even going out of business. Managers aspiring to compete in the sharing
economy, it seems, often suffer from Survivorship Bias. They only concentrate on the strategies
and business models of firms that were very successful and disregard those that were not. Such a
logical error, vividly described as the Fallacy of Silent Evidence by Nassim Taleb10, lulls decision
makers into the dangerous belief that the sharing economy offers high returns for all new entrants.
Worse yet, managers appear to search for instances that confirm their beliefs and desires, known
as a Confirmation Bias, without looking for more critical, contradictory evidence that would
teach them about the risks of operating in the sharing economy.11 Taken together, the
phenomenon might be reminiscent of the dotcom boom of the 1990s. While the silent evidence of
failures in the sharing economy rarely makes the popular press, it can offer important insights
to managers. Accordingly, we ask: why did some sharing economy firms fail? Based on our
findings, we propose that hybrid business models can help to mitigate the common sharing
economy risks identified through these failure cases.
The presented insights are derived from two complimentary research approaches. We
started our research by conducting 21 interviews with managers and investors of sharing
economy firms about their perceived success drivers in the sharing economy. Over the course
of 2 years, we additionally visited sharing economy firms like Airbnb, Lyft, Getaround, Udemy,
or 99Designs, examined various business models conceptually12 and developed case studies.
10 Taleb, N. N. 2010. The black swan: The impact of the highly improbable, New York: Random House Trade Paperbacks. 11 Taleb, N. N. 2010. The black swan: The impact of the highly improbable, New York: Random House Trade
Paperbacks. 12 A typology of ride-sharing business models, for instance, is provided by Cohen, B. and J. Kietzmann (2014). "Ride on! Mobility business models for the sharing economy." Organization & Environment 27(3): 279-296.
While the interviews and case studies help us identify what works, they did not provide much
understanding about what doesn’t work. Towards gaining a more comprehensive
understanding of failure in the sharing economy, we gathered a sample of all firms that fulfilled
our definition of the sharing economy and had passed the initial startup phase. We analyzed
the business models of each of these 73 firms and observed their performance in the
subsequent quarters. As expected, some of these firms filed for bankruptcy during the
observation period. Others are still operating, but have not shown any substantial growth.
These cases provided us important insights into sources of failure and under-performance in
the sharing economy. For some failure cases, the firm’s entrepreneurs or managers have
publicly reflected the reasons for the death of their firm. These reflections, known as
postmortems in the startup world, further allowed us to integrate the first-hand perspective of
the responsible decision makers into our understanding. We have distilled our key insights into
a set of the most prominent failure factors, which we illustrate using mini-cases.
We proceed as follows: First, we summarize the current common wisdom about success in the
sharing economy. Next, we present the mini-cases to illustrate common causes of failure in
the sharing economy. Subsequently, we show how a successful firm like Udemy has mitigated
the failure risks through business model innovation. The Udemy case demonstrates that
successful sharing economy firms increasingly adapt hybrid business models to reduce their
exposure to the identified risks. Finally, we draw conclusions on how managers can utilize our
insights.
COMMON WISDOM ABOUT SUCCESS IN THE SHARING ECONOMY
Sharing economy firms are commonly associated with exceptional business opportunities. In
its essence, the high expectations about their future profitability are often based on two related
characteristics: scalability and network effects. Scalability generally refers to a firm’s ability to
flexibly offer its service to a large number of users without incurring proportional costs. Since
many firms in the sharing economy offer a self-managed matchmaking service through a digital
platform, additional users can be served at a marginal cost close to zero. Given the economics
of software, these firms can increase their profit margins as they serve more customers with
their platform product. In addition, the increasing efficiency of cloud computing services like
Amazon Web Services allows firms to flexibly adjust their capacity to their customer demand.
As such, investors often emphasize (and expect) huge growth within a relatively short period
of time.
Network effects describe how a firm’s offering becomes more attractive to users as the network
grows. For instance, Airbnb becomes more attractive to travelers as more apartments are
available on the platform. In turn, the service becomes more attractive to hosts as more people
search and book accommodations on the site. This dynamic generally leads to a reinforcing
attractiveness to both market sides in which everybody benefits from a platform’s increased
network size. Business models that are both scalable and generate network effects are
therefore expected to lead to a virtuous cycle of increased market share and profitability. In
fact, many of these sharing economy markets are commonly expected to demonstrate winner-
take-all dynamics, in which the market leader will eventually dominate the space13. Based on
this perspective, it follows that new entrants will not be able to compete once the market leader
has reached a substantial network size. If this common wisdom holds true, firms with strong
network effects and high scalability should perform well in the sharing economy.
