What Is the Sharing Economy – Example Companies, Definition, Pros & Cons
Some call it the gig economy. Others call it the peer economy. Others, the collaborative economy, or “collaborative consumption.” Still others, the sharing economy.
Tomayto, tomahto. More important than what it’s called is what it is.
As Fast Company contributor Rachael Botsman points out, the sharing economy has long lacked a shared definition, and it’s probably more accurate to break it into several related but distinct realms.
These realms form the wireframe of a highly flexible economic network. The network – we’ll call it the sharing economy, for simplicity – allows people to exchange tangible and intangible with one another at scale. These exchange relationships often undercut traditional retail or employment arrangements, generally by reducing transactional friction or looping middlemen out altogether.
You can now get an unsecured personal loan directly from your peers, share the same office space with dozens of different companies, and stay at a stranger’s house instead of a hotel when you’re traveling out of town.
By making it easier to exchange resources on demand, the sharing economy increases efficiency. In many circumstances, it allows participants to get by without owning valuable items, such as cars, while creating opportunities for others to extract value from idle possessions or talents.
It wouldn’t be possible without technology. Virtually all forms of collaborative consumption use the Internet to connect providers with customers, whether they’re renting a house through Airbnb or looking for a place to board their dogs.
Anyone can participate in the sharing economy. In fact, whether you realize it or not, you probably already do. And, if you don’t yet, you probably will soon enough.
What It Is: Peer-to-peer lending platforms allow individuals to lend and borrow money without going through a traditional bank. Based on the borrower’s credit history, the interest rate is typically set by the platform, which acts as the intermediary between the two parties. However, the individual who lends the money bears the risk. Though the most common type of peer-to-peer loan is an unsecured personal loan, offered on such platforms as Lending Club and Prosper, platforms like SoFi offer student loans and mortgage refinancing loans as well.
What It Challenges: Traditional institution-to-individual lending is not an option for many would-be borrowers. With more liberal lending standards than most traditional banks, P2P lenders offer opportunities for a wider range of borrowers. Over time, this could compel banks to be more accommodating.
According to Sebastian C. Moenninghoff and Alex Wieandt, business experts at the Otto Beisheim School of Business, peer-to-peer lending is driven by the “emergence of the Internet, ongoing innovation by startup companies, and increasing financial regulation of traditional banks.”
Basically, technology makes it easier and safer for individuals who have money to find people who need money. Since the platforms themselves don’t have to worry about absorbing losses from failed loans, they can be much leaner than traditional banks.
Though this creates risk for individual lenders who lend via peer-to-peer platforms, it also allows them to put some of their capital to use without researching stocks and funds or settling for meager interest payments from a savings account. Also, it provides capital to borrowers who may not be able to find a traditional loan at an affordable rate (or at all) due to a shaky credit history or a stingy bank.
What It Is: Like peer-to-peer lending, crowdfunding connects people who need money with those willing to provide it. On platforms such as Kickstarter and Indiegogo, entrepreneurs, artists, and others present startup or project ideas to a community of potential funders, and then set a target fundraising amount and date. Dozens, hundreds, or even thousands of individuals can contribute to a single campaign. This makes crowdfunding doubly potent as a top small business fundraising option and a brutally effective way to cut small business expenses.
However, unlike peer-to-peer lending, the recipients aren’t always expected to repay the funds. Some crowdfunding campaigns function like grants, where individual lenders give money with the understanding that they won’t get it back. (Recipients sometimes offer rewards, such as merchandise, to encourage this type of funding.)
Others are more like capital raising rounds, where startups or small businesses solicit investments (typically in minimal amounts) in exchange for equity in the company. This is known as equity crowdfunding, and it’s become far more common in recent years thanks to legislation such as the JOBS Act and regulations such as the SEC’s Regulation A+.
What It Challenges: Traditional business financing can be difficult to attain, as can grants. However, crowdfunding may make it easier for businesses and projects to obtain financing. For banks with strict lending standards, many startups and even established small businesses are too risky. For creative types, using a crowdfunding platform is less time-consuming – and offers a better shot at success – than applying for grants through government or nonprofit arts organizations.
And for those who contribute funds, the rewards can range from the emotional satisfaction of supporting something they care about, to an equity stake in a potentially successful venture.
What It Is: Apartment/house sharing platforms, such as Airbnb, VRBO, and Couchsurfing, connect homeowners with people who need a place to stay when they’re traveling. Hosts set the nightly price and specify available dates, typically when they’re not using the property. In preparation for a trip, visitors can browse accommodations in their destination and choose a place that fits their desired neighborhood, amenity needs, and budget.
