Sticky Business

I often like to think about business models in terms of how sticky they are. “Stickyness” is sort of a term for how easy it is to get an equivalent good or service from an alternative supplier. If you can’t get an equivalent product, and you keep coming back to that original company, then their business model is sticky.

For simple products and services this is a pretty simple concept. A really good product, that is blindingly better than the alternatives, is pretty sticky, but not as sticky as a subscription model for that item. For example, Nespresso have a pretty sticky business model – they sell you the machine for cheap and then get you stuck buying capsules that you can’t get from anywhere else.

For network companies this equation becomes more complicated, but still very useful. Uber isn’t very sticky for riders because they can get an equivalent service from Lyft or from a taxi company. Equally, Uber is a network company, connecting riders and drivers – if Uber was sticky for drivers then all the drivers that ever drove for Uber would want to come back a drive for them again, making it harder for Lyft to get a foothold in the ridesharing market.

But Uber isn’t sticky for drivers. It doesn’t offer them anything extra over Lyft or any other new ridesharing app. I’ve seen Uber drivers flip between Uber and Lyft to see which app would pay them more for the next drive. As a result, ride sharing apps are stuck in the middle of a race to the lowest cost to riders and a race to the highest wage to drivers.

On the other hand, AirBnb has built a network that is sticky. People go to AirBnb because they know that they will probably be able to find a good homestay there. People don’t tend to look at other websites because other homestay sites don’t have as much choice as AirBnb. On the other side of the equation, property owners list their homes on AirBnb because they know that their potential visitors use the site, and if their home was on a different site, they would be less likely to be able to rent out their property. Sticky.

The obvious difference here is between a full marketplace where everything on the market has individual value (AirBnb) and a commodified service portal, where there is one thing you can buy (maybe multiple when you count Uber Black and Uber XL). Commodities can be directly compared which causes a price race to the bottom – full assets have more complex value propositions, making comparison difficult.

But the idea of stickyness is even more complex when we think about food delivery apps as there are three players in the network. The restaurant part of the value chain is a full asset, but the driver part is a commodity. This mix creates a complex navigation of trying to get the best restaurants on the app, as well as paying drivers enough to get them to want to deliver, while keeping prices down for customers. But are these apps sticky?

So far it seems not – I have three food delivery apps installed on my phone, and will flick between them until I find something I like. But it might be possible to make these apps sticky. Restaurants, like Uber drivers, will put their menu on multiple food delivery services to maximise their chance of being bought from – app fees will just be factored into the prices they charge. But the drivers’ experience can be changed to make it sticky. I propose the following three changes to make food delivery more sticky:

1. Incentivize the drivers to stick with the app – you could give a bonus to drivers who accept >90% of requests within a 4 hour period to disincentives app switching.
2. Reward extra value – what customers care about is speed of delivery, so you could reward drivers that deliver more quickly. (Though this will likely cause drivers to take unnecessary risks while driving. As with all of these, someone needs to think through the unintended consequences.)
3. Build a better experience for drivers – allow drivers to track their distance cycled, allow them to plan breaks in their day, and possibly allow drivers to meet up with other drivers in a central location, and plan this wait with their friends into the routing software (more time with friends, less time waiting outside a restaurant).

Each of these factors would make the app sticky for drivers. If drivers get a better experience from delivering for one company, they will try to spend more time delivering for them, and less time delivering for another. To make up for an inferior experience, the second company will have to pay the driver more, and will have to pass that cost onto the customer eventually, causing the customer to be less likely to pick the second company in the first place, accelerating the cycle of collapse for the second company.

In traditional business lingo, this idea is often called the barrier to entry – but in the world of network applications, I think sticky is a better term.