Years ago, lots of new on-demand startups started to appear in the market. Initially, they were all considered a bubble which would soon fail. However, the time has passed and many of them rank at the top of the most successful businesses in the world.
So have you recently built an incredibly designed mobile app that’s going to solve the pain of thousands of people in the market? Well, if the answer is yes, then you might be thinking that you have done something unbelievable. You'll feel on top of the world and start to believe that your idea is one in a million. But that is not the case in reality.
With the advent of technology, on-demand startups are burgeoning and proliferating over time. The internet has trained us to do multiple tasks in quick time. App-based services such as cab booking, ordering online groceries, navigating through local markets have become superhits in the global market. While some startups have tasted the cherry on the cake, others miserably failed to do so.
When the entire world is going digital, a mere click of a button on your mobile phone can create wonders for you. Amazon's 'Same-day shipping' has taught us how products can be delivered to our doorstep in no-time. With Entertainment platform Netflix, we can watch our favourite movies and web series anytime anywhere. Taxi-riding app, Uber has awed millions of daily travellers with their schematic booking interface.
Local on-demand delivery apps have adopted the model of scaling the consumer base to bring in more vendors for your business. There are consumer-centric hyperlocal startups that are draining multi-million dollars on marketing and acquiring new customers. These startups are eventually failing to sustain in the long run and therefore running into huge losses without achieving the desired results. The deterring experiences of these blooming entrepreneurs leave us startled to find out the appropriate reasons for failure.
Before going straight to the causes of the collapse of these on-demand startups, lets deep dive into finding the key challenges they are facing in this space.
Challenges faced by On-demand startups:
On-demand startups sometimes fail to acclimatize with the fluctuations and mood-swings of the customers. This change in the customer's behaviour creates a slump in their growth.
Most on-demand startups fail to record tractions from all parts of the country since they work on a hyperlocal model catering to people from certain pockets of a city.
Services startups in the hyperlocal space require a lot of time to settle in. Thus, time acts as a roadblock for some startups to flourish in a full-fledged manner.
Throughout the years, we have experienced a considerable number of shutdowns of on-demand startups in the United States and other countries.
Let's sneak a peek at the five possible reasons of failure of such companies.
With the upsurge in demand for hyperlocal services, the market is flooded with on-demand businesses catering to A-Z needs of consumers. Many striving entrepreneurs are jumping onto the startup bandwagon without having a clear vision for the future. In order to compete steadily with the other players, they are giving away services at a minimal cost.
They are spending heavily on delivery such as labor, transportation, and infrastructure development. With insufficient funds, budget constraint acts as a roadblock for the startups to flourish. Due to the inexperience of these entrepreneurs, they are failing to create an impact in the market with their offerings. After spending abundantly on marketing and workforce employment, they are facing the fund crunch which is ultimately leading to their demise.
Reluctance in Investments from Venture Capitalists
With the failure stories of startups hogging headlines of the famous newspapers and digital news media, the investors are becoming doubtful of investing in these startups. The honeymoon period between VCs and startups is finally over, and the investors are mainly relying on the numbers. They have slowly taken a backseat and started assessing the credibility of these on-demand businesses.
VCs have become exceedingly cynical about writing drafts for these startups and asking them to prove their business model in the market. The startup funding has not yet dried: the new businesses that are having a calibrated financial model will hit the jackpot.
VCs are of the perspective that the startups having long-term goals will be able to survive in the market and such companies are slowly becoming the focal point of cash investments for a majority of investors. These startups will be able to surmount the coming challenges, and their valuations will go higher in the future.
Slender margin of profit
Since the on-demand startup ecosystem in the United States is beaming with a number of new entrants, prices are optimized in such a way so that it becomes lucrative for the consumers. High prices can lead to a decline in the number of existing customers and cast a negative spell on the growth of sales and revenue generation of the business.
