What Really Killed Homejoy? It Couldn't Hold On To Its Customers
A cleaning company charges north of $85 for a 2.5-hour house cleaning, but to rope in as many new customers as possible, it offers the servicefor a promotional price of $19. Guess what happens when the introductory deal is used up?
You don’t need an MBA to solve this riddle. The customer never books again — and that’s the problem that plagued Homejoy, the cleaning services marketplace startup that was, for a while, a Silicon Valley darling before it said Friday it was shutting down.
Homejoy cofounder and CEO Adora Cheung told Re/code that the “deciding factor” was the four lawsuits it faced from cleaners who claimed they were misclassified as independent contractors. That’s likely true — the liabilities and legal costs associated with the suits were no joke. But there’s more to Homejoy’s demise: its customer acquisition model simply didn’t pencil out, former employees and industry sources said.
Former employees tell FORBES that Cheung and the startup pushed relentlessly for high growth numbers instead of fixing its poor retention rates, which persisted both because Homejoy relied too heavily on deal sites like Groupon for new customers and failed to improve its core service because it couldn’t train its independent contractor cleaners.
“Retention was clearly bad, and that’s what killed us,” said a former employee, one of several who spoke with FORBES but declined to be named because of the sensitivity of the subject.
Homejoy’s customer retention rates varied depending on how the numbers were sliced, but they were never rosy. Only about 15% to 20% of customers booked again within a month, former employees said, though a source close to Homejoy said that experiments in some markets raised that rate to 30% to 40%. Handy, a larger rival, said more than 35% of its customers book again within a month, and that rate goes up to 45% in larger markets. Homejoy and Cheung declined to comment for this article.
“Our product is almost entirely a recurring business product — the economics are all about driving repeat use,” said Handy cofounder and CEO Oisin Hanrahan. “That’s so, so important in this category.”
Pushing For Growth In The Wrong Places
Homejoy faced pressures dreadfully familiar to many successful young startups: Raising a huge round (in this case, $38 million in 2013) comes with investor expectations of equally huge growth. To meet those expectations, Homejoy expanded quickly — too quickly, former employees said — into new and international markets, at one point opening in 30 cities in six months.
Cheung “was always telling the growth story … because we need to have this story to raise the next round of capital,” said the same former employee. “She really felt that if the company stopped growing really, really fast we’d be dead.”
Homejoy paid dearly for its growth. When it entered new markets, it grabbed new customers on deal sites like Groupon and LivingSocial or by offering discounts on its own site. It leaned on these sources, with about 75% of its bookings coming from discounts as opposed to referrals or organic traffic, former employees said.
Not only did that kind of discounting make Homejoy lose significant money, it also brought in the wrong kind of customer. Many never booked again because they weren’t willing or able to pay the full price, which ranged from $25 to $35 an hour. Homejoy changed its pricing last year to make recurring cleanings cheaper and encourage repeat business. In response, some customers simply booked at the cheaper price and cancelled future appointments.
“There’s an adverse selection to high discount — it’s maybe not sending the right message,” said Benedikt Franke, cofounder of Helpling, a German company similar to Homejoy. (It goes without saying, but Franke, like Handy’s Hanrahan, has an interest in highlighting that his company differs from Homejoy and will not suffer the same fate). “It’s very easy to give away free T-shirts, but you still don’t have a fashion brand.”
Homejoy’s infamously steep $19 deal only lasted a few months last summer. But overall, the company struggled to predict a customer’s likelihood of sticking around and often paid more to acquire a customer than they would ever reap in revenue from them, former employees said. As key metrics flagged, so did workplace morale. Employees knew the company was fundraising but couldn’t see how the next round wouldn’t be a down round given that its numbers had been dropping.
“Looking back, it’s like, that didn’t make sense — if your core business doesn’t work here, why expand in new markets?” said another former employee. “I think they were sort of fooling themselves with this exciting top-line growth, and they had cash in the bank so it wasn’t really a concern, immediately, getting to profitability.” But, he added, “it was fun to have that hockey-stick growth. It’s hard not to get caught up in that. As a startup, you know your task isn’t to make money — it’s to get new users, and it’s easy to grow in new markets.”
As independent contractors, Homejoy’s cleaners couldn’t be trained — which led to spotty service quality and poor customer retention. (Courtesy Homejoy)
The Training Dilemma
But it wasn’t just deal-sites customers that didn’t stick around. Customers that came directly to the site also left, largely because cleaning quality was hit-or-miss. And because Homejoy’s cleaners were independent contractors, the company was barred from giving them even basic training on how to clean a house, even if the workers had never cleaned professionally before.
That legal limit “affected our ability to put together a strong product, since we couldn’t train or equip our cleaners, which in turn led to average customer experiences and low customer retention,” said former operations manager Anton Zietsman. And cleaning houses is a more subjective and sensitive service than driving someone across town, meaning one bad experience could lose a customer forever.
In that sense, it’s not the four existing misclassification lawsuits that made the company shut down. It’s the deeper problem behind the lawsuits: Companies on this business model who want to sell a consistent product have their hands tied. If they over-train their workers, they might get sued. If they don’t, their product will suffer — and so will their business, maybe fatally.
Homejoy knew about this problem and was trying to find a way to fix it. The company ran an experiment in Chicago where it trained some cleaners to do things like leave a Homejoy-branded fold on the bed, arrange the pillows in a particular way and leave a card and small goodies in the house. That clearly crossed the line of an independent contractor’s job freedom, but it “helped a ton” with qualitative feedback and customer retention, said one former employee. It’s hard to see how that experiment could have been expanded nationwide, however, without prompting more lawsuits or requiring housecleaners to be employees, not contractors.
Homejoy also kept a significant part of the cleaning fee as commission — sometimes close to half, depending on certain cleaning bonuses. The higher the commission, the higher the incentive for cleaners and customers to strike a better deal directly with each other. Homejoy tried to track the size of the problem but had a hard time since it happened outside of their control.
“Maybe our retention was a lot better, but it was retention off the platform,” cracked one former employee.
Some deep-pocketed companies like Uber and Lyft are fighting their misclassification lawsuits, while others like Shyp and Instacart have opted to pay up instead by shifting contractors to part-time employees in order to train them more. What’s clear from Homejoy is that leaving your contractors untrained could keep you on the safe side of the law, but you might be left with a spotty product that kills your company anyway.
“This is a problem I anticipate many more service platforms will face in the next 12 to 24 months,” Zietsman said. As Fusion’s Kevin Roosepointed out, many similar contractor-based companies that raised big rounds of capital will soon be coming up to the same point as Homejoy, where money is running out and investors start to expect a path to profitability. They’ll either need to figure out a way to ensure quality and repeat customers or risk being squeezed out by Amazon and Google, which are starting their own home services arms — and never have to make a profit to survive.
Follow me on Twitter at @ellenhuet, find more of my stories on Forbesand send me tips or feedback at ehuet at forbes.com.
from : http://www.forbes.com/
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