Growth challenges for a different kind of ride sharing company

While yet to make significant inroads into America, a new generation of dockless bike sharing services is already reshaping Chinese cities.

In 18 months since launch, the two largest competitors in the industry, Mobike and ofo are already valued at over $3 Billion USD each. This month, Mobike closed a $600 million Series E from Tencent, Sequoia and others, and Ofo raised a $700 million Series E led by Alibaba. These rounds make bike sharing the fastest industry to produce multiple unicorns.

And perhaps those valuations are warranted. Mobike currently claims over 100 million registered users with up to 25 million daily actives during peak times and a projected growth rate of over 2000% in 2017.
This week, we’ll take a look at the growth models at work behind these unlikely unicorns.

Reducing onboarding friction by removing the dock

Docked bikesharing programs have been around for over 30 years in over 1,100 different cities but have failed to gain meaningful traction. The requirement that each trip start and end in a dock creates several significant points of friction for onboarding a new user:

  • The users must start and end at fixed locations where docks are built
  • High starting price points make it costly to try the new systems (depending on usage Citi Bike can cost significantly more than public transportation, or even Uber/Lyft)
  • Empty and full docks each present a different problem that can prevent people from using the system, even if they have paid

Related Lecture: Optimizing the Adoption Phase

For new users, these UX challenges have meant that adoption has been slow. Even for successful bike sharing systems, the requirement for additional docks to be installed and coordination with city governments naturally limits growth.

Dockless bike systems fix these problems by putting the docks into the bikes themselves. Bikes are located and unlocked via an app and can be left anywhere at the end of the ride, and the bike locks itself. All payment is done in-app and negative behavior is disincentivized via hefty deposits required upon joining.

Because there’s no physical infrastructure required, dockless bike companies can enter into a new city without first coordinating with city governments and demand can scale up simply by importing more bikes.

Related Interview: Eventbrite’s Brian Rothenberg on Growing Marketplaces

With price points currently at around 1 Yuan (16 US cents) per hour, the combination of better convenience and lower prices has unlocked explosive growth in the bikeshare market.
Mobike alone owns more bikes and has provided more rides in a single year than every single docked bikeshare system on the planet cumulatively, with even more growth projected in the near future.

Low-cost density vs defensible supply inventory

Despite both being in the bike sharing space, Ofo and Mobike have approached the problem from two different angles.

Mobike’s bikes are fully featured, coming with in build GPS, Bluetooth and sturdy construction but at a cost of $300 - $500.

In contrast, Ofo’s bikes reputedly cost less than $35 to build because they rely on simple, mechanical locks, QR codes and users’ smartphone GPS.

Mobike’s model allows them to precisely pinpoint bikes on a map and making them much more resistant to theft. In contrast, Ofo can only show you a rough estimate of bikes in your area and depend on assumed density to ensure that a bike will always be within sight.

Both companies rely heavily on gamification to increase engagement and push the bulk of the operational cost onto users so they can maintain only a skeleton staffing crew (reportedly less than 50 employees for 100,000 bikes in Shanghai):

  • Users are granted points by reporting vandalized or improperly locked bikes
  • Users can earn cash rewards for riding bikes from less populated to more populated areas.

Related Lecture: Identifying High-Impact Retention Optimizations
Newer competitors are differentiating themselves by offering more comfortable/adjustable bikes and geared bikes as opposed to the simple, fixed gear Mobike or Ofo models.

Monetization for bike-sharing and an uncertain future

Having only been in business for 18 months, much remains unknown about the future viability of the industry, even to the participants.

Basic variables such as churn (for both users and bikes) remain difficult to calculate which makes financial modelling challenging or irrelevant.

All of this has opened these bike sharing companies up to criticisms familiar to many US companies in the on-demand space, namely:

  • Is the demand generated by sustainable consumer need or only propped up by generous VC subsidies?
  • Does the winner in this space have any sustainable competitive moat that will allow it to generate outsized profits?
  • Or will this perpetually remain a low-margin, low-switching cost, and therefore high-churn business?

Anecdotally, we’ve also heard that these bike sharing companies are addressing their low margins in a different way.
The companies care less about the per ride fee and more about the deposit that users put up when they join (299 RMB for Mobike, 99 RMB for Ofo) because, claim some, they're using that deposit money to fuel future growth.

While this hasn’t been corroborated by official sources, since it wouldn’t be a legal use of deposit funds, if it’s true, it would be a creative way to optimize “payback period” to enable more aggressive acquisition efforts and create a competitive advantage.

Related Lecture: Monetization (more about payback period & CAC)

For the time being, none of these companies have to confront these questions because they’re flush with VC cash, but whether they’re the Amazon or Pets.com of this generation has yet to be seen.

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