EXAMINING FAILURE IN THE SHARING ECONOMY
Our analyses, however, show that high scalability and network effects are no protection against
failure in the sharing economy. In this section, we present five mini-cases of sharing economy
firms that, despite impressive network growth in their early stages, had to cease operations or
were acquired by competitors. Table 1 provides a descriptive overview of the five case firms.
It is noteworthy that firms in the sharing economy initially face similar challenges as startups
in other markets. A number of firms that failed due to technological challenges, a lack of
product-market fit, the inability to attract venture capital, or due to flaws in the organizational
13 Eisenmann, T. R. 2006. “Internet companies' growth strategies: Determinants of investment intensity and long-term performance,” Strategic Management Journal (27:12), pp. 1183–1204.
design. Here, we focus on challenges that directly arise from the nature of these business
models and markets.
Table 1: Overview of failure cases
Firm Country Description Founded Exited /
acquired
Total
funding
Homejoy USA Peer-to-peer home
services
2010 2015 $64.2M
Carpooling.
com
Germany Long distance ride-
sharing
2001 2015 $10.0M
Sidecar USA Ride-sharing 2011 2015 $ 45.5M
Stayzilla India Accommodation sharing 2005 2017 $34.0M
Beepi USA Marketplace for used cars 2013 2016 $148.9M
Low customer lock-in
Sharing economy firms benefit from low marginal costs as they are often not directly involved
in delivery the service to customers. Rather, they provide value through the matching and
facilitation of transactions. Monetizing such intangible benefits can, however, be challenging.
Take the example of Carpooling.com, a German firm founded in 2005 that had pioneered and
dominated the peer-to-peer carpooling market in Europe. Carpooling.com allowed car drivers
an efficient platform to find co-passengers to share costs when travelling from one city to
another. The business model was highly scalable and generated strong network effects
between drivers and passengers. In 2013, the firm introduced a revenue model that charged
participants a small commission fee for rides organized via Carpooling.com’s platform. While
passengers had previously paid drivers in person after the ride, Carpooling.com now asked all
participants to register and pay their rides upfront via its digital platform. The change in the
revenue model and the upfront payment was not received well by the customers, as evidenced
by heated user comments on Carpooling.com’s social media sites. Users complained that they
suddenly had to pay for a service that was previously free. Over the subsequent months,
passengers started to use alternative carpooling sites. The reduction in passengers
subsequently decreased the attractiveness to drivers. Within a few months, the virtuous cycle
that had spurred previous growth turned into a vicious circle, with more drivers and passengers
leaving the platform every month. Within a short period of time, the firm had lost a large share
of its network. Following a dramatic demise in size, Carpooling.com was acquired in 2015 by
French competitor BlaBlaCar.14
Low control over service quality
Sharing economy firms are often not physically involved in delivering the service to customers,
have no formal obligations to supply-side users, and therefore enjoy beneficial taxation and
regulation compared to incumbents. While it is easy to recognize how firms can build a
competitive advantage against incumbents based on these features, they simultaneously
present some challenges. As an example, consider the case of Homejoy. Founded in 2010 in
San Francisco, Homejoy was a pioneer in the market for peer-to-peer home services. On its
matching platform, independent participants offer their skills for house cleaning and related
tasks. Homejoy soon became the fastest growing venture backed by Y Combinator, one of the
world's most elite start-up incubators. The firm had already expanded into 30 cities in North
America and Europe until flaws in its business model became apparent. First, Homejoy’s user
acquisition strategy, financed by promotional prices below the firm’s cost, enabled rapid
network and revenue growth but did not build a loyal customer base. Most customers never
returned to pay the regular price after enjoying the promotional offer. At the same time, the firm
encountered quality issues as the independent cleaners showed different levels of
qualification. If Homejoy would have formally trained its cleaners, regulators would have
questioned their legal classification as independent contributors. Thus, the firm faced a trade-
off in which it had to decide between a higher service quality (through formal training and
procedures) and much higher costs (through taxable formal employment). In addition,
customers were hesitant with the idea of trusting their house to a different stranger every time
they used Homejoy’s cleaning service. Further saving both sides the commission fee, satisfied
customers started making cleaning arrangements outside the platform once they found a
trusted cleaner via Homejoy. As Homejoy’s business model was thus financially unsustainable,
14 Source: https://techcrunch.com/2015/04/15/blablacar-acquires-its-biggest-competitor-carpooling-com-to-dominate-european-market/.
