Today’s my last day as news editor at Sifted — five years after I joined the publication as a part-time foreign correspondent based in Spain, before coming on full time and moving back to London. Reporting on startups (while also working at one), during an exuberant and then painful boom and bust cycle, has taught me a lot about how tech companies grow and why they fail, as well as the herd mentality that can lead investors to coalesce around questionable ideas.
I’ve also met smart people working on ideas that could genuinely make the world a nicer place to live in, whether it’s founders trying to generate clean electricity from thin air, trying to improve whistleblowing procedures in the workplace, or just making fun video games to help us unwind.
But — given that the VC-backed startup world tends to be fairly well populated by rocket emojis and lads screaming “LFG!!!” into the Linkedin void — I’m going to take the opportunity of some closing remarks to focus on something a bit less rosy. It’s what I’ll call the “convenience economy”: tech services that use a shiny app to make our lives easier and, often, founders and shareholders wealthier.
They’re behind some of the startup world’s biggest success stories, be it ordering a taxi with a few taps of the thumb, or streaming any song in the world at a fraction of the cost it would take to purchase all that music. But, while the presentation of a slick user experience can give the impression that these kinds of services are made possible by some kind of technological wizardry, someone, somewhere is often paying a price for that convenience.
The tech world loves to celebrate the entrepreneurial spirit, but the truth is that it’s often small, independent businesses who are picking up the bill.
“Punishing small business”
Take Klarna, a company with a growth story that gets a lot of VCs frothing at the mouth and weak at the knees, and one that many consumers love.
I remember a former colleague singing its praises to me once in the office.
“It’s literally free money. It’s a win-win,” they told me, describing Klarna’s buy now, pay later (BNPL) product that lets people spread the cost of a purchase over months, at no extra cost to the consumer. “I always use it for those bigger purchases.”
But these kinds of services aren’t always great for the people you’re actually buying stuff from.
One owner of an independent, craft retailer based in London (who preferred to remain anonymous) recently told me how using Klarna makes it harder for his company to turn a profit.
“I think the biggest misconception about Klarna, from the perspective of consumers, is that it is somehow free, or that the merchant is not affected by your choice of payment,” he says. “The reality is that when we accept payments through Klarna, it’s bad for us, versus accepting a payment through Stripe or something else like Shopify.”
“When someone chooses to pay through Klarna, we pay up to 6% of the transaction as a transaction fee, which is about three times higher than the 2% we pay to Shopify, so it costs us a lot more.“
He adds that it isn’t the only BNPL later product that charges high fees, and that his company has stopped using other solutions, and is now considering removing Klarna too.
“Very often, customers will choose us over using a bigger brand or a bigger retailer, because they want to support local business, but they’re unaware that actually, if they choose to pay through Klarna, they can end up punishing small business,” he says.
I put this criticism to Klarna, who responded saying that, while the percentage fee that the tech platform charges merchants varies, the average is 2.54%, adding that its “fees are comparable to what a retailer would pay to accept a credit card.”
The company also says that “Klarna goes beyond traditional payment methods by helping retailers drive growth.”
The fitness industry in ill health
Another tech platform that’s made our lives more convenient in recent times is New York-based ClassPass, which offers users a monthly membership service providing access to fitness and wellness classes. It gives people more flexibility than a single gym membership, and can be cheaper than paying directly through studios themselves — but it’s often small businesses that end up shouldering the cost.
An owner of one London-based fitness studio tells Sifted that ClassPass users tend to pay around 40% less than the full price of a full class, and that her business ends up receiving substantially less than that after the tech platform takes its fees.
She says that, when the platform launched, it was presented to her as a way for people to access different fitness options in different cities, but that many people are now just using it as a way to get cheaper prices at studios they attend regularly.
“My advice to consumers would be: if you are using ClassPass as a way of getting a discount from a studio that you actually love, there’s a very real chance that that studio might go out of business if you don’t support them directly,” she says. “It’s like anything, if anything sounds too good to be true, it probably is.”
She adds that being on ClassPass makes it impossible for businesses to predict how much they’ll make from any given class, as users of the platform are given promotional free sessions which studios have no say over.
“The way that it works is, let’s say I release some spots in a class for ClassPass. It’s not till after the class that they’ll show me who was free and who was paid for,” she explains. “So it’s a regular thing that the next day I look at my sales report, and most of the spots were free.”
Responding to the criticism that ClassPass can hurt studios’ business, a representative of the company told Sifted that “we deeply value our studio partners and the importance of supporting their success.” They added that ClassPass’s “number one goal as a business is to help studios fill spots that would otherwise go unused, with new clients that they wouldn’t have been able to bring in themselves.”
But the owner of the London-based studio says that, from what she’s seeing, the majority of people using ClassPass had already discovered her business.
Think harder
Stories like these are just a snapshot of the way that “disruptive” tech companies — backed by hundreds of millions of VC dollars — can impact independent business owners. And while it often feels like it’s clever innovation in these apps that’s making our lives easier, it’s often something far less high-tech that’s creating value.
Take gig-economy based delivery apps, which rely on huge networks of couriers to maintain speedy response times. One delivery rider once pointed out to me that, while couriers are only paid for the jobs they do and not for the time spent awaiting orders, this unpaid time is what enables apps to provide the service they do: “They are benefitting from us being out here. Without us, there is no service.”
So, as I get ready to take a step back from reporting on tech startups, I’ll leave you with a final thought — if something feels extremely convenient, it’s likely that there’s a very real cost to delivering that service.
If you’re an investor, ask yourself whether the app you’re backing has the potential to destroy the industry it’s relying on. If you’re a customer ordering takeaway, tip your courier. And if you love independent businesses and want to support them, always make the effort to ask how using a tech platform to access what they do might have an impact that you’re not seeing.
Read the orginal article: https://sifted.eu/articles/convenience-economy/