By: Abdullah Hamdonah & Atta Yousafi
The sharing economy is an economic system in which goods, services or assets are shared between private individuals, usually enabled by a third party and monetized by fees or commissions. Due to the nature of this model, collaboration and openness play a role in defining a passage through which resources are shared and offered. This model helps both individuals and organizations earn significant profits by providing niche items as well as using underutilized resources. Over the past decade, the sharing economy has seen significant growth primarily due to technology and the accompanying network effect that it has helped enable.
An important component of the sharing economy and the boom it has experienced has been the P2P (peer-to-peer) exchange. P2P businesses interact directly with individuals (a two-party exchange) to sell a good or service with no intermediary involved. The most famous examples of P2P businesses are Uber, Fiverr, Amazon, Airbnb etc. The reason these are considered P2P businesses is because these companies provide services that are consumed by individuals/other parties without any other intermediaries. One of the biggest reasons that these companies have gained such traction is because of the deregulation, the convenience provided, and the networking effect.
The P2P business model involves them having their own platform, which facilitates the exchange of goods and services between the company and individuals. This platform also established rules and regulations along with other processes necessary for the transaction to be successful for both parties. This is successful both because of the network effect that it has but also the ability of the company to have a direct relationship with its customer(s). Moreover, the fact that there are no external intermediaries involved reduces the risks of failure and the transaction going incomplete from both ends.
P2P businesses have several revenue streams but the most common ones are transaction fees and advertisement revenues. From a unit economics perspective, P2P companies are able to have higher margins, those that are also expanding because of their decreased production costs due to their business model. This is also very beneficial from a customer standpoint because this means that these lower costs can be passed onto customers in the form of lower prices - another key reason these P2P businesses have seen such an uptrend.
In recent years, the concept of sharing has moved from a community practise into a profitable business model. The key to peer-to-peer (P2P) businesses’ success is that they democratized the availability of their industries’ goods and services, providing consumers with more options. Highlighting Uber and AirBNB, drivers and hosts are able to use their own cars or properties which reduces the need for significant and unaffordable capital investment. This provides ordinary people with opportunities for income while Uber and Airbnb act as facilitators for these entrepreneurs. This allows the companies to invest more in their technology, a critical component to the rise of the sharing economy, instead of investing in cars or property.
Technology facilitated the fast growth of collaborative consumption businesses; in order to facilitate peer-to-peer (P2P) transactions, digital platforms use the web and mobile apps. Making things easier for consumers, the business model’s convenience is made possible by simplified payment systems and connectivity with other user accounts. By tapping into consumers’ increased connectivity with smartphones and the Internet, it was much easier for them to be adopted. This connectivity translates into a source of data to be used for analysis to be used for future decision-making and marketing, allowing these companies to continuously provide products and services for customers in innovative ways. While the private and public sectors are still navigating their way through the nuances of the sharing economy, it’s beginning to transform what business is and could be.