the firm incurred increasing losses as it expanded. Given the lack of profitability and staggering
costs, Homejoy had to shut down its business in 2015.15
High competition for ‘idle’ resources
A strength of sharing economy firms is that they utilize resources without owning them. Yet, as
the sharing economy grows and more firms enter the market, access to these resources
becomes increasingly difficult. The ridesharing market and the case of Sidecar provide a good
illustration of the risk associated with leveraging resources that are seemingly idle and free.
Founded in 2011, Sidecar, a San Francisco-based ridesharing firm, provides a good example
for the risks of the survivorship bias. Sidecar pioneered the on-demand peer-to-peer
ridesharing, at a time when Uber pursued a limousine service (hiring drivers) and Lyft had not
yet been founded. After 2012, the three firms applied nearly the identical business models.
Given that the market opportunity and business model enabled the success of Uber and Lyft,
why did the firm announced to cease operations in late 2015? Over the last years, Uber and
Lyft had increasingly engaged in fierce competition to sign on new drivers and passengers. In
cities like San Francisco, both firms offered new drivers a sign-up bonus of up to $750 as well
as additional bonuses for drivers who switched from one platform to another. Thus, access to
drivers and their assets was an increasingly sought-after resource. The strategy builds on the
assumption that the firms can reap superior profitability once they have gained a superior
market position and network size, an expectation that builds on the so-called winner-takes-all
hypothesis. In a market with strong network effects and scalability, the market leader will
become more powerful over time and eventually force its competitors to exit the market or
pursue a niche strategy. The hypothesis explains why Uber is considered to be on a successful
growth path despite having generated a loss of nearly $3 billion in 201616. While Sidecar had
attracted $45 million in funding, the amount was only a small fraction of the funding of Uber
($12.5 billion) and Lyft ($1.8 billion). Hence, competing with a similar loss-making strategy as
Uber was not an option. As the management eventually realized that they could not
15 A good review of Homejoy’s failure is provided by: https://backchannel.com/why-homejoy-failed-bb0ab39d901a#.m3f6hzmq8. 16 Source: http://www.businessinsider.de/uber-2016-financial-numbers-revenue-losses-2017-4?r=US&IR=T
successfully compete in such a competitive environment,17 they decided to pivot their business
model to a peer-based delivery model in 2015. In the transportation market, however, Sidecar
faced competition from firms that both larger financial resources and several years of
experience in the market. Thus, management closed the business months later.
The case also illustrates the risk of inconsistent comparisons when assessing the potential of
sharing economy firms. Network effects and scalability are often used as a narrative to convey
the advantages of sharing economy firms – such as Uber, Lyft, and Sidecar – against
traditional firms in the same industry (e.g., taxis). While such a comparison can emphasize the
specifics of the business model, it often seems to provide an over-simplified and even
misleading understanding of the firm’s commercial potential. The ridesharing industry
demonstrates how sharing economy firms no longer compete only with traditional business
models, but increasingly with each other. Moreover, even Uber’s large network size and
presence around the world does not guarantee its success in key markets such as China or
India, where local competitors Ola and Didi Chuxing currently hold the largest market shares.18
Comparing these firms with each other reveals that network effects and scalability represent
common attributes, rather than factors that can explain the success of individual firms. Hence,
a business model with strong scalability and network effects does not lead to a competitive
advantage within the sharing economy.
Low transaction frequency
Even with lower acquisition costs for the supply side, it can be challenging to develop a
profitable business model if transactions occur on infrequently. Take the example of Beepi, a
marketplace for used car sales. Founded in 2013, the firm provided an algorithm that effectively
matched buyers and sellers of used cars by leveraging big data to find the adequate price. In
comparison to other sharing economy firms, Beepi’s employees were more involved in the
transaction as they inspected and delivered each car, and completed the related paperwork.
