Last week, on-demand home cleaning service company HomeJoy announced it was closing its doors. This is one of the first big name on-demand economy companies to go under. Despite it’s significant growth, valuation, and VC funding, Homejoy couldn’t solve issues around quality control, customer service, rising customer acquisition costs and lack of repeat customers. While it blamed the uncertainty around the classification of workers as the main reason it was closing its doors (its clear it had an effect) Homejoy had many other issues that it was dealing with. There have been some great post-mortems on the death of Homejoy and the future for other on-demand companies – you can check a few of them out here, here, and here. Some additional thoughts:
Chasing growth has its challenges – startups thrive off of growth, which enables them to build brand recognition, expand nationally and internationally, and hopefully drive future rounds of funding to scale the company. Homejoy was no exception as it made aggressive expansion plans to U.S. Markets, Canada and International. During these efforts, it faced significant challenges which made it shut down some of these operations soon after they started. Since Homejoy was burning lots of cash and not seeing returns in the form of customers and revenue, it was going to face significant challenges (or did face significant challenges) in efforts to raise more VC funding. There was the prospect of having to take a down round (not good.) Perhaps HomeJoy expanded too fast too soon, and since it was stretched so thin it didn’t have the runway to keep going. It may have been better off expanding slower, using the cash to refine the product which could have helped it grow its customer base. While the growth may have come at a slower rate, choosing that option could have kept them around today.
Deep Discounting doesn’t drive customer loyalty – One of the strategies in their growth playbook was to leverage deep discounting sites such as Groupon when they expanded into new cities. I remember last summer when my roommate bought a $19/coupon on Groupon and use it for a home cleaning service. Once the coupon expired, we never used Homejoy again. Unfortunately, while these coupons were popular, many other people were like myself and my roommate, and instead of using the coupon as an opportunity to forge a relationship with repeat cleanings, we used it as a one-time cheap solution. In the world of marketing, Profit = Revenue generated ($19) – Customer Acquisition Cost and Expenses (much higher than $19.) While it’s okay to lose money on these types of marketing campaigns (in some cases, necessary) they can work if you can increase your Lifetime Value of your customer by getting them to be a repeat customer until they spend enough money to have the LTV equation become positive. Unfortunately, there were not many repeat customers, thus making their deep discounts nothing more than a significant marketing expense.
Poor Customer Service drives people away – As I mentioned earlier, for Homejoy to work they would need to generate repeat business from customers. Customers tend to be loyal when they feel their needs are being met and that they are being served well. Homejoy struggled with its customer service operations – as you can see from the Yelp ratings there were many instances of cancellations, rebooking without consent, and in some cases what seems like deceptive practices to lock people into generating repeat business. None of these things bode well for generating health customer relationships, and ultimately drove people away from Homejoy instead of to it.
Contracting is a double-edged sword – By not having its cleaners as employees, Homejoy was able to save significant payroll costs. At the same time, because these contractors were not employees, Homejoy could not set contractors’ schedules or provide training, all of which hindered its ability to deliver a service that met the needs of its customers. One of the biggest challenges with this was service consistency. What I consider to be adequate for making a bed or cleaning a bathroom is entirely different than the next contractor. Without any legal ability to mandate standards or guidelines, Homejoy was unable to deliver a consistent product that was up to the standards of its customer.
This particular issue will continue to impact other on-demand companies, especially ones that have a large workforce or have a diverse set of contractors. Uber and Lyft struggled with this, so did AirBNB. Companies like Shyp and Postmates have already bitten the bullet and decided to make these contractors employees to help manage some of these issues. The current court cases could have huge implications for how these on-demand companies classify their workers, so be on the watch for how companies begin to respond.
This isn’t the first on-demand company to fold and it won’t be the last. I was surprised that they were not acquired by Handy, which seems to have a much better operation in place that has enabled it to avoid some of the pitfalls of Homejoy. The death of Homejoy should make other on-demand companies think about how they are running their business but it’s important to remember that there are always casualties and failures that happen when new business models come about.. Innovation and new business always has its casualties, and while it’s unfortunate to see Homejoy close its doors (and to see people lose their jobs) I look forward to seeing the changes (and hopefully, improvements) companies make as a result of this. We’re still early days in the on-demand economy, but I think that while this is an unfortunate event, there still are plenty more exciting things to come.