Like many Chinese companies, Swan Daojia (天鹅到家) had to suddenly shelve their IPO plans after Didi fell in trouble with Chinese government. Before this disruption, it had intended to go public on the New York Stock Exchange (NYSE), eyeing a US$3 billion valuation.
If the name Swan Daojia doesn’t ring any bells, you are not alone– the platform is better known in China by its original name, 58 Daojia (it is owned by the online classified marketplace 58.com). It is a home services marketplace– backed by Alibaba and Tencent– that matches users with home service providers. Users can use its app to hire cleaning, nannying and other services.
It is not the only home service platform to draw investor attention. Earlier in June, Urban Company (previously Urban Clap), a India-based start-up which operates along a similar model, raised US$255 million in a Series F funding.
Although Urban Company‘s valuation showed the confidence that investors have, a number of similar platforms have failed to take off in the past. Homejoy, a pioneer in this domain, petered to a halt in 2015, five years after it was founded. Gojek took a stab at it in 2017, but even its most promising services, GoClean (home cleaning) and GoMassage, were closed down in 2020.
The question, therefore, remains: Swan Daojia is about to take flight, but how far can it actually fly?
A home service platform makes sense in China
China has shown a growing appetite for home services, with the total household expenditure increasing from RMB 570.3 billion in 2016 to RMB 909.0 billion in 2020. More people in China’s cities are earning higher incomes but also working longer hours, so they are more open to outsourcing their domestic responsibilities.
At the same time, with the country’s growing urban population, there are plenty of individual service providers nearby to answer such requests on-demand. However, their sheer numbers also makes the market fragmented. As of 2020, China has an estimated 630 000 home service agencies and 30 million service providers. Swan Daojia, its market leader, only controls an estimated 1% of this market’s overall transaction volume.
In this fragmented market, consumers are dissatisfied with online classified sites. User satisfaction is uncertain– buyers cannot regulate the quality of service or prevent moral hazard. These pain points will make home services platforms (such as Swan Daojia), which can facilitate direct transactions while standardizing quality more attractive.
Bigger players are still reluctant to enter this market
Despite its growing market potential, we find it unlikely for bigger platforms such as Meituan to venture into home services. While they are trying to strengthen their position as Super Apps for local services, the opportunity cost of entering the home services market remains high.
Whether it’s ride hailing or food delivery, most service offerings offer a higher transaction volume than home services because their transactions are higher in frequency. Simply put, the capital that bigger players invest into a home services venture could generate higher returns (through increasing revenue and user stickiness) than if it was funneled towards their existing businesses instead.
As such, the home services market remains a niche market that bigger players seem unwilling to enter (for now). This reluctance provides room for dedicated players such as Swan Daojia to expand their market share, but they will have to manage the unique constraints of the home services market to grow efficiently.
The challenges that Swan Daojia face
Compared to other industries, the home service marketplace requires a much higher level of trust from its customers. For most of us, our houses are intimate sanctuaries that we are hesitant to invite strangers into. To overcome such resistance, home service platforms will need to woo consumers with either low prices or premium quality services.
Low prices can allow platforms to quickly attract users, but it is ultimately unsustainable. As more competitors enter the market, the existing players will have to keep cutting prices to maintain their advantage. They could try to cope with these squeezed margins by lowering wages, but that path usually leads to unmotivated workers and lower-quality work. Absorbing these losses is another way around, but funding is limited– and so is the patience of investors.
Swan Daojia has pursued the other strategy of attracting users by raising the quality of its services. It provides paid and certified training programmes for its service providers, allowing them to standardize service quality and control (to an extent) the level of user satisfaction.
However, highly satisfied consumers provide another dilemma for home service platforms. While it could translate into user stickiness and more transactions made, it also increases the risk of platform leakage. Again, it ties back to the fact that home services entail a high degree of trust. Once consumers have found a service provider whom they can rely on, they would prefer to maintain their customer-contract on an offline capacity (much like online dating, actually), which is especially likely if both parties can negotiate for better terms.
Can Swan Daojia take flight?
Ultimately, the conditions for Swan Daojia are favourable. The market demand is strong, the home services market is very fragmented, and bigger players are still unwilling to enter the market anytime soon. That being said, it will have to overcome significant structural challenges to expand its business operations. Figuring out how to balance service quality and platform leakage may be key.
Furthermore, even if Swan Daojia does take off, it could find yesterday’s friends turning into tomorrow’s enemies. Let’s not forget that Alibaba used to invest in Meituan; now the two giants are tussling out for supremacy in China’s on-demand local services market.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].