Yet, the business model had one key challenge: selling or purchasing a car is an event that,
17 For the postmortem of Sidecar’s Co-founder & CEO, Sunil Paul, see: https://www.side.cr/why-we-sold-to-gm/ 18 https://venturebeat.com/2016/08/08/uber-targets-ola-in-india-after-losing-to-didi-in-china/
for each buyer, usually occurs only every few years. Even when customers were highly
satisfied with the service, they had no need to become customers more frequently. As such,
the customer acquisition cost may only amortize after several years. Yet, over the short run,
the firm’s $149 million in funding were not sufficient to survive until the firm could capture
sufficient value from the established customer relationships. While different organizational
challenges might have contributed to the failure of Beepi19, the case illustrates the risk of
operating in markets with low transaction frequency in which costs occur before the firm can
generate revenues from recurring transactions.
High costs of developing two market sides
To successfully operate a multi-sided business model, sharing economy firms need to attract
a critical mass of users on the demand and supply side. Developing both market sides can be
a challenging task, particularly when the market environment is not (yet) accustomed to
principles of the sharing economy. With more than 50,000 homestay options, Stayzilla was
one of the leading accommodation sharing platforms in India. Stayzilla’s business model was
similar to Airbnb in that the firm charged a commission fee for every successful booking on its
platform. With cutting edge technology, the firm could forecast demand, prices, and predict
booking confirmation rates. Despite the large domestic market potential, the firm announced
its closure in early 2017. Reflecting on the reasons why Stayzilla failed, co-founder Yogendra
Vasupal emphasized the high costs of developing the market in India. “The demand and supply
for homestays was non-existent 18 months back, excluding a few small pockets. As a result,
we had to invest extensively in both sides of the marketplace, creating homestays as well as
guests who would choose a homestay across the country. […] we could not even recoup what
we put in, necessitating very large capital requirement simply to sustain growth.”20 The firm’s
heavy investment in market development had resulted in rapid network growth until early 2015.
Ever since, the number of users had declined steadily21 and caused losses of US$14 million
19 For a discussion of these issues, see: https://techcrunch.com/2017/02/16/car-startup-beepi-sold-for-parts-after-potential-exits-to-fair-and-then-dgdg-broke-down/ 20 The full reflection on the firm’s failure was published on the firm’s blog. 21 Data for monthly users are derived from: https://mattermark.com/app/companies/194104.
in the subsequent financial year (against revenues of US$2 million). Moreover, once Stayzilla
had familiarized Indians with the concept of private accommodation sharing, Airbnb entered
the market. Given its large brand recognition and financial means, Airbnb soon forced Stayzilla
into a small market niche.22 The case demonstrates that whether a sharing-based business
model succeeds further depends on the specific market environment. In addition, it shows that
even if the firm succeeds in developing the market, the initial costs and efforts might not pay
off if competitors can leverage their network size across markets.
22 Source: Velayanikal, M. (2017). India’s largest homestay startup Stayzilla shuts down. URL
https://www.techinasia.com/stayzilla-likely-shut-down.
Unexpected changes in legal environment
Sharing economy firms often develop a competitive advantage as they operate outside their
industry’s formal regulatory and taxation system. Yet, with increased professionalization of
sharing economy services – i.e. participants earning their living through the sharing economy
–, public perception and legal treatment of these firms started to shift. Legal battles of ride- and
accommodation sharing firms in cities around the world demonstrate the dependence of these
business models to their legal environment. For instance, authorities in Airbnb’s home market,
San Francisco, have implemented legislation that limits short-term rentals and requires
participants to officially register with the city and pay a hotel tax. Most importantly, the
legislation shifts the responsibility of violations to the accommodation sharing platforms, who
have to pay fines of up to $1,000 per day for each listing on their platforms that is not registered
with the city. As only around 25% of Airbnb’s San Francisco were registered when the law was
introduced, it represents a large financial risk to the firm and forces Airbnb to actively remove
listings from its platform.23 In addition, public opinion about these firms has shifted as people
start to gain more awareness about the working conditions in ride sharing or the impact of
accommodation sharing on the nature neighborhood communities. In some cases, new
legislation has even destroyed the viability of a business model. The startup Flytenow entered
the market as the first ride-sharing platform for aircrafts, connecting local pilots with aviation
enthusiasts. After the venture had successfully grown for two years, authorities decided to ban
flight-sharing websites.
These examples provide some counter-evidence to the common wisdom about success in
the sharing economy. While they shouldn’t discourage managers from pursuing business
opportunities in the sharing economy, they highlight that even business models with high
scalability and network effects are no guarantee for sustained performance. In addition, the
cases can help managers in understanding the specific challenges for competing in the sharing
economy. Table 2 summarizes the identified causes of failure and describes the related risks.
