The on-demand service business has proven to be the most prospering vertical in 2020, even during a pandemic. Learn how to start your own with a small amount of capital.
Business is first won from the mind and then with efforts. It doesn't matter whether your business is limited to a single neighborhood or across 100 countries; the basics are always the same. In this article, I will review everything there is to know about starting an on-demand business with small capital.
You don't need an MBA degree to know that starting a business with very little capital is challenging. Starting any business is challenging, and that is the thrill that entrepreneurs seek with every new venture.
Entrepreneurs are quite restless souls, and business is the game of patience. It's always tempting to "just go" with a business idea without any proper analysis, especially if it shows high revenue and return at first glance.
Money is not the most important aspect, though it is a very significant one. The present culture of glorifying the bootstrap business approach is in trend. We all love a good underdog, rags-to-riches story like that of Amazon and Tesla, that started from a garage with just a few hundred dollars or even less.
But you need to understand that such stories of persistence and hardship also had a smart brain and foolproof business model that had all the alternatives of how to get more money if the business ran out of cash.
I will review how to start an on-demand product/service startup with a business plan that maximizes your available small capital. But before we take a look at the business plan to start an on-demand business, you need to have some rudimentary knowledge of on-demand business vertical and the factors that make it desirable as a startup.
What is an on-demand business?
The basic definition of an on-demand business is to fulfill customer demand based on their immediate needs to particular goods or services. The fundamental concept of this business is that access is better than ownership, meaning it's better to temporarily rent something than to permanently buy it. For example, it is better to order a cab whenever you need one than it is to buy a car (which you can't afford) or hire a massage therapist once in a while rather than buying a costly spa membership for a month or year.
It is a business model driven mostly by companies with the help of an app and/or website. This way, the customers always access the on-demand products and services in seconds on their smartphones. With this approach, on-demand businesses have created an efficient digital platform for themselves that productively uses their existing less-utilized assets and infrastructure at scale.
For on-field work, the on-demand businesses mostly rely on freelancers and part-time working professionals that register with their digital portal, rather than the hiring of full-time employees as their workforce.
Why is the on-demand services industry in high demand?
Convenience of process
The on-demand customers are, in most cases looking fora quick and convenient service. If your on-demand platform provides them with a convenient booking system available at all times, you'll be their first preference.
Available anywhere, anytime.
We are not in the 2000s when going to the mall was a thrilling experience. People now prefer to get served at home. From buying groceries to getting your pet's toys, everything can be dome staying at home. Book the product or service, and the customer will receive the service at the place and time of their choosing.
Previously, you enter a store and have to pay a fixed price for a service or product. If you wanted options, you had to find another store. With the on-demand app solution, finding and comparing options is as easy as swiping left and right on the mobile screen. Compare the prices and find the best of what you are looking in your price range and purchase it with a tap.
Easy payment methods.
There is no need to struggle for cash on the counter or feed in credit card details safely. Most of the latest on-demand apps offer a secure two-step payment method across multiple payment options which would take you less than 10 seconds.
A look into the on-demand economy
There's a lot more in the on-demand economy than these four reasons mentioned above. Let's take a look at the on-demand marketplace's potential for growth in the upcoming years. The on-demand services have produced an economy that’s bound to achieve great heights at a breakneck speed.
The future of the on-demand economy
It is predicted that the on-demand business vertical profits will reach $335 billion in the next ten years. This expected growth of the on-demand economy is attributed to several factors like user-friendliness, good profit margins, a cost-effective working model, and a highly streamlined business strategy and operations.
The younger customer base, namely millennials and Gen Z, are almost entirely dependent on the on-demand industry to get products and services. One could say that just like baby boomers were almost entirely committed to the supermarket and mall-shopping culture, their succeeding generations are equally committed towards the on-demand service model.
The investment opportunity
The entire on-demand industry is seeing a massive boost with new app launches as the demand for more and more on-demand service model based companies is increasing with time. Fundraising events have become more and more common, and a vast majority of angel investors are looking for new opportunities in this ever-growing vertical.
The on-demand businesses have become a mainstream trend with increased revenue count. Top on-demand businesses like Uber, Grofers, Thumbtack, etc. are receiving fundings from big investors to get the resources to grow further.
Steps to start an on-demand business with small capital
Launching any kind of business has a basic structure; we will look into that structure and compare it with your on-demand business model.
Step 1: Research is the biggest key.
