Over the last decade, the sharing economy became very popular with many new arising businesses that try to succeed in this competitive market. While Sharing economy businesses (SEB) like Airbnb are prime examples for success, many others fail. In this short blog, I will present several reasons for the failure of such businesses.
In total, Chasin, Hoffmeister, Hoffen, and Becker (2018) have identified 7 major reasons.
1. Lack of platform providers: A major issue is an imbalance between service providers and consumers. If there are too many consumers and not enough providers, a sharing economy business will not be able to function properly. The main challenge for businesses is to recruit a sufficient amount of providers. A lack of participants usually results from insufficient marketing (Chasin, Hoffmeister, Hoffen, and Becker 2018).
2. Insufficient analysis of the sharing market: SEBs are prone to performing only poor analyses of their business idea before designing and creating the service. Oftentimes, there is no market with sufficient size to operate in. Likewise, some markets are dominated by bigger businesses who have more resources and therefore are able to change the rules of markets (Chasin, Hoffmeister, Hoffen, and Becker 2018).
3. Trust and safety concerns: In fact, sharing economy businesses rely on providers of resources and thereby have little control over service delivery and quality. However, consumers need to trust that a provider will deliver the expected service at good quality. Likewise, providers need to trust that consumers will behave in the expected manner and treat resources with respect. Trust and safety concerns are a major impediment to user’s participation in SEBs and firms need to put much effort into creating such trust (Chasin, Hoffmeister, Hoffen, and Becker 2018).
4. Hidden resource requirements: Oftentimes, managers of SEBs tend to be less prepared for the resource demands than managers of traditional businesses. Some managers view their business to be simple and therefore not needing many resources. Such mismanagement increases the risk of failure and often results in lack of financial resources (Chasin, Hoffmeister, Hoffen, and Becker 2018).
5. Unscalable technical design: While a unique benefit of SEBs is their ability to scale up quickly to accommodate increasing consumer demand, this requires a scalable technical solution to it. However, some businesses fail due to insufficient technical capabilities which does not allow them to grow as fast as they potentially could. While the business design often is complex, it should still allow for quick changes to allow rapid growth (Chasin, Hoffmeister, Hoffen, and Becker 2018).
6. Unclear legal environment: Legal barriers are hard to avoid and often are a serious risk to the viability of SEBs. Especially at younger age where firms lack financial resources, challenges with legal requirements can quickly lead to complete firm shutdown (Chasin, Hoffmeister, Hoffen, and Becker 2018).
7. Business termination through acquisition: A further reason why SEBs cease to operate are acquisitions by other businesses. Most acquisitions result in the acquired business’ users being transferred to the acquirer’s platform (Chasin, Hoffmeister, Hoffen, and Becker 2018).
Overall, there are many factors that managers of sharing economy businesses need to consider since they are also prone to failure.
Reference
Chasin, F., Hoffen, M., Hoffmeister, B., & Becker, J. (2018). Reasons for Failures of Sharing Economy Businesses. MIS Quarterly Executive .
Hi Sebastian! Thank you for your interesting article. I would add that a critical failure factor for sharing economy are the existence of barriers for participants. Particularly, such barriers decrease the likelihood of participation or even preclude participation most of the times. Therefore, as sharing economies are based on collaborative consumption, barriers to participation are considered among the biggest challenges for platforms. Managers must be careful to design platforms and processes that strictly take the elements of the sharing economy and the corresponding users’ barriers into account.