Millennial Business Model
Starting about a decade ago, a fleet of well-known start-ups promised to change the way we work, work out, eat, shop, cook, commute, and sleep.
These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with “Uber for X” pitches.
But as their promises soared, their profits didn’t.
It’s easy to spend all day riding unicorns whose most magical property is their ability to combine high valuations with persistently negative earnings—something I’ve pointed out before.
If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year.
If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never earned a dime or have seen their valuations fall by more than 50 percent.
These companies don’t give away cold hard cash as blatantly as Seated. But they’re not so different from the restaurant app. To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy.
You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base.
And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.
The idea that companies like Uber and WeWork and DoorDash don’t make a profit might come as a shock to the many people who spend a fair amount of their take-home pay each month on ride-hailing, shared office space, or meal delivery.
There is a simple explanation for why they’re not making money.
The answer, for finance people, has to do with something called “unit economics.”
Let’s say you buy a subscription to a meal-kit company, which sends you fresh ingredients and recipes to cook at home. You pay $100 a month. The ingredients are tasty, so you renew for the second month. And the third. But by the fourth month, you’ve decided that you’ve learned enough basic tricks around the kitchen to handle roasted chicken or sautéed cod by yourself. You cancel the subscription.
Your lifetime value to this company is $400—or $100 for four months. Since you quit, the meal-kit company has to find the next “you” to keep growing. So they advertise on podcasts. Let’s say that, on average, this company can expect to add 100 new users if it spends $50,000 on podcast advertising—or $500 per new user.
If the company spends millions on podcast ads, its user base and revenue base will grow and grow. Outside analysts will gasp and marvel: This meal-kit thing is on fire! But look closer: If it costs $500 to add a new user, and the typical marginal user—like you—only spends $400 on meal kits, there is no path to profitability.
The road leads to the red.
This example is not a hypothetical. The meal-kit company Blue Apron revealed before its public offering that the company was spending about $460 to recruit each new member, despite making less than $400 per customer. From afar, the company looked like a powerhouse.
But from a unit-economics standpoint—that is, by looking at the difference between customer value and customer cost—Blue Apron wasn’t a “company” so much as a dual-subsidy stream: first, sponsoring cooks by refusing to raise prices on ingredients to a break-even level; and second, by enriching podcast producers.
Little surprise, then, that since Blue Apron went public, the firm’s valuation has crashed by more than 95 percent.
Blue Apron is an extreme example. But its problems are not unique.
WeWork’s valuation crumbled when investors saw the company was losing more than $1 billion a year.
Peleton’s stock got crushed when investors balked at its growing sales and marketing costs.
Lyft and Uber may collectively lose $8 billion this year, in large part because the companies spend so much money trying to acquire new customers through discounts, promotions, and credits.
Unit economics will have its revenge—just as it did after the last dot-com boom.
How long do these people think they can operate at No Profits?
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