The on-demand service economy — also known as the online to offline (O2O) market — was virtually unheard of five years ago. In the ensuing years it's gone from investment darling, to reports of its imminent implosion and back again.
In its most common form, an O2O business is a mobile app that aggregates locally available services available on-demand, delivered or consumed at the user’s location, with the transaction usually taking place over a short duration of time. Proximity, immediacy, aggregation and affordability all lie at the heart of a good O2O business.
Declining Investment and the Race Towards Dominant Design
Investment into on-demand startups poured in last year with San Francisco-based Uber, Beijing-based Didi Chuxing and San Francisco-based Airbnb taking the lion’s share according to CBI Insights. Didi Chuxing alone, formerly known as Didi Kuaidi, took in $3 billion in the third quarter of 2015, with China and India dominating international on-demand financing.
However, we saw a sharp decline in global funding at the end of 2015, putting the long-term viability of the many O2O models under question. Delivering on everything from healthcare to entertainment services, these businesses attempt to serve the innate human need for choice and ultimately, convenience.
Despite this, most have yet to prove their unit economics and are struggling to gain consumer loyalty in a competitive world. But as with any tech innovation wave, the initial frenzy gives way to a defining period where every vertical's dominant design (i.e., standard) emerges, and winners pull ahead from the rest.
The most notable failures in the US were the demise of cleaning service HomeJoy and kid’s taxi service Shuddle. In India, the entire food tech vertical has felt the pain, with larger players like restaurant booking service Zomato hurting from slashed valuations and many smaller players exiting the market like food delivery startup ShutterTap and grocery app Dazo.
Deep discounting without recovering costs was a key factor in their demise.
While winners have yet to emerge in most verticals, at least in the taxi category, the model seems proven and the frontrunners clear. The success of Uber in the US and globally, Didi Chuxing in China, and Midview City, Singapore-based Grab (formerly GrabTaxi) in SouthEast Asia, O2O taxi apps have become an essential part of our lives, and are well on their way to becoming profitable enterprises.
View from India: O2O Growth
While innovative O2O models are disrupting traditional models in the West, markets such as India and China are experiencing a more fundamental transformation. In these fast emerging markets with large populations, infrastructure and limited public services act as constraints.
Couple that with tech savvy, mobile-first urban populations who have growing disposable incomes, and you get large, concentrated pools of sustained demand that can seed viable businesses that benefit from cheap labor costs.
An IT worker in Bangalore today can easily afford an Uber or Ola cab for her daily commute in the absence of reliable public transit, orders her weekly groceries via Bigbasket or Grofers without braving the city’s traffic-clogged streets, consults with a specialist doctor on Lybrate or Practo for a sudden fever and receives her prescription delivered to her door the same day.
But while these services are fast becoming a way of life in urban India, none of the local players are close to generating returns for their backers. And with an ongoing funding crunch, they’re being pushed to monetize.
China presents an entirely different picture.
Real Returns on the Horizon in China
In China, O2O gross merchandise volume (GMV) grew 38 percent last year to RMB 335 billion ($51 billion) according to iResearch, and that figure is predicted to nearly double in the next three years.
China stands out as the world’s most advanced and fascinating O2O market, with a thriving ecosystem that not only includes apps providing the full spectrum of services available in the US and India, but also unique platforms such as WeChat that already play an integral part of people across multiple generations daily lives.
All three of the nation’s internet giants, Alibaba, Tencent and Baidu have invested in the sector’s growth and even collaborate to grow the size of the pie. Last year saw consolidation across the industry with four large mergers, including one between Alibaba and Tencent-backed Meituan and Dianping to form the nation’s largest O2O player.
Moody’s is projecting 15 to 30 percent year-over-year revenue growth for all three of these giants over the next 12-18 months, driven in part by their O2O efforts. These efforts have led to increased consumer engagement and higher monetization potential. With large cash-rich players backing O2O in China and growing consumer demand, arguably, it’s only a matter of time before their strategic investments start to see concrete returns.
Platforms, Proliferation and Payments in China
The conglomerate approach in China has translated into multi-service platform models that stand in stark difference from the single service app models of the West or even India.
Social platforms like Tencent's WeChat have become one-stop service aggregators that offer a user everything from messaging, feeds, location tracking, file transfer, gaming to integrated O2O services like taxi, restaurant and movie ticket bookings. For Chinese consumers, WeChat goes far beyond the combined value of Facebook and WhatsApp to provide an all-in-one service pack powered by a full digital wallet, enabling quick and seamless digital payments.
Evidently, platform models are easier to monetize, and therefore attract big brands. A college student in Shanghai can select from new offers and coupons while chatting with friends on WeChat and engage with big brands like Starbucks or H&M whose increasingly creative interactions woo customers on the platform.
Another evolution that characterizes the O2O landscape in China is the next level proliferation of niche services. The long tail of the ecosystem is made up of everything from nail art apps such as Helijia, to hotpot delivery, a favorite social food.
Flourishing O2O demand is attracting startups to tap into every unfulfilled gap. So while the top is heavy with platforms, the tail is long with niche players.
The O2O story in China would be incomplete without discussing the engine powering the revolution — digital payments. Whether it’s a credit card payment via the Alipay payment gateway or a P2P transfer via WeChat Pay, payment integration has been fundamental to the rise of O2O. These two players have dominated China's third part mobile payments, which reached $1.4 trillion USD in 2015 and is projected to reach a staggering $7.9 trillion by 2018.
When we look to the East, the scale, scope and importance of O2O comes into focus.
Success stories like Uber and WeChat prove that ultimately, the classic fundamentals of service quality, reliability and affordability will differentiate in a hyper-competitive market. China’s platform model and solid payments foundation have fueled O2O success.
O2O players in the West should take inspiration from this global perspective in their search for returns and market dominance.
Title image Denys Nevozhai
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