23 After a year-long lawsuit, Airbnb settled in May 2017. For the story behind the settlement, see: https://www.wired.com/2017/05/airbnbs-san-francisco-deal-puts-storyline-bottom-line/.
Table 2: Causes of failure in the sharing economy
Causes of failure Related risk for sharing economy firms
Low customer lock-in The transaction-centered nature of sharing economy
business models generally provides low switching costs
between platforms. Hence, a firm can rapidly loose its
demand- and supply side participants.
Low control over service
quality
Inability of sharing platform to provide a consistent customer
experience as the firm has no formal control over its
contributors.
Competition for ‘idle’
resources
New entrants can threaten the business model of the
dominant platform by aggressively competing for its supply-
side participants.
Low transaction
frequency
Firms face difficult economics if customers only have highly
infrequent need for the shared good.
High cost of developing
two market sides
Pioneering firms need to invest in legitimizing sharing
activities and developing the networks of demand- and
supply-side participants.
Unexpected changes in
legal environment
Regulatory changes threaten the firm’s business model or
impose expensive lawsuits.
The identified sources of failure and the revealed fallacies show that sharing economy
business models can become highly rewarding, yet are faced with certain risks. When
designing their business model, managers eager to maximize growth, should not lose sight of
these sources of failure. Over the course of our case studies, we observed how several peer-
to-peer sharing platforms had transformed their business models towards greater resilience
against these risks. Based on an in-depth case study, the next section describes how Udemy,
a peer-to-peer marketplace for skill sharing, developed a hybrid business model to combat the
risks of the failure factors inherent in the sharing economy.
TOWARDS A HYBRID BUSINESS MODEL: THE CASE OF UDEMY
Udemy and the market for skill-sharing
With new technological advances, new opportunities exist to match individuals with
specific skills to learn from each other. As such, several firms have developed business models
around skill-sharing services. Among them, Udemy, a San Francisco-based firm, set out in
2010 to develop an online platform on which individuals would share their unique knowledge
and skills by creating short online courses and selling them to other individuals.24 More than
10 million people learn with the 55,000 courses created by individual experts on Udemy’s
platform. Udemy’s primary product is a web-based learning platform (www.Udemy.com) that
offers self-paced online courses on a broad variety of topics, ranging from business and
marketing skills, to design skills, language courses, or courses for developing skills in specific
hobbies. Each course generally consists of a series of videos, additional multimedia files, or
short quizzes.
Against this background, the empirical case study aimed to discover how Udemy’s
business model originally enabled the firm’s sustained growth. Udemy’s applied a typical
sharing economy business model, providing a peer-to-peer marketplace. Udemy applied a
commission model in which it captures a percentage of the price paid for each course. Prices
for courses were freely set by the course instructors within the range of US$9 to US$300 per
course. Udemy’s value creating activities were rather similar to those of other peer-to-peer
marketplaces like Airbnb or Uber. By early 2016, Udemy employed 270 employees, with its
largest teams focusing on engineering, instructor development, and user growth (marketing).
As other sharing economy firms, the business model did not engender substantial marginal
costs and was therefore considered as highly scalable. The platform becomes more attractive
to learners when more people create online courses – and more attractive to instructors when
more people buy their courses. Hence, the business model also inherently generates network
effects.
Udemy faced several of the identified risks and addressed them with different solutions.
To reduce the burden of developing both a demand and supply side, the firm initially focused
on attracting supply-side participants (instructors) with an innovative technological solution that
allowed to upload videos, blog posts, presentations, and engage with an online audience. In
addition, Udemy partnered with other learning platforms to link existing online courses to their
24 The Udemy case is based on a series of six interviews with board members and executives from Udemy (Marketing, User Growth, International, Supply Side, and Communications), a visit to the headquarters of Udemy in San Francisco (California) and its lead investor (Norwest Venture Partners) in Palo Alto (California), as well as 8 interviews with managers of competing online learning platforms and experts in the Education Technology (EdTech) market.
platform and even produced proprietary content. The firm only started to attract demand-side
customers after it had attracted a substantial network of experts and learning content. To
reduce the risk of participants taking their transactions outside the platform, Udemy developed
comprehensive technical and social features that provide learners with additional benefits of
taking courses on Udemy’s platform. These continuously engage (and retain) students, rather
than suggesting they simply purchase the course content. Udemy effectively serves as a cloud-
based learning library, in which students discuss the content with each other and with the
course creator. Thus, Udemy’s service provides a natural lock-in mechanism as users need to
return to the platform in order to consume the content. To ensure a certain quality level, Udemy
provided instructors with detailed design guidelines and a design platform. Yet, with thousands
of courses created every year, the firm could not prevent some instructors from offering low-
quality lectures.
