Wave upon wave of new consumer-facing apps are hitting the home screen of millenials’ smartphones. Uber and Lyft have harnessed technology to acquire and expand upon the cab industry’s inventory, extracting additional rents to meet true demand more efficiently. Airbnb piggybacked on excess inventory in people’s homes and rental properties, meeting lodging demand in ways that still confound Starwood, Hilton, and Marriott. Like Uber and Lyft, Airbnb was so successful that their service expanded the total available inventory of homes, rooms, couches, and air mattresses to rent.
New upstarts like Drizly and Instacart are following in the predecessors footsteps, but in different industries. These companies are tapping into consumers demand for convenience with other people’s inventory. Drizly delivers alcohol to your door within the hour, and Instacart delivers groceries from your local supermarkets to your door within a day or less. By creating a platform on top of someone else’s goods, these companies can focus on service and eliminating the hassle of high overhead costs (storing and showing products). The showroom is the app, and the goods are only in their possession en route to the consumers’ home. As time passes, I speculate that these services will do so much volume it will be more efficient to warehouse the goods themselves and cut the liquor stores and supermarkets out of the equation completely. AmazonFresh and others are already making use of this strategy in key cities.
Aside from a delivery fee, these on-demand companies often charge a premium on goods sold. While it might cost me $4.00 for a gallon of milk when I walk into my local Market Basket, Instacart might charge me $4.25 for milk in my digital basket. While it is completely fair to extract rents from consumers in exchange for near-instant gratification and convenience, I can’t help but draw light comparisons to scalpers who buy sports tickets and flip them to consumers at a premium. If you don’t want to take the time to buy tickets from Ticketmaster the second they went on sale, or if you’re just too lazy or don’t have enough time to buy groceries yourself, you pay the price. Drizly and Instacart are market economics at its best, benefiting the inventory-providers with higher sales, aiding willing consumers with convenience and speed, and allowing these new services to pocket the premium. In these scenarios, the proposition is often a win-win for all involved.
One Step Too Far?
Now imagine an industry where they offer their inventory for free on the promise they will be paid once a service is later performed. In this industry, everyone has an equal opportunity to avail of the inventory should they be able to afford the later service, and the most players in this space have followed tradition by not charging for their inventory…even though it is clear the best could. A new tech company arrives on the scene, starts capturing lots of inventory, sells this inventory to consumers at a premium, and even allows consumers to sell their captured inventory to others. The company directly benefits from this efficiency, and the industry doesn’t see a dime from the inventory value created.
That industry is the restaurant industry, and the company is ReservationHop. In my opinion, this practice is worse than scalping. Allow me to break down the challenges present at each step in their business model:
“If you have a reservation you can’t use, you can sell it on ReservationHop. The most attractive reservations are at prime times at the hottest local establishments, and we identify the high-demand restaurants that are booked up on other platforms.”
– Just as ticket brokers scoop up the hottest tickets the second they are released and immediately put them up on StubHub, enterprising individuals and groups will call to book as many reservations as possible at the hottest restaurants…only to post them on ReservationHop. They will use multiple accounts (should they be booking on OpenTable) or multiple names if they are booking by phone. All great holiday seatings will be quickly scooped up and sold to the highest bidder. There is technically no way to prevent this abuse aside from restaurants checking IDs before seating guests.
“Up until 4 hours before the alotted time, anyone can claim any reservation in the marketplace for a fee. Claimed reservations will be taken off the market immediately; don’t worry about overlapping. If a reservation is not claimed 4 hours before the alotted time, we personally call and cancel the reservation as a service to the restaurant, to prevent no-shows.”
– Assuming there will be excess inventory on ReservationHop each night, restaurants could be inundated with a flood of cancellations. Eateries currently have problems with short seatings, imagine the problems that could arise from guests booking reservations they had no intentions of filling. Four hours may be enough time to fill a couple open slots, but it’s definitely not enough time for the maitre’d to fill a large number of seatings.
“Upon purchase, we provide you with the name the reservation is under. 99% of the time you can show up at the restaurant, give them the name and grab the table, no problem. If you have any trouble, email us.”
– As restaurants become aware of this service, some will move quickly to protect the integrity of their reservation lists by turning away anyone who’s ID doesn’t match the name on the reservation. Others, not wanting to turn away cash-carrying diners at their doorstep, will feel powerless and allow the practice to continue.
“For Restaurants: We believe that we can reduce no-shows through a paid reservation system, without putting tables at risk. Alinea did it and dropped no-shows 75%. So let’s meet and talk about options.”
– Alinea’s system is quite different. Instead of charging extra for reservations, Alinea, Aviary, and the like charge tickets as deposits towards the meal or the total value of a prix fixe meal. This strategy was meant to reduce no-shows and cancellations, not to drive additional dollars per meal. They are of the thought that the customer should not have to pay a premium for access…even if the customer is willing to pay more. Through their ticketing system, revenue has popped and no-shows have dropped. With ReservationHop, there is nothing tying a customer to their initial reservation…so short seating will inevitably rise.
Where Do We Go From Here?
ReservationHop will certainly not be the last company to take an industry’s inventory and force them to adapt. MonkeyParking is an app that allows drivers to sell their parking space through an app to the highest bidder. The negative externalities of this app jump right off the page. Enterprising drivers will hop to dozens of parking spaces each day, preying off those who need city parking. Fewer open parking spots will be available for normal drivers, forcing them to use the app and pay this 3rd party service layer a premium for metered parking.
Will the proliferation of apps targeting supply/demand inefficiencies cause inventory holders to launch their own technology and pricing schemes to close the gap? How will regulated spaces like municipal parking authorities use their power to control variations? Will these new apps grow fast enough to leverage their user bases against the inventory-holders?
I believe the impact on each industry will be unique. Efficiently matching supply and demand is the inevitable result of technological influence, and these battles will be played out across every line on a consumer’s credit card bill. Welcome to the app “optimized” economy.