Online marketplaces dare not forget the human touch

November 27, 2013 6:39 pm

Online marketplaces dare not forget the human touch

By Richard Waters

It takes more than an app to keep customers happy

It is every tech entrepreneur’s dream. Think of a new idea for a marketplace, throw up a website (or, these days, an app) for buyers and sellers to connect, then sit back and rake in the cash. It also helps to come up with some lofty rhetoric to ennoble your opportunism. Calling yourself part of the new “sharing economy” makes the endeavour sound so much grander.Online marketplaces such as Uber, for high-end taxi services, and Airbnb, for temporary accommodation rentals, have struck a chord with start-up investors. Economies, however, depend on more than just the marketplaces where willing buyers and sellers meet and transact – even if those happen to be the most profitable places for middlemen to insert themselves.

They need infrastructure and services to support the new forms of activity they promote. And they must generate the trust among customers that comes from a consistent, reliable and safe experience – even when the service is being delivered by a third party.

As Brian Chesky, chief executive of Airbnb, put it at a press conference this month: “We used to think the product was the website and we only designed the online experience – because that’s what every other tech company does.”

Along the way, though, reality intruded. It was not just that some landlords returned to find their homes damaged by paying guests, or that regulators and tax authorities got interested in the company’s success. Renters wanted the assurance that they would get a decent place to stay – and, when things went wrong, that there would be someone on the end of a phone to make them right again. It takes more than an app to keep customers happy.

An important question for companies such as Mr Chesky’s will be whether they can evolve into true service businesses capable of dealing with issues like these, without at the same time adding a layer of cost that undermines the attractions of their business model.

The best example of the low-touch, high-commission online marketplace is still eBay. More than 15 years after its initial public offering, the virtual flea market has maintained a remarkable consistency. Its take rate – the share of gross sales that it keeps for itself – was 8 per cent last year, exactly what it was a decade and a half ago. Users griped in the early days that eBay was slow to tackle fraud. With only 76 employees when it went public, it did not have the resources to do much beyond run a website. Since then, its cost base has ballooned, and now encompasses a workforce of 31,500. But revenue per employee more than doubled after the IPO, topping $500,000, before slipping slightly in the past couple of years.

Providing new services to keep the eBay economy running smoothly has also been a new business opportunity. The extra payment processing revenue it gets from PayPal, which is used to settle about half of the transactions on eBay, lifts the average take rate to 11.5 per cent.

The Airbnbs and Ubers of the world are only at the beginning of working out how to deal with similar problems – and opportunities. Uber, for instance, is now offeringsubsidised car financing to its drivers, provided they commit to a certain level of business with the company.

We used to think the product was the website and we only designed the online experience – because that’s what every other tech company does.

– Brian Chesky, chief executive of Airbnb

The eBay experience has provided at least one valuable lesson: in the early days, trust is all. Airbnb’s use of showy (and sometimes expensive) interventions to appease customers when things go wrong has been an effective way to reassure early users. But it becomes harder to maintain the reputation for special treatment as a company grows without permanently inflating the cost base.

The expense of providing the human touch is a problem confronting online services of all types.

Take Redfin, an online real estate group in the US that employs its own network of brokers. Most marketplaces see it as their mission in life to make humans like this redundant. But Redfin’s investors, who just pumped an extra $50m into the company, claim that in the long run many service businesses will do best with a hybrid approach that blends humans and computers.

This may make them less attractive as takeover targets, according to James Slavet of Greylock, one of Redfin’s backers. He relays the answer that Glenn Kelman, chief executive, proudly gave to investors asking who his company’s logical buyers were: “We don’t have any.” Companies like this believe they are building a more lasting, high-quality service than a mere website could provide.

But as they face the higher costs and slower growth that come from adding more humans to the mix, entrepreneurs such as Mr Kelman had better be careful they do not get what they wish for.