Some platforms address the potential security issues of sharing your living space with a stranger by putting security protocols in place. For instance, Airbnb’s Verified ID program requires hosts and visitors to provide detailed information about their background before using the platform. VRBO encourages owners to collect a deposit from renters and draw up a rental agreement that specifies the rules that renters must abide by (such as quiet hours and whether guests are allowed). However, due diligence still ultimately comes down to the homeowner to properly vet potential renters.
What It Challenges: The traditional hospitality industry focuses on hotel rooms as opposed to entire suites, apartments, or homes. But these can be cramped and often lack amenities that make a longer stay more comfortable, such as a full kitchen. Previously, when you were in an unfamiliar place and needed a bed (or a couch) to sleep on, you had to check in at a hotel or motel. However, now you can now find people willing to share their entire home and all the amenities that come with it – often at a lower cost than traditional lodging.
And if you want to explore the lesser known parts of a new town, platforms such as Airbnb offer an opportunity to stay in neighborhoods far from touristy districts where hotels tend to cluster.
What It Is: Ridesharing and carsharing offer some of the benefits of car ownership, such as easy access to a city without having to rely on public transit, with few of the drawbacks, such as paying for gas, insurance, and maintenance.
With apps like Uber and Lyft, you can hail a ride from drivers in their personal vehicles. With services like Car2Go and Zipcar, you can commandeer a shared vehicle, owned by a for-profit or nonprofit organization, and pay for the time you drive it. And with newer companies like GetAround, you can rent privately owned cars by the hour or day when their owners don’t need them.
What It Challenges: Taxi and rental car companies have become antiquated. Ridesharing has forced these players to adopt technological solutions, such as smartphone apps, and may result in lower prices over time. Though taxis and rental car companies have been around almost as long as the automobile itself, the sharing economy dramatically undercuts their business model.
Depending on the location, rides with Uber, Lyft, and other ridesharing companies can cost half the amount of an identical taxi trip. Since carsharing companies like Car2Go and Zipcar mostly charge for the time (minutes or hours) and distance you drive, they’re much cheaper than rental car companies, which typically charge by the day. GetAround translates low overhead costs into savings, with rates starting at $5 per hour.
What It Is: Coworking lets you share the cost of office rent, utilities, storage, mail, and office supplies with other professionals. It’s particularly useful for freelancers, sole proprietors, and very small businesses that don’t have huge inventories requiring lots of storage space.
Many cities and university towns have at least one coworking hub, such as Minneapolis-St. Paul‘s Fueled Collective, Chicago‘s The Coop, and Austin’s Link Coworking. These facilities, stocked with coffee and connected to the outside world with phone lines and WiFi connections, typically feature large, bullpen-style space with office suites, conference rooms, and common areas. You pay a weekly or monthly fee based on your space requirements and the amount of time you spend at the office.
Depending on the coworking hub’s policies, you may also need to pay to for conference room time, storage lockers, P.O. boxes, and other perks. But these costs are likely to be significantly lower than what you’d pay for even a small office space, especially in the bustling districts where coworking hubs are usually found.
What It Challenges: Traditional workplaces can be expensive, but coworking allows freelancers and solopreneurs to work in a dynamic office environment at relatively low cost. Coworking doesn’t just spread overhead costs among hundreds of workers in dozens of different fields – it’s also a social experience that puts people in close contact with professionals who have complementary talents. This makes forming mutually beneficial partnerships easier for all.
For instance, a lawyer I know by association (a one-woman operation focused on intellectual property issues) rents a desk at three Fueled Collective outlets in my area. She spends one day a week at each and generates the majority of her business through referrals and informal contacts there. She spends the other two weekdays at home or at a coffee shop, working furiously on projects for them. Until recently, a lawyer without an office was unheard of.
What It Is: If you’ve ever used eBay or Craigslist, you’ve participated in this part of the sharing economy. If you haven’t, take a moment to check out our comprehensive guide to selling on eBay, Amazon, Craigslist, and more.
Behemoths like eBay and Amazon let you buy, sell and sometimes trade new and used goods (and, in Craigslist’s case, pretty much anything else you can imagine) without face-to-face interaction. Other sharing economy platforms focus on specific niches. For instance, Kidizen is an online marketplace for used childrens’ toys and clothing.
What It Challenges: Markets, retail outlets, and manufacturers often sell new items with a significant markup. But when you share a physical good, you cut out the middle man – the retailer or manufacturer – and recover some of what you paid for it.
As popular marketplaces for used goods, eBay, Craigslist, and Kidizen let sellers extract value from things that might otherwise collect dust and buyers obtain needed items at a lower cost. As lower-cost, human-scale alternatives to traditional retail and rental networks, these options turn normally impersonal, potentially expensive transactions into rewarding experiences you can feel good about. And the arrangement is more sustainable than buying a new item and throwing it away when you no longer have use for it.
