Which "Uber for X" businesses actually make money?

Posted by Josh Weissburg on Feb 11, 2016

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The term “Uber for X” is everywhere, optimistically applied to almost any type of on-demand, crowd-sourced service. For example, Sprig was called the “Uber for Food” according to The Atlantic, while a dog-walking service called Wag earned “Uber for dogs.”

Huge amounts of money are being poured into the expanding on-demand economy: food, cookies, car rentals, groceries, laundry, shipping, pet care, flowers, parking, cleaning, car mechanic, bikes... the list grows longer every day.

But which of these businesses will actually succeed? Unit economics is the key to answering this question, and close attention to these data points leads to the underlying secret: repeat customers are the key to creating a profitable "Uber for X."

What Are Unit Economics?

In an app-based consumer business, one unit is one customer. Two main numbers are associated with that unit. On the plus side is the Customer Lifetime Value (LTV): the value of all the orders that customer will ever make at that business. On the minus side is the Customer Acquisition Cost (CAC): the amount the company pays to acquire and keep that customer. The comparison, or ratio, between these two numbers can reveal a lot about the direction a company’s growth marketing should take.

How to Estimate LTV and CAC

The LTV that the customer brings to a business is the cumulative sum of each order they will make, minus the “margin” (the company’s individual cost of filling and processing each of those orders). Estimating CAC involves considering all aspects of marketing, advertising, and customer relationship management.

Lifetime Value = Repeat Orders

Even if a business doesn’t have an Uber-sized market, it can still be extremely profitable if it generates a high number of repeat orders. Statistics quoted in Forbes make this point: "According to Bain and Co., a 5 percent increase in customer retention can increase a company’s profitability by 75 percent. And if those numbers don’t impress you, Gartner Group statistics tell us that 80 percent of [a] company’s future revenue will come from just 20 percent of [its] existing customers."

On-demand companies that win are the ones that optimize customer engagement: quantitatively tracking how effectively their messaging affects specific customer actions such as browsing, ordering, and reordering. It’s important to evaluate messaging effectiveness using AB testing across a range of different channels (email, SMS, mobile push, and web notifications) because this is how you move beyond customer retention analytics: messages should actually affect customer behavior - otherwise, why are you sending them?

Why Customer Retention Is So Efficient

Keeping existing customers is always more cost-effective for a business than finding new ones, and the more repeat customers a company can nurture, the higher it can make each unit's LTV. Conventional wisdom frequently suggests that acquiring a customer costs five times as much as retaining an existing one. Of course, the LTV / CAC ratio varies depending on the age of the company. A new startup will spend more heavily on acquiring each customer, whereas a seasoned business will invest more in nurturing the loyalty of its existing customer base. But over time, it's easier to boost LTV than reduce CAC, which is why retention is so powerful.

Regardless of where a company is in its life cycle, an analytic approach is critical to the all-important goal of customer retention. Outbound’s API Integration enables businesses to test the effectiveness of their messaging in every customer situation and across every channel. For example, an on-demand food company that uses Outbound found that the number of people reordering with a coupon increased 500 percent when Outbound sent them an SMS. The reason these messages were so effective was not because the copy was so good; it was because only customers in a very specific situation received them and the message related so closely to that situation.

Knowing exactly what the customer last did and setting specific actions as triggers for tailor-made messaging allows a business to reap the benefits of optimizing customer retention.