While the business model’s characteristics allowed to rapidly grow the network size
and revenues, the firm yet to become profitable. In particular, it was not clear whether and
when the business model would redeem the high costs of rapid market development, as well
as whether it could sustainably fend off aggressive competitors. While the online skill-sharing
market itself was growing at significant rates every year, market saturation would eventually
increase the competition between these firms. Hence, Udemy’s managers faced an important
strategic decision. On the one hand, they could focus their entire resources on scaling the
platform at the highest speed possible to further strengthen their size-based advantage. On
the other hand, the management gained awareness of the risks associated with the pure peer-
to-peer sharing business model.
Towards a hybrid business model
Knowing about the short-sightedness of focusing on scalability only, the management
decided to transform towards a hybrid business model. In this context, hybrid refers to a
business model that combines a network-based with a hierarchical coordination approach for
creating and delivering value. Hybrid business models provide the growth benefits of a peer-
to-peer sharing platform while ensuring financial stability through recurring revenues from a
contractual business-to-business (B2B) model. In the B2B model, Udemy bundles the most
popular courses – created by individuals on Udemy’s platform – and offers them as a corporate
training solution to other firms. In the model, Udemy curates the best courses that fulfill the
quality expectations of business customers. The courses are provided via a customized
version of Udemy’s online learning platform, in which the corporate customers can integrate
their existing content with the courses already created by Udemy’s instructors. Udemy charges
business customers a monthly subscription fee for its services, which included the learning
platform, content, technical support and other personalized services. The price for business
customers depended on the number of employees.
The hybrid business model addresses several of the identified risks. Selecting courses
with high quality allows Udemy to take greater control over the ultimate quality of the service.
Also, the nature of the customer relationship shifts. In the sharing business model, learners
interact mostly with instructors. In the B2B model, Udemy provides a customer support service
as a primary point of customer contact. In addition, the B2B model provides a much more
predictable stream of revenues as customers pay the monthly subscription fee. Also, the hybrid
model can increase customer retention. While it requires more time in resources to acquire the
business customers, they have a much higher retention rate. Once a firm decided to use
Udemy’s service as its primary source of employee training, it would incur substantial costs to
reverse this decision since it had already invested substantial effort in customizing and
integrating Udemy’s platform with their other learning resources. Also, the hybrid business
model is less vulnerable to changes in legislation would still allow a sustainable income stream
if instructors would leave Udemy to share their skills on a competing platform.
As the B2B model incurs higher marginal costs per customers – given the customization
and the customer support – the hybrid business model is likely less scalable as the pure
sharing business model. However, apart from network effects, the hybrid business model can
engender an additional virtuous cycle between the two customer groups. Such virtuous cycles
have been identified as one of the most important features of effective business models.25
In a first virtuous cycle, Udemy actively uses its popularity in the consumer market as a
competitive advantage in the corporate market by communicating its services on its website
as: “Business relevant, professional-grade online training vetted by 12M people around the
world”. Hence, the network of individual learners represents a valuable resource to business
customers, and vice versa. Thus, the more individual customers the platform attracts, the more
legitimacy it gains among business customers. In turn, attracting well-known brands as
business customers allows Udemy to gain further legitimacy in the consumer market. At the
same time, a hybrid business model often also engenders a virtuous cycle between business
customers and the supply-side participants. In the case of Udemy, instructors benefit from
increased revenue opportunities. An increased engagement of instructors, in turn, leads to
larger supply and thus increased value to customers. Overall, the hybrid business model can
provide Udemy with a much more stable path towards profitability and reduce its vulnerability
to several of the risks associated with peer-to-peer sharing business models.