What It Is: Do you have a skill or knowledge base that you’re not using in your day-to-day job? The sharing economy can help.
What It Challenges: Traditional jobs may never go away entirely, but for some, talent marketplaces may be a much more enticing form of employment. Talent marketplaces are more flexible than traditional employment arrangements, eliminating the stress and complexity of the hiring process for everyone involved. If you have the requisite skills or knowledge, these platforms allow you to earn money by providing them, often from the comfort of your own home (or at least your own car).
By creating more liquid marketplaces for knowledge and and talent, this facet of the sharing economy enables busy people to delegate work on demand – and creates economic opportunities for those willing to do it.
What It Is: Some sharing economy platforms offer services that are extremely useful to smaller slices of the population. For instance, Spinlister lets you rent a bike when you’re traveling – or when you decide you need a pedal-powered ride for a bike commute on a beautiful day. It’s a great way for bike owners (and owners of other types of recreational equipment, too) to earn passive income and for bikeless people to source a sustainable ride. DogVacay helps you find a place, typically another dog-lover’s home, to board your pooch when you’re traveling or otherwise unavailable. It’s usually cheaper, and far more welcoming, than a commercial kennel.
Bike sharing is another sharing economy application that’s disrupting traditional conceptions of ownership. Bike sharing services such as Bcycle, which has multiple locations in cities like Denver and Austin, allow members who pay manageable membership fees to rent bikes by the hour or half-hour, often for just a few dollars per session. Used wisely, a bike sharing membership can be significantly cheaper than traditional bike ownership after accounting for maintenance.
What It Challenges: Impersonal commercial arrangements can be avoided entirely. Like other functions of the sharing economy, these services cut out the middle man, reduce costs, and connect like-minded people. DogVacay and Spinlister allow dog lovers and cyclists, respectively, to turn their passions into income while addressing potential headaches for travelers. This increases trust among participants, creating a clear contrast with an impersonal bike rental outfit or kennel.
The sharing economy is built on the idea that sharing certain goods, services, and skills is more efficient. This can reduce costs for available goods, services, and time. For instance, if you only need to use a bandsaw once a year, it’s much cheaper to pay $20 to rent one from a neighbor or tool lending library than to shell out $1,000 or more for one of your own. The same goes for an occasional service, such as an annual housecleaning or a point-to-point ride in a densely populated area.
By using something or someone only when necessary, you don’t have to deal with the headaches or costs of ownership and employment, such as car and health insurance, maintenance, and HR issues. In essence, the sharing economy cuts out the middle man, whether that’s a traditional employer or the company you buy goods and services from.
On the other side of the transaction, an owner can unlock the potential value of an item, such as a vehicle that would otherwise be sitting in the driveway or a talent that wouldn’t be utilized in a day job, by sharing it when it’s not in use. By giving rides or working in a talent marketplace, you can replace or supplement the income you’d earn in a traditional job. By renting out your house or possessions, you can earn passive income while you’re doing other things – possibly fun things, like going on vacation.
The sharing economy offers access to things that might not be practical to own or obtain. For instance, many people simply can’t afford a car or convince a traditional bank to extend a personal loan. Peer networks make it possible to access such things without asking participants to pay a lot or assume unacceptable amounts of risk.
Many sharing economy platforms, such as ridesharing apps and Airbnb, have built-in ratings and reviews that help keep providers and consumers honest. Coworking and task marketplaces are built on the idea of interpersonal collaboration and resource-sharing. And some platforms use their influence – and the shared resources of their participants – to help those in need.
For instance, according to TechRepublic, Airbnb has coordinated free accommodations for people affected by natural disasters, and TaskRabbit has experimented with organizing volunteers in crisis situations. These and other trust-building efforts help sharing economy participants see one another as equals, building constructive relationships where none existed previously.
The sharing economy requires people on both sides of the transaction to forfeit some privacy. For instance, when you rent out your house on Airbnb or VRBO, you basically invite strangers into your home. While you trust your renters to be respectful and law-abiding, you can’t be 100% sure that they’ll follow through. The same issue applies to ridesharing, selling or renting items in an online marketplace, and using a task platform to source in-person labor, like housecleaning and home repair.
By contrast, taxi services, traditional retail outlets, and cleaning and contracting services must be licensed and/or abide by consumer-protection regulations that don’t necessarily apply to sharing economy providers.
When you share your resources with others – whether by renting out a house, car, or equipment, or participating in a talent marketplace – you also assume the risk that you won’t get paid or that the items you share will be damaged. For instance, in a talent marketplace, there’s typically a finite number of jobs for which you’re qualified and thus no guarantee of a steady income – or even payment for completed work if the buyer isn’t satisfied. Ridesharing platforms feature the same constraints. Plus, renters in your home or riders in your car could cause damage that you have to pay for – either above and beyond a security deposit you require, or in the form of an insurance deductible.
