The household services industry (the market for basic tasks such as cleaning, home repair, furniture assembly, etc.,) is massive – around $400B. If you’ve used home service professionals before, at one point or another you’ve likely been overcharged or received poor service. It’s an industry in need of disruption, and there is undoubtedly a huge potential upside for the winners. Hundreds of millions of dollars are being invested into startups that promise on-demand, transparent, and reliable household services across nearly every type of service imaginable, and only $2B of the $400B potential market has already converted to these platforms. As investors look to place their bets, I believe they must consider three key questions.
1) Will vertical or horizontal models win?
2) How will on-demand platforms differentiate from each other, and is this a winner take all market?
3) Is there enough repeat demand to sustain the model?
1) Will vertical or horizontal models win? Historically, horizontal players have dominated many markets. “This trend towards horizontals is such a truism in Silicon Valley that when Andreessen Horowitz launched, the firm considered an iron clad rule: No investments in verticals ever.” (Source: PandoDaily) Recently, that trend has begun to change (most notably with AirBnb and Uber). Shervin Pishevar, founder of Sherpa Ventures claims, “Single function apps that organize the physical world are where it’s at for me. That’s what people want: A single purpose company that proves a very powerful service people can trust.” (Source: PandoDaily) To see what’s happening in on-demand household services, I pulled data on 4 leading horizontal players and 4 leading vertical players. (click to zoom)
The general takeaway: There are and will likely continue to be winners in both the horizontal and vertical spaces in the next few years. In the horizontal space, Handy and Thumbtack have achieved incredible success, however, they are the only horizontal players to truly thrive. In the vertical space, players are emerging and growing across many different verticals.
My personal view is that horizontal players will ultimately win this market. When horizontal players establish consumer trust, the best ones will effectively market new services within their platforms and eventually consumers will come to rely on these companies for the vast majority of their household service needs. These companies will have the scale, the brand recognition, and the frequency of use needed to drive top of mind awareness among consumers.
2)How will on-demand platforms differentiate from each other? Is this a winner take all market? I believe that household on-demand service platforms are becoming relatively commoditized. Users have basic expectations, but they ultimately want a reliable professional at a decent price. This is reflected in the lack of differentiation among players today. Some examples of differentiation include UrbanSitters, who leverages users’ social networks to drive recommendations for babysitters, and Bellhops, who builds a certain vibe by hiring only college students to help with on-demand moving. Beyond these and a few other examples, the products in this market look remarkably similar. As a result, I believe that competitive pressures will drive down margins and ultimately only the best and most efficient players will survive.
3) Is there enough repeat demand to sustain the model? Once someone finds a great service professional (e.g., a handyman), will they continue to use the on-demand platform or will they do business directly through the professional? The on-demand companies are aware of this problem and they carefully monitor (to the best of their abilities) whether business is being done outside of the platforms. Many impose penalties or even ban service professionals for going around their platforms. Therefore, one argument is that service professionals cannot afford to jeopardize their presence on the on-demand platform since they rely on it to build their client bases. However, this argument mainly applies to emerging service professionals. Once a professional establishes him or herself to a certain extent, I believe that they will deal directly with their clients. There will always be a market for service professionals who need to market themselves and build their client bases through these on-demand platforms. However, I question the extent to which on-demand platforms will ever fully capture all household services transactions.
Despite these challenges, there are incredible opportunities ahead in this sector, and we are likely to see significant growth in the coming years. If you haven’t tried using one of these companies yet, I would highly recommend it. The platforms are easy to use and they provide what this industry has long lacked – transparency, reliability, and price competition in household services. We’d love to hear your thoughts and comments, where do you believe this market is heading?