CONCLUDING THOUGHTS AND RECOMMENDATIONS
Driven by the success of few sharing economy firms, investors and entrepreneurs alike
are interested in exploiting sharing economy opportunities. With their eyes on success factors,
many oversee the inherent risks in sustainably operating a business that does not own key
resources, depends on the voluntary contributions of independent actors, and operates in an
environment with high regulatory uncertainty. Indeed, the last years have seen several sharing
economy firms fail with business models that applied the same factors that seemingly explain
the success of Airbnb or Uber. Scalability and network effects are necessary characteristics of
successful sharing economy business models. Yet, the tales of Carpooling, Homejoy, Sidecar,
Stayzilla, and Beepi have shown that they are far from sufficient to develop a sustainable
25 For a conceptual understanding of how virtuous cycles enable sustainable business model design, see: Abdelkafi, N., and Täuscher, K. 2016. “Business Models for Sustainability From a System Dynamics Perspective,” Organization & Environment (29:1), pp. 74–96.
business model. In fact, these characteristics can equally turn a virtuous cycle into a vicious
cycle. To assess the economic potential of a sharing economy firm, it is time to start comparing
sharing economy business models with each other, rather than only with traditional ownership-
based business models in the same industry.
The cases revealed six causes of failure that reveal insights into the risks of competing
in the sharing economy. First, sharing economy firms often struggle to retain customers on
their platform, as customers encounter low switching costs between competitors. In sharing
economy markets where transactions are not highly time and location sensitive, customers
often aim to bring transactions outside the platform once they founded a trusted sharing
partner. Second, these firms have lower control over service quality as they are not involved
in delivering the good or service. Third, we observed an increasing competing for the access
to participants and their contributed resources. As sharing economy markets become more
competitive, the rising demand for these ‘idle’ resources increases their indirect costs. Fourth,
we observe that some markets are less suited to achieve profitable growth when transactions
typically occur on a rather infrequent basis. A fifth challenge relates to the high costs of
pioneering a sharing economy business model in a market that is not (yet) accustomed to
sharing principles. Finally, sharing economy firms across several markets face increasing legal
challenges that might increase their costs, or even threaten the validity of their business
models. Without denying the strong growth and profitability potential of peer-to-peer sharing
models, the identified challenges should alert managers to focus not only on success cases
but also consider the silent evidence.
The article hopefully helps managers to learn from past failures by recognizing key risks. Table
3 summarizes the findings by providing questions that allow managers of sharing economy
firms to reflect upon their current business model and generate ideas for a potential hybrid
business model.26
26 An overview of tactics and practices to design and manage business models based on independent participants
is presented in: Täuscher, K. 2016. “Leveraging collective intelligence: How to design and manage crowd-based
business models,” Business Horizons.
Table 3: Summarizing questions for reflection
Approach Questions for reflection
Evaluate risks and
recognize potential
sources of failure
▪ How likely are demand and supply-side participants to change to competitors? Do they have sufficient incentives to conduct transaction via on our platform?
▪ Can we ensure a consistent quality level in the work of our sharing participants?
▪ How much will it cost us to attract new supply-side participants once more competitors enter the market?
▪ How frequent will participants return to the platform for subsequent transactions?
▪ Can we at least attract one market side without incurring large costs? ▪ Which regulatory changes would threaten our current business model?
Develop a hybrid
business model
▪ How can we leverage the shared assets to target a new customer segment?
▪ How can we develop a stable revenue model that is less vulnerable to market fluctuations?
▪ Is the new business model complementary with the peer-to-peer sharing model? Does it create any virtuous cycles?
We hope that this article inspires managers to think about business models with the
objective of reducing risk in the long run rather than maximizing growth over the short run. In
investment theory, it has become common practice to build investment portfolios with the
objective of risk diversification and mutual risk mitigation. Similarly, a hybrid business model
can mitigate the inherent risks of the sharing economy by combining a sharing- and a
hierarchical business model.
To successfully develop such hybrid business models, managers can start by reflecting on
how they can leverage their firm’s key assets in different markets and generate more stable
revenue streams by adding additional services. Once they have generated some ideas, they
should critically examine whether the new business model is complementary with the existing
sharing model. Ultimately, only a sustainable business model allows sharing economy firms to
substantially contribute to social and ecological goals. Over the next years, we expect that
several new hybrid forms will emerge and further blur the boundaries between the sharing
economy and traditional economies. In such a transformative environment, managers can find
countless opportunities to succeed in the sharing economy if they can learn from early failures,
mitigate common risks, and build business models that are not only scalable, but also
financially sustainable.