Just three years ago, Homejoy had $38 million in the bank thanks to backers like Google Ventures and Redpoint Ventures. The startup, which facilitated on-demand cleaning services through a platform that matched cleaners to customers, charted rapid growth, high acquisition rates, and operated in 30 cities. They worked with the so-called 1099 business model, which allowed them to save costs by using independent contractors instead of full-time employees for their cleaning services. They were a hot company, in a hot industry, at just the right place and time.
What they didn’t have were repeat customers. And this Friday, Homejoy will be closing their doors for good.
The official story for Homejoy’s demise has been the four lawsuits that have been filed against them, and there’s no doubt that this is a major factor. There is a lot to be said of the complications of using independent contractors instead of hiring employees, as companies like Uber, Lyft, and Homejoy’s main competitor Handy are in the process of finding out. There are legal ramifications that the sharing economy as a whole might come across in the coming months.
That said, even Homejoy’s legal troubles are linked to their issue of customer retention. And in the end, what killed them wasn’t a business model that hired contractors but treated them like employees, which invited lawsuits and controversy. What killed them was a business model that didn’t put the customer first.
Deep discounts led to a deeper hole of acquisition-fueled “growth.”
Hindsight is 20/20, and looking back, the moment that Homejoy offered $115 worth of cleaning services for $19 should have been a red flag.
The company’s main goal was clearly to grow as quickly as possible. Instead of focusing on building and scaling a loyal customer base, however, the startup grabbed business wherever they could through discounts, Groupon deals, and other online coupons. They built a customer roster of deal-hunters and one-time users, and trained what repeat customers they did have to hold out for bargains.
The eventual conclusion of discount-driven acquisition is deeper-discount-driven acquisition, and this held true for Homejoy. With no real customer retention practices set in place and the pressure to consistently show growth figures, the company had to double down on acquisition, which meant cutting prices even further. The $19 deal only lasted for a few months, but the damage had been done.
The business model ranked profitability over the customer experience.
The reason for the deep discounts? Service was hit or miss, largely because of the restrictions that came with hiring independent contractors. The 1099 model lends itself well to keeping employee-related costs down and keeping the core business lean, which maximizes the business’ profitability. In this case, however, it also meant that Homejoy’s hands were tied when it came to regulating — or even developing — a consistent customer experience.
As contractors, Homejoy couldn’t train cleaners to adhere to certain standards or practices. Even instructing them to arrange pillows a certain way or to leave a Homejoy-branded item behind was considered overreaching. The company relied on a system of ratings for cleaners to maintain a degree of quality, but there was little legal room to build a brand-specific customer experience for every cleaning appointment that took place.
By trying to maximize growth by upping profitability, Homejoy neglected the core of customer retention: putting your customers first.
In the end, Homejoy burned bright, then burned out. It’s not something altogether unique in the startup world ‘ the recent flash sale site bubble is proof enough of that. The company failed for a number of complex reasons, including the lawsuits; it would be simplistic to claim they failed because they didn’t invest enough in Retention Marketing.
However, one thing is true: Homejoy had a laser focus on demonstrating their “growth.” With the added pressure of proving their company was worth their investor’s $37 million, Homejoy looked for momentum in the most obvious of places: in acquisition numbers, in the number of countries they expanded to, in total “growth” achieved. By doing so, they failed to remember the key to any sustainable business: loyal, repeat customers, who feel your business is one worth remembering.
Without customers ‘ and without the ability to keep them coming back ‘ “growth” is pretty meaningless. Unfortunately for Homejoy, it was a lesson learned too late.