Though its community-building power can be a benefit, the sharing economy requires close cooperation between people on each side of a transaction. This may lead to tradeoffs that constrain your independence or self-reliance. For instance, when you use a coworking space, you agree to share resources that, in a standalone office suite, you’d have total control over. When you rent on a house or apartment sharing platform, you occupy a space that contains someone else’s personal property, and may be subject to a homeowners’ association’s rules (or neighbors’ scrutiny). In a hotel room, you don’t have to behave as if you’re a guest in someone’s home.
The sharing economy’s inherently disruptive effects sometimes feel downright punitive. Among the most widely studied are local housing market distortions precipitated by short-term rental platforms in major cities and popular tourist destinations.
A 2017 study by the National Bureau of Economic Research, UCLA, and the University of Southern California found that “a 10% increase in Airbnb listings leads to a 0.42% increase in rents and a 0.76% increase in house prices.” That might not sound like a lot, but keep in mind that Airbnb listings have grown at a much faster clip over the past decade in top markets like San Francisco. According to Zillow, housing prices roughly doubled between early 2012 and early 2018.
Though theories abound, no one is really sure how peer-to-peer networks might reorder our society and economy in the coming years. But the sharing economy does promise some tangible benefits that could become more pronounced as more people participate.
One important outcome of a society built on sharing goods and services is the flexibility to make arrangements faster, with less risk or uncertainty, and often on your own terms.
Say you need to close or move your business. Coworking allows you to walk away from your current space without worrying about breaking a lease or leaving thousands of dollars on the table. Home-sharing services offer on-demand lodging, with many of the comforts of home, at a reasonable cost. Crowdfunding lets you raise money for a new idea without jumping through a traditional lender’s hoops.
Likewise, as a ridesharing provider, peer-to-peer lender, or participant in a task marketplace, you have the opportunity to set your own work schedule or earn passive income. That may be attractive compared to conventional employment arrangements.
Collaborative consumption offers economic benefits for everyone involved. If you’re using your car as a ridesharing vehicle, renting out your house when you’re not home, or participating in a crowdfunding campaign in exchange for equity, you’re unlocking value in something you already own. If you’re on the other side of these arrangements, you may eliminate the cost of car ownership, reduce your travel expenses, and secure valuable financial support for a new business idea that may not have been fundable otherwise.
Other sharing functions, such as coworking spaces and task marketplaces, may be cheaper than their traditional counterparts. In all cases, the sharing economy either saves money or provides income for its participants.
If you can get more of what you need through the sharing economy, you may be able to live a leaner existence that requires fewer valuable possessions – and fewer worries about them. For instance, if you live in a city and only need to drive a few times per month, a car may be unnecessary. Not having to deal with car insurance, maintenance issues, and potential thieves could be a big benefit. Likewise, if you can rent or share expensive tools or equipment that you only use for special projects, your tool shed or garage won’t be as attractive a target for thieves.
Despite its increased prominence and continued growth, the sharing economy won’t completely displace traditional economic networks anytime soon. It’s more likely to force existing industries to become more like the collaborative platforms that challenge them, with potential benefits for everyone involved.
For example, in response to competition from ridesharing companies such as Uber and Lyft, some taxi companies now offer apps that let riders hail nearby drivers without calling a dispatcher or waving their arms, and car rental companies such as Enterprise send cars to pick up customers wherever they are. The story of existing businesses forced to adapt to dynamic competitors is an old and familiar one that often benefits consumers.
As the old saying goes, the only certainty is change itself. The past couple decades have seen a whirlwind of technological changes, from a dramatic increase in processing power, to the creation of a global network that permeates every aspect of our lives. These developments have created new avenues for social change too, letting pro-democracy protesters in Africa and Asia organize gatherings from their cellphones and making it possible for people to work from virtually anywhere with an Internet connection.
The sharing economy is a huge facilitator of these shifts, but the endgame is far from clear. Sooner rather than later, you may need to ask yourself: Are you ready to step up and write the next chapter in the story of an increasingly collaborative planet, or do you trust others to put the right words on the page?
Updated: October 15, 2018
Categories: Economy & Policy, Lifestyle, Shopping, Small Business, Technology
Brian Martucci writes about frugal living, entrepreneurship, and innovative ideas. When he’s not interviewing small business owners or investigating time- and money-saving strategies for Money Crashers readers, he’s probably out exploring a new trail or sampling a novel cuisine. Find him on Twitter @Brian_Martucci.
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What Is the Sharing Economy – Example Companies, Definition, Pros & Cons
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