The Uber Effect: How Companies Are Using The Consumer To Scale Return

by Thomas Honeyman

When the Internet became popular, a subtle shift with important effects began.

The Internet is inherently a free, open network, and with every new person to join, the cost of reaching any one person fell.

Over the span of just a few years, the cost of distributing a product or sales material online has dropped to nearly zero. This change led swiftly to the fall of Microsoft and the rise of Apple, Facebook and Google. Now, to a new wave of companies that include Uber, Airbnb, HotelTonight and Ticketbis are taking over.

When distribution costs nearly nothing, companies don't win by putting more dollars into sales teams or advertising more than their competitors. Instead, companies have to compete on a more important and challenging vector: the customer experience.

The modern equation, as best explained by Ben Thompson, has become simple: Provide the best customer experience, and you will own the best customers.

The best customer experience can build a monopoly.

The customer experience has become so important, a company can develop monopoly power with this strength alone. That's why nearly 70 percent of all online searches in the United States go through Google, which is almost four times more than their closest competitor, Bing.

Google doesn't force anyone to use their search engine, and we're all free to use Bing if we'd like. But very few of us do, because Google's search engine is simply better than the alternatives.

The trouble for contemporary companies is building an exceptional customer experience is expensive. Somehow, that cost must be recuperated.

Companies like Apple pass that cost onto customers directly. Apple's products are well-known for being shockingly expensive, but that hasn't deterred customers from eagerly investing in Apple products.

In fact, their customer experience is so good that, despite their sky-high prices, Apple is not only the biggest company in the world, it is twice the size of the next biggest one.

Other companies bring down costs by reaching the greatest number of users possible. When Facebook and Google earn dominance in social networking or in search, they also earn access to the best customers: advertisers.

Both companies have invested billions of dollars into their products, and that investment now brings them billions of dollars in profit. Instead of passing the cost of that quality onto their users, they first relied on investors. Now, they're relying on paying advertisers who are desperate for our attention.

In other words, when the cost of distribution fell to nearly nothing, companies who relied on enterprise customers, sales teams and advertising budgets were overtaken by companies that had the best customer experience.

This has brought us into perhaps the greatest-ever period in history to be a consumer. But we're just getting started.

These two approaches (charging incredible prices or reaching billions of users) have been played out. The Internet has already coalesced around the few companies that have managed to pour billions into hardware development, like Apple, or who have reached a scale measured in billions of users.

New companies don't have the resources to develop customer experiences that can compete.

But a new cultural shift has happened in the past few years, and it promises to have consequences as powerful as free distribution. It's called the sharing economy, and it's driving the newest wave of multi-billion dollar companies.

The biggest examples of the sharing economy are Airbnb and Uber.

At Airbnb, a property owner can lease out his or her unused space to another person for short stays. It's often cheaper and more enjoyable than staying at a mid-tier hotel in the same area.

At Uber, a regular driver can opt to pick up passengers and drop them around the city at prices cheaper than a regular taxi. Drivers often provide free water, snacks and an aux cable, so passengers can play music. In both cases, customers get a more pleasant experience, at lower prices than using hotels or taxis.

The sharing economy works by making trust a commodity.

Before Airbnb, hotels won by becoming a reputable destination. Before Uber, taxis won because you trusted the driver to safely bring you to your destination. Hotels and taxis could charge high prices because we cared about being safe more than we cared about finding the cheapest option.

That's exactly what Airbnb and Uber have changed. They step in the middle, and offer a safe way for two parties to meet and make an exchange. That means I can now stay in a British castle for about the same price as a mediocre hotel in Los Angeles. (No points for guessing which one I'd prefer.)

Ultimately, that's what matters most.

The foundation of building a consumer company today is to win the best customers by providing the best experience. Companies who couldn't win by investing more than their entrenched competitors a decade ago are now battling on the strength of the sharing economy.

It's only getting better.

I thought the sharing economy made things as cheap as they could be, but that was before I spent my summer traveling internationally.

Travelers have a knack for finding the best price on anything, and perhaps the best way to get a good deal is by buying last minute. That's why Craigslist explodes into a flurry of activity the last few days before Coachella, and it's why moving and flash sales are so successful.

While Airbnb was busy taking advantage of the sharing economy, a company called HotelTonight took a different approach to cheap stays. Instead of baking trust in their own service, they simply partnered with the highest-rated hotels in cities around the world.

Then, when a hotel had empty rooms for the night, users of the app could same-day book for a fat discount. The result? Savings on par with Airbnb, without having to build an ecosystem of buyers and sellers.

Both the sharing economy and last-minute deals provide a route to great experiences for little money. What if you put the two together?

That's exactly what's happening now.

While I was traveling, I heard about companies in all sorts of industries taking advantage of these two approaches, to provide the best possible experience at the lowest possible prices. The earliest of the companies and the ones I heard the most about, focus entirely on events and festivals.

Companies like TicketBis and TicketScalpr put buyers and sellers together to exchange tickets for upcoming events. And because trust is the foundation of the sharing economy, the tickets you buy (on Ticketbis, at least) are guaranteed.

No more buying a FYF ticket on Craigslist, only to find your ticket was voided before you finished parking.

Where are we now?

We've come a long way since the early days of the Internet, when the company who could afford to send you the most CDs in the mail ended up with the most customers.

As the network matured, companies began to win based on how good its product was. This is a big win for customers.

Now, with the rise of the sharing economy, an even more exciting transformation is happening: Companies win by offering the best customer experience for the lowest prices.

We're now living in the greatest era to be a customer, so take advantage of it.