Financial Risk Manager: Sharing economy

Sharing economy
Wednesday, August 10, 2011

This article appeared in Profit, Pakistan Today, August 10, 2011 issue

The concept of sharing economy is as old as society itself. Economic model based on bartering, lending, trading, renting, gifting, and swapping (commonly called collaborative consumption) has always been present in all civilization in one form or the other. Only the ongoing boom of collaborative web technologies has accelerated sharing on the pace that was never possible before. The growth is more evident online.

Loosely defined, sharing economy is a business model in which shared goods or services are distributed via a market place to a community of users. The basic idea is to better utilize existing assets. Connected population can better participate in organized sharing of goods that would otherwise sit unutilized. Many of us are probably already participating in this fast growing trend. Anyone who has created software for download free or posted information online for users to benefit is already participating in the trend. Those who are using online marketplaces to recycle physical goods creating less of a need to produce new products or are facilitating an economical and convenient ways of sharing are also aiding collaborative consumption.

Initially, sharing economy concerns followed business-to-consumer market strategies. Over time, peer-to-peer models are mushrooming. Peer-to-peer models are much more capital efficient than their business to consumer counterparts because they do not require major capital investment to acquire assets. Instead, they rely on a community to supply them, typically in exchange for a revenue share of the transaction.

Growing fast, sharing economy stands at one of those interesting points in time where no one knows how big it might grow. Social technologies have already changed the concept of a community and consumers’ behavior. What in the past was about ownership is now about access.Traditionally, the growth of conventional economy has always based upon larger inputs from finite resources. That is not sustainable long-term solution. Still, armed with theories that disregard physical limits, conventional economy has been successful in creating incredible wealth and technological progress, notwithstanding the depletion in existing resources to near exhaustion. Almost all resources are running out, leaving little for generations to come. Environmental hazards that come with exploiting resources, like climate change, ecosystem devastation, and biodiversity loss.

That is why ecologists were the first to support sharing economy as a phenomenon. Ecologists and environmentalist view economic fundamentals by making a distinction between growth and sustainable development. While growth can be defined as an increase in output, sustainable development means increasing the quality of human well-being by a given output. By focusing on the latter, ecologists believe that our society can progress without destroying the ecosystem that sustains it.

Sharing and renting more stuff means producing and wasting less stuff, which in turn means producing less and that is good for the planet we live on. In addition to this green element, best thing is that collaborative consumption has new opportunities for entrepreneurs to make money. As per careful estimate, sharing economy as a whole is a $110 billion plus market and it is growing as a perfect fit for an cyber lifestyle in which “digital natives” (those born after 1980 and are now growing up during the digital revolution) can participate with trust. One can see the growth in the rise of big businesses like car rentals and media companies whose millions of subscribers pay a fee to share a car part time or download DVDs they want. In addition to the so many successful examples, a huge new opportunity is already driving new businesses and renewing old ones.

Let us take a look at human factor in collaborative consumption. Collaboration is human nature in the first place. Digital natives have discovered that consumption and capitalism are not necessarily the doors to happiness. They are connected; they know that the world is now a group of interest based communities ripe for collaboration. The tools the digital generation embraces and the platforms that are coming up every day are making it possible to collaborate more.

Sharing is first of all a human experience, probably as old as our existence, but after the rise of rampant consumption, “sharing with” is the new humanized experience.

Local market scouting reveals that all businesses from bartering, lending, trading, renting, gifting, to swapping are already running in Pakistan since pre internet era still working the old ways. They need to adjust to the age of collaborative web technologies. The bottom of the pyramid in Pakistan is much wider than most people realize. Collaborative consumption phenomenon that promises austerity will sure find great demand.

Is collaborative consumption really the answer to rampant consumerism, a change in the air? While the exchange economy may have been appropriate for the industrial and post industrial age, the sharing economy is coming back as we proceed through the digital age and yes, it can change so many things.