The birth of “sharing economy” gave rise to a series of mighty empires in the market such as Uber, Airbnb, and Grab. Unfortunately, several sharing economy startups around the world had been dead recently, causing heavy losses to both investors and customers.
A recent example is Wenow, a startup that was once glorious in Vietnam. Wenow filed for bankruptcy on May 11, four years since its launch. It provided subscription plans of fitness and beauty packages for its users in the two largest cities of Vietnam, Hanoi and Ho Chi Minh City.
Wenow may had a chance to become a unicorn in its own right, but its arrogance has led to its demise.
In 2019, leading Chinese bike-sharing startup Ofo sank into debt, despite having raised the total funding of US$2.2 billion from 2015 to 2018. Even the tech giant Alibaba, with its enormous investment, could not save Ofo from failure.
Another case study of failure is of leading home cleaning service in North America and Europe, Homejoy, which had also closed due to its weak business performance.
Sadly, those startups had collapsed due to some identical reasons.
Also Read: These three startups prove that the sharing economy can still be inclusive to its partners
Failure in analysing customer behaviour
Back to Wenow’s story. This Vietnamese startup made a mistake in assessing the diligence of users. Like other sharing economy business, the business model of Wenow extremely depends on user behaviour.
In particular, the core service of Wenow is the fitness app. Called Wefit, it charges customers a fixed subscription cost to use in all of Wefit’s fitness partners.
Wenow charge users a monthly fee, then pay its partners for each fitness session that users come to the class. Basically, it would have profits when users got lazy and only participate in certain sessions.
However, Wefit was so naive in believing the integrity of users. Unlike customers in Europe or America, the majority of users in some Asia countries are known to try to exploit the loopholes in the package’s policies for personal gain.
This mistake of Wefit had allowed users to take unlimited turns for each account, which was the same fault of an incumbent in the US, ClassPass.
Due to the loose rules, users could readily set several virtual bookings, which induce a tremendous amount of payable to its partners. Additionally, Wefit has failed in predicting this fraud behaviour, as several active users were sharing the same account. Whereby, many accounts had booked over 100 sessions each month with three sessions daily.
Also Read: These three startups prove that the sharing economy can still be inclusive to its partners
Likewise, Netflix, the world’s leading entertainment platform, also made this mistake when entering the Vietnamese market. Netflix allowed a one-month free trial to access its resources.
Since the register for free trials was fast and easy, many people used illegal payment cards to create Netflix accounts then selling them to others with a small fee (only US$1/month compared to US$20/month as the official subscription prices of Netflix). The point is Netflix had not been paid any parts of this amount.
On the other hand, Ofo was also a victim of theft and vandalism among parts of its users. In 2017-2018, Ofo claimed that it lost around 90 per cent of its bike. Parts of the remaining got severely damaged because of the negligence of users.
Generally, these companies suffer the mistake made from their own arrogance that they underestimated the cheating actions of customers. They had built the services with weak and loose rules. Definitely, their failure did not absolutely come from users but their internal defects.
Expensive cost of customer acquisition
The second mistake of Wenow is that it had an enormous amount to burn to attract new customers. Wefit had a successful year in 2017 when its revenue reached US$700,000. Then, it received an investment of US$155,000 from ESP, followed by another from CyberAgent Capital and KBInvest in 2019.
Accordingly, it spent lots of money to achieve more users’ volume by launching great deals and promotions. At that time, users were only charged approximately US$38 for unlimited booking in one month plus three or four free spa sessions.
Apart from Wefit, Wenow rapidly extended its network by introducing WeFit Point, WeFit Pago, and WeJoy for beauty care and swimming. The cost of expansion induced an interruption in the company’s financial flow, that it had to pay to more and more partners.
Also Read: These 9 famous startup failures have a lesson for you
Similarly to several e-commerce apps, Wenow paid high costs to promptly occupy the majority of market share. It eventually broke the financial balance, leading to bankruptcy.
In Homejoy’s case, its user acquisition strategy includes promotional pricing below the business operation cost. It expected rapid growth in size and network.
Unfortunately, customer loyalty defeated it. Most users cancel the services after ending the promotional offer. Several industry experts believed that the business model of Homejoy was financially unsustainable, bearing huge losses from the expansion period.
A late response to the failure
From the middle of 2019, Wenow was deep in trouble from the promotional campaigns. Until then, it had just started tightening the regulation in its packages. Instead of allowing unlimited fitness sessions, each account would have a certain point to be subtracted for each successful booking. Additionally, Wenow also cut down the partners’ network for reducing the cost.
However, it seems too late for Wenow to revive the broken financial chain. Users got angry due to sudden changes in the business model, then leaving this startup. Wenow experienced difficulty in finding new users due to an adverse branding image. Hence, its revenue went down dramatically, causing insolvency to suppliers. In the end, this startup got stuck in tremendous debt.
On the contrary, had Wefit promptly solved the mistakes as ClassPass did, it would have survived, at least for two to three more years. The American fitness startup had fixed the business model in 2016, only one year after the loss, while it took Wefit three years to change.
Currently, ClassPass has started to receive the initial success through becoming a unicorn which worth over US$1 billion.
In conclusion, the failures mentioned above have killed several excellent business ideas. To thrive in the market, startups should delicately avoid the breakdown of market incumbents in building their own business strategies.
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