More robust your research, better your business plan. It is most likely that you have already identified the on-demand business idea for your startup. You already know how to use Google to your advantage, but now comes a more advanced approach in researching.
First, you need to search the proof that your business idea is a promising one and has the potential to succeed. It's time to balance your business idea with reality. You will need to run your business idea through a validation process.
You need to ask questions like:
- Is there a need for your on-demand products or services?
- Who is your target audience?
- Who are your competitors that are offering similar products/services?
- How will your on-demand business fit into the market?
You've researched your business idea and the competition in your business vertical. Now comes the second phase of research: Find the perfect team of developers to build your on-demand business's digital side.
You need to find the best app development company that has the most skilled resources and valid experience in building on-demand products and services apps.
Step 2: Make each dollar count.
We have already established that you are running low on capital. So, you need to make every dollar of your capital count. With every question that comes at you, go beyond what comes to mind immediately. You need to think a little more deeply about every financial decision you make.
You have an option to benefit in other ways. What you have needs to be combined with who you know to have real power. You can substitute your lack of monetary power with the benefit of business connections.
In simple terms, map out your network of connections and consider how the connections of yours will enable you to spend your capital more effectively.
Step 3: Create a business plan.
Build your business plan in a smaller module. Breaking the plan into stages of smaller components makes it easier to manage your money and other resources effectively.
For instance, if you plan on launching a grocery delivery service business, consider hiring a few delivery guys, and investing in uniforms and vehicle decals to establish a brand.
Another example would be of hiring employees for your business is a long-term investment, so it is advised to outsource what you can and hire only those employees on the payroll that are vital for the long run. Hiring independent contractors for the majority of your work will reduce payrolls and save you on insurance and benefits expenses.
Contractual profiles like bookkeepers, app development partners, marketing team, designers, etc., are often outsourced and kept only until there short term services are needed.
Step 4: Legally register your business.
If you want your business to be recognized as an official business entity, you need to register with the government. You need to register and get a few permits, mainly getting a business permit, registering as a corporation, and also get yourself registered with the IRS.
You would also want to trademark your business name for extra legal protection. Based on your on-demand business's nature of work, you may also require federal, state, or local licenses and permits to operate. Also, check with your city or state officials to find out if you need a seller's permit authorizing your business to collect sales tax from your customers.
Step 5: Build a digital app.
The on-demand business vertical totally depends on its 24/7 availability to its customers. That can only be achieved with a smartphone app of your on-demand business. Developing a custom app is the best option but it also is a very costly option which startups with low capital can't afford.
That's where clone app solutions come into play. By hiring a clone app development company, you can build a highly-functional on-demand service app at one-tenth of the price and timeline of custom app development.
The reason for such a huge price cut is that the development time reduces drastically as the developers use existing app code script and tweak it to your business's preferences and needs.
Why do certain on-demand businesses fail?
There is a drastic upsurge in hyperlocal on-demand services. This popularity and rise in on-demand business vertical have made more and more entrepreneurs interested in trying out their luck. This increases competition as more and more companies are entering and lowering the service costs to compete.
This discounted price point in addition to the operational costs, infrastructure, and labor, has been hindering on-demand business startups from flourishing.
Reluctance among venture capitalists
Venture capitalists and angel investors are always on the lookout for the best business opportunities, but they also keep their eyes open for potential threats. Lately, on-demand business vertical has grown a negative impression due to several failure stories.
Due to half baked business ventures in the past that failed, on-demand startup ideas with real potential are being turned down by investors. VCs have started becoming wary and more cynical about investing in on-demand business startups.
Remember how amazing the Lego bricks set were a decade ago? Cheap knockoffs made today are just dropping the quality and the market valuation. This problem is inevitable for any business vertical, but it primarily affects the on-demand service industry.
The only way to fight against such competitors who will challenge your corporation will be by upping your product/service quality consistently.
Inefficient resource set
A company that lacks experienced employees and resources often result in a failure as an on-demand company. Irrespective of what particular products or services you choose to offer, if your team isn't good enough, then neither is your business.
If you research the existing on-demand companies that have been a grand success, you'll find that the ones that survived were known for their skilled workforce.
Sub-standard app experience
Your customers don't talk to you on call or visit your office, they interact with your business app. So, if your app is sub-standard in function, design or experience, the customers will hate using it and find an alternative.
Your app needs to give the best service as well as user experience to keep your target audience to yourself.
