Many aspiring entrepreneurs are looking at the growth of platform-based companies that match sellers of services with buyers of services, and thinking about how they might apply this business model to their own new startup. Despite the success of companies like Airbnb and Uber, developing a flourishing on-demand two-sided service market is not an easy thing to do.
Justin Raymond learned what's required to get it right based on his experience as president of Hailo North America.
Hailo is an app which lets people hail a cab with two taps on their smartphone. It's different than other app-based transportation services like Uber because suppliers are restricted. Instead of allowing anyone to transport customers in their private cars, Hailo transportation is provided by licensed drivers in licensed taxis or limos. Mr. Raymond describes Hailo as "dedicated to following regulations," such as the insurance regulations for drivers and cars.
Hailo was launched in the U.K. in Nov. 2011 and entered the Toronto market – its first North American market – in Sept. 2012. Mr. Raymond joined Hailo in 2012 as president of Canadian operations to spearhead the Toronto launch, and became president of the North American operations in early 2014.
What was required to get traction in Toronto? And, importantly, what went wrong in the U.S. markets?
Mr. Raymond says that it is essential in two-sided service markets to establish a "triangle of fairness" with suppliers, customers and the business. Suppliers must be able to generate enough new business to make it worth their while to stay on, customers have to experience sufficiently high levels of quality and service reliability in order to stay on after an initial trial, and the business has to be able to generate enough money from commissions in order to pay for constant technology development and marketing campaigns, and to make a financial return for investors.
"If any of these fall out of whack, then it's going to be hard to grow," he says.
He explains that you need to start with suppliers because customers will stop using your service if you can't provide satisfactory service levels.
"For the on-demand transportation market, it is essential to achieve an 80 to 90 per cent completion rate in order to have satisfied customers, and so it is risky to start offering a service without confidence that you'll be able to hit that target," he says.
In addition, regular use is essential: "People need to use the service on a regular basis for it to be top of mind."
This means that having a large stable of taxi drivers in Toronto was essential, and Hailo Canada put together a three-month program to recruit them. Mr. Raymond describes these licensed drivers as independent contractors that are free to answer any dispatch.
"We focused on helping drivers understand how Hailo would grow their business. Our technology eliminated the middle-man and sent the call automatically to the closest cab, which saved them money and time."
Once there were enough drivers and the technology was fully tested, the company was confident that people would get a taxi when they tapped on the app and they launched a successful campaign to attract customers.
Two years after entering the Toronto market, Hailo pulled out of North America altogether, to concentrate on European and Asian markets. Mr. Raymond asserts that while the Toronto market was working well, it was an island.
The other North American markets were weaker and it didn't make sense to leave Toronto operating on its own. He identifies two reasons for the weaker traction in other markets. The first has to do with supplier dynamics: in the other markets, "taxi drivers relied very heavily on street pickups and contract work (hotels, etc.) and couldn't provide the reliability required to meet customer expectations."
The second reason has to do with the competition. The entry of Uber made North American markets intensely competitive. "Hailo already had a deep imprint in the U.K. and Ireland and so there were benefits to focusing on growing the business there. In North America, Uber was so well financed that it was difficult to compete against them for passengers."
For aspiring entrepreneurs, an important lesson from Hailo is that a great service might not be well-suited to all markets. It's important to rigorously test fit in a market to ensure that the service can be offered reliably, prior to investing in customer acquisition in that market.
Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They now appear every Tuesday on the Report on Small Business website.