Can you remember the last time you saw a movie? Did you buy it or stream it from a service like Netflix or Amazon Instant Video?
If you streamed it, you’ve joined the sharing economy, where consumers prefer to rent access to something instead of owning it outright.
The sharing economy is exploding around us:
•Instead of dropping $1,850 on a Catherine Deane "Godiva" gown, you can check out Rent the Runway, which allows women to rent the dress (and an entire collection like it) for $300 and guiltlessly return it the next morning.
•Airbnb allows you to rent an expensive house for a short period of time, and the home owner gets paid to share their pad for a few days.
•Zipcar enables you to rent a car by the hour, when you need one, without the expense of owning it.
•We’re not downloading as many songs from iTunes as we used to. Now we simply share access to a music library from Spotify or Rdio.
•Last month, eRetah announced they are launching a NetFlix-like model for e-books: all-you-can read books for one monthly fee.
•Next time you need to do a major home renovation, don’t bother to buy a nail gun. You can simply rent it for the weekend from SnapGoods.
Sharing stuff has been around since stuff itself, but the new sharing economy is being fuelled by technology: Websites like Airbnb match buyer and seller; your GPS-enabled iPhone allows you to find the closest ZipCar; Facebook and LinkedIn enable you to vet anyone you’re thinking of doing business with; and sites like PayPal allow you to safely pay for what you’re renting.
There are two models gaining traction in the new sharing economy:
A Sharing Marketplace
Creating a sharing marketplace like Airbnb or Vacation Rental By Owner (VRBO) means you set up the marketplace but you don’t actually own the things being shared. You simply take a cut of the transaction. The chicken and egg challenge is that you need listings to get traffic and you can only get the listings if you have traffic.
Buy to Rent
In the buy-to-rent model, you buy something with the intention of renting it out. Unlike the sharing model, Rent the Runway actually owns the dresses.
Two key metrics define the buy-to-rent model: how long it takes to recover the cost of buying and your cost-to-rent ratio. Take the Catherine Deane gown, which costs $1850 retail. Let’s say Rent the Runway pays $1,000 for the dress (since they are buying a bunch of them, they probably get a discount similar to a retailer). Since they rent it for $300, and they need to steam clean it between each rental, they probably break even on the fourth rental.
If they can rent the dress once per month, it will take four months to get their money back on buying the item. Buy-to-rent businesses often need a lot of capital, so the faster you can recover your cost of goods rented (COGR), the more sustainable the business.
The other number that is important is the buy-to-rent ratio. In the case of Rent the Runway, it’s around 6:1; meaning you can buy the dress for about six times the cost of renting it. Obviously, the higher the ratio, the more attractive the rental option becomes for the consumer. On the flip side, the less often you need the item, the lower the buy-to-rent ratio needs to be. A wedding dress rental company, for example, may support a 3:1 buy-to-rent ratio, whereas a multi-purpose cocktail dress from Rent the Runway may only support a 6:1 ratio.
There was a time when the pride of ownership trumped any cost saving associated with renting. But in an environment where everyone is “deleveraging,” and technology allows us to share without dramatically impacting the quality of our experience; for many, access now trumps assets.
What will your sharing business model be?
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.