Not solving the actual problem
You can't do good as a business unless you are solving some real problems. You also need to make sure that your service is something that people need consistently. For example, if you sell on-demand pet toys, then the sales would be less compared to selling pet food. Toys are bought less frequently by pet owners, whereas pet food is a consistent commodity they need to buy.
Simply said, your business can thrive better if you sell stuff or services that people will always need, round the year.
Under/overvaluing demand and supply.
The biggest mistake that any business can commits once the operations start is to over or undervalue the demand and supply of your products. Whether you underestimate the demand and stock low, or you overestimate and can't sell enough, both ways, you are losing business or money.
Factors to keep in mind while your business is still growing
Don't buy new equipment.
When you are starting a new business, would you prefer to buy a new iMac worth $1,000 or a used one in good condition for $400? It’s just an example that can be applied to any and every equipment you are planning to buy for your business.
Leasing is even better.
Buying used equipment is profitable, but why even buy it. Leases are available for almost everything. Now imagine that you can still get the $1,000 new iMac, but you have to only pay a $50/month rent on it. And, the $950 that you save can be invested somewhere else more needed in your business.
Do you need an office? Maybe not.
Buying or even leasing office space and furnishing it is a massive and costly investment. If your capital is limited, you shouldn’t be making such significant investments in the starting. Hold off on buying or leasing an office space unless you absolutely need it.
In simple terms, unless you need to meet your customers on a daily basis for meetings (which you don't as an on-demand service startup) or need a retail space to store your large set of equipment, you don't need an office in the beginning.
Outsourcing is better than hiring.
With monthly salaries, bonuses, insurances, etc., full-time employees are a huge overhead cost. Instead, you can outsource the work to external business services and freelancers almost everything your business needs.
Once your business breaks even with the investment and starts making a profit, then you can scale by hiring full-time employees. Even then you can keep outsourcing the work to two or three dependable part-time freelancers instead of hiring one full-time employee.
Keep your business account and personal account separate.
One of the most common mistakes that entrepreneurs make is that they start to use the business's profits for their personal use, like buying a car, a house, or going on costly vacations, etc. You need to understand that in the beginning, you can either grow your fortune and let the business grow or cut your expenses and let the business flourish.
As the entrepreneur who starts the business, you must be prepared to take little or no salary for the first year of your business venture. You still have to pay your employees, as they are not stakeholders who work for free or for a very low salary (like you). It could be possible that for the first few years of your business, you may be the lowest paid employee of the company.
Which on-demand business ideas are guaranteed to succeed in 2020?
Starting any on-demand business is a very costly affair as you need to have the right equipment, inventory, and skilled labor for any business you plan to launch. For instance, if you plan to offer an on-demand car wash service, you need to have expert car washers and inventory needed to do the car wash.
But there is a low investment option to start such an on-demand business. You can just build and own the app platform for such a business where professional service providers can register and potential customers can contact them to get the service.
Launch your home and office cleaning platform with an app where professional cleaners will register their profile. Whenever a customer needs their home, office or vehicle cleaned, they'll search among your cleaners list and choose the right service and professional for the job.
You can launch the next Uber with this on-demand service startup. Uber too didn't own any of the cabs; they just offered a platform for drivers and passengers to connect and took commission over each transaction.
If not Uber then probably the next UberEats. Food-delivery businesses have seen high demand in 2020. People are not leaving their houses for casual meals these days due to the COVID-19 pandemic. Their craving for good food is as high as ever, leading them to order in their favorite food to be delivered at home.
Maybe food delivery seems too much for you, then the next and most lucrative on-demand business idea is offering grocery delivery service. There would be several people who may not order cooked food, but everyone needs groceries every day. Offering a grocery delivery service like Instacart or PeaPod is an up-and-coming business model for 2020.
People are staying more and more at home, which leads to more wear and tear of home appliances and infrastructure. Offering on-demand handy services like plumbing, carpentry, electrician, landscaping, etc., promises a very lucrative business opportunity.
How about becoming the next Amazon or Alibaba? You don't need to own the products that you sell as an e-commerce platform. You can offer the platform to vendors to sell their products directly to people that are interested in buying.
Transport and logistics
Trucking and logistics is probably the most prominent industry that connects all the other business verticals. Starting an app platform for truckers and shippers to interact and deal with cargo transport could be the most profitable on-demand service business you could start in 2020.
Bottom line on starting an on-demand business
We talked about a lot of things today from what is an on-demand business to which are the best on-demand business ideas of 2020 and everything in between. I hope your on-demand business venture becomes a grand success very soon.