Capital & Economics

In Demand: The Growth Of The On-Demand Economy

June 29th, 2017

Overview

A car hailed, a room booked, a job filled – all at the swipe of a finger. Welcome to the “on-demand” economy.

Thanks to advancing technology and customers pushing for a better experience, old ways of doing business are being transformed. Also known as “the gig economy” and “the sharing economy,” this new economic model has become a phenomenon, with revenues in the automotive, hospitality, finance, staffing and media streaming sectors alone projected to grow from $14 billion in 2014 to $335 billion in 2025.

As the on-demand model is still developing, its definition is changing. However, its businesses tend to include three distinct elements: an independent worker providing a specific service (e.g. a driver); a consumer requiring a service immediately (e.g. a passenger); and an online platform connecting them directly at the moment of need (e.g. a ride-hailing app).

Other core characteristics are workers who enjoy a high degree of autonomy and receive payment per task or sale, whether it’s a 30-minute drive or a 30-week project.

Following strong uptake by both workers and employers, investment in on-demand platforms such as Uber, Airbnb and Deliveroo has been enthusiastic. From transportation to accommodation, the on-demand model disrupts every sector it enters – and has also created new ones.

Even established firms are adding on-demand elements to their business models. U.S. retail giant Walmart recently began building a network of on-demand delivery drivers from its own employees, to deliver customer orders on their way home.

So, is this new economic model a fad or will it continue to improve the customer experience and become the norm?


In Depth

In the first of a new series exploring the on-demand economy on The One Brief over the coming weeks, we look at its growth and identify five key characteristics of the model’s expansion:  

1) On-Demand Is In Demand

On-demand services are proving to be hugely popular, with major platforms reporting substantial user figures. Being directly connected with service-providers by a digital platform – whether it be a handyman or a private lender – cuts out the middle man. Having services available at the moment of need is convenient and reduces waste, creating an attractive and competitive marketplace for customers.

2) The On-Demand Economy Is Already Here

The on-demand workforce can be seen as an evolution of freelancers, part-time workers on zero hours contracts, and day laborers – filling short-term requirements in manpower and expertise. What has changed is the way those needs are being met, with digital platforms enabling greater efficiency for businesses and flexibility for workers.

On-demand workers can be defined in four categories:

  • Free agents, who choose this style of work because they enjoy the flexibility, e.g. a freelance copywriter or coder.
  • Casual earners, who are supplementing their income from a traditional job, e.g. a university professor giving after-dinner speeches.
  • Reluctants, who take on-demand work out of necessity but would prefer traditional jobs, e.g. a temporary secretary on a zero hours contract seeking a permanent position.
  • The cash-strapped, who are employed in low-paid jobs, but have to take extra work to make ends meet, e.g. a school janitor also taking work as a decorator at the weekend.

In some instances, the transition to the on-demand economy has been subtle for the worker. Just 35 percent of U.K. on-demand workers are familiar with the term “gig economy” – perhaps because they do not see their part-time job as part of a high-tech business revolution.

 

3) The Rise Of The Flexible And Freelance

The growing number of workers joining the on-demand economy has been fueled by a rising desire for flexible working arrangements. This is being led by digitally-savvy Millennials, a key component of the on-demand working population, and a generation used to managing their lives with digital platforms. With each worker more in control of the jobs they accept and when they are available to carry them out, the on-demand economy appears an ideal environment to offer an improved work-life balance.

4) A Maturing Investment Environment

To be successful, businesses in the on-demand economy need to achieve scale – and fast. This means frequent and substantial funding rounds. Before the first half of 2014, on-demand startups had never raised more than $500 million a quarter. Since then, that figure has shot up to $1.5 billion – a sign of increasing maturity in the sector.

However, as the on-demand economy matures, total annual investment in it is declining – falling 35 percent in 2016 on the previous year. Capital is also gravitating towards the established market leaders. Early-stage investment declined by 53 percent as a share of total investment in the sector in 2012, to 40 percent in 2016. Over the same period, successive funding rounds increased from 18 percent to 30 percent of the total.

5) Good Service Has Broad Appeal

On-demand services are proving almost universally popular: Users are spread evenly between rural areas and big cities, and between rich and poor.

Unsurprisingly, Millennials are leading the generational uptake, accounting for 49 percent of on-demand consumers. But with 29 percent aged 35 to 54, and 22 percent aged over 55, the generational skew is mild, considering the greater degree of familiarity Millennials have with technology in general.

Looking To The Future

It is still early days for the on-demand economy. Business models – and revenue models – are likely to continue to shift. There are also many challenges to overcome – from regulatory unknowns to the meaning of “gigging” for the wider economy and society.

The model poses many long-term questions: as more people move to freelance roles, what will be the impact on employee engagement? How will traditional benefits – such as health insurance and pension and retirement planning – be impacted when workers are no longer full-time? How will technology impact other sectors?

Even with such unknowns, whether by a swipe or a click, the on-demand economy seems to be delivering something new: a world in which the customer owns the experience. With technology as such an enabler, perhaps organizations should begin to think about how to disrupt their own models.


Talking Points

“It’s all about democratizing capitalism.” – Chris Lehane, Head of Global Policy and Communications, Airbnb

“On demand isn’t going away as an investment sector. There’s just this perception that the obvious white space has been occupied – that those areas have been tried and either have an anointed winner or just don’t work in the on-demand context. Whether either conclusion is correct is another matter.” – Zach Noorani, Partner, Foundation Capital

“Our survey finds that the majority of independent workers in all countries participate by choice.” – Susan Lund, Partner, McKinsey Global Institute


Further Reading

 

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