According to the market belief, your prices should match the quality of the products or services you are offering to your consumers. Keeping in mind, the huge competition in this business, startups whittle down the prices of their products to stay evident in the market. They become unsuccessful in optimizing the cash outflow of the business and hence fall short of reaching the break-even point. Instacart, the popular US groceries delivery start-up, is yet to prove its profitability and feasibility in the market.
To make your services scalable, you need to fight through the odds and make your product standalone in the market. This can be done only when you start burning your cash. Money-making becomes increasingly tough once you start losing orders and so for keeping the count constant, you have to price your products reasonably. In either way, startups face the heat of either losing money or losing customers.
Incompetence of the product in the market
Your startup idea won’t serve you better unless your product or service is of superior quality. The customers will prefer your product only if it has a competitive edge over the existing products or services. Most of these startups rely on their mobile app to provide their services.
Most of the hyperlocal startups fail to improve the quality of their product over time. If they have a working app, then they mostly focus on monetizing their business by building a customer base. As forecasted by the analysts of famous VCs, the market size of these on-demand businesses is swelling day by day.
The on-demand businesses are sprouting out of nowhere to add more value to the local marketplace in the United States. In order to maximize the customer visits, these startup companies are trying to hook their existing and new customers with attractive coupons, offers, and discounts. They fail to understand that this is not a genteel way of acquiring customers. Instead, they have to think out-of-the-box to earn the trust of the customers and also enhance the brand loyalty.
Such bizarre tactics are depreciating the valuation of these startups since the investors are highly skeptical about the discount model of marketing. Discounts often lead to negative margins, where the cost of the service is higher than the money you get from it. Startups are willing to lose big amounts of money to build that customer base and then raise prices when the users are hooked and highly engaged with their brand.
The All-In-One Newsletter for Startup Founders
Every week, I’ll send you Failory’s latest content, curated resources, and updates on how I’m growing the site to $10k/mo. Join +9,000 other startup founders!
Lack of expertise in the operations related to the domain of your business can result in the downfall of your startup. Such is the case of a number of startups functioning in the on-demand business domain. If the appropriate workforce is not hired for a particular job, the growth of a startup will be hampered on a large scale. Unwillingness to perform as a team and lack of coordination among the team members will make your startup dysfunctional. Most of these drowning businesses have been choked by the deficit of high-skilled industry experts.
Before being deployed for a particular role, training should be given to them. Drying of funds is prevalent among these startups, and the exit of high profile bosses creates a more jolting impact on their growth. Startups without even adjudging the skill-set and expertise of candidates hire them at ease and offer them cushy paychecks. For most of the startups thriving for growth in this section has a proper set of employees.
In some cases, startups operating in this domain fail to retain professionally trained employees due to lack of money in their kitty, They fail to praise the performance of their employees by giving them cash benefits and subsidiary incentives. Since on-demand service is a niche domain, these startups need to hire people who have a prior work experience in the same domain.
The Final Note
There are hundreds of startup ideas in the market but how will you validate your own?
Be cocky and validate the market keeping all the dynamics in mind. At first, you need to track and optimize the data from the trusted sources. Study the numbers in details before making any decision.
On-demand startups have the advantage of building the trust of customers in the long run.
If you are a founder of one among these startups, these points will help you in creating a successful on-demand business
Take help of the latest technology in enabling the best services suited to the needs of the customers.
Try to give them a positive feeling about your product and enhance the user experience.
Focus on earnings that are driven by the performance of your startup.
Increase the present count of the vendors to provide more options for your customers.
Try to automate your services by leveraging advanced tools and solutions.
Use analytical tools to measure the performance of your business. It gives you a rough estimate of where your business stands and how will it grow in the coming few months.
Last, but not the least, reduce overhead expenses to build an endurable solution for both the customers and service providers.
The most useful business tips come from the successful entrepreneurs. Know how they have made it big, and then start creating a product which is viable to the market requirements. All of them have stated that success is a slow and steady process. The more you try to achieve it faster, more is your chance of committing mistakes. Hence a sustainable business model is of high priority to create a scalable solution for your customers.