Should you join Uber and the on-demand economy?

With on-demand start-ups from Uber to Handy shaking up their industries, many would-be solo business owners wonder if they should get in on the action and become contractors for the platforms, too.

More than 40 companies now sell services via on-demand platforms, according to The On-Demand Economy, an industry group in New York City. On-demand platforms offer everything from office cleaning to massages. In the U.S., Uber alone has more than 160,000 active independent operators, whom it recruited with the promise of being their own boss.

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The Uber app on a mobile phone
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The Uber app on a mobile phone

Similar to how local businesses use Groupon to offer discounts during a downtime, these platforms can often be helpful to local business owners when things are slow, by helping them find new customers. However, they are not necessarily the best route if your goal is to create a valuable, sustainable business—an important consideration for the leader of every company, no matter what size.

For one thing, when you depend on a platform, you may give up control over some areas of your business, like pricing, that you might later wish you had maintained. There are other viable models you can use to build a service business, such as running an independent business or buying a franchise. Uber and its imitators are modern-day franchises—without many of the upsides of joining a franchise network—where independent contractors are quasi-franchisees.

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Like franchises, the on-demand platforms offer small-business owners affiliation with a big brand and use that brand to aggregate consumer demand and drive leads. Beyond that, they offer little else that's unique in terms of the operational playbook provided by most franchisors. They are simply aggregators of demand—a variation on the models used by Yelp, Angie's List and Groupon—engaging with customers via the mobile phone.

And, in many ways, the platforms' trendy business models offer a lower value proposition than a franchise, at a much higher cost to the business owner.

Steep commissions

A case in point can be seen by taking a look at platforms' commissions. Many of the on-demand platforms don't openly publicize their cut in their team's revenue. However, on the major on-demand taxi platforms, drivers can be asked to pay a 20 percent share of revenue from each ride. In contrast, the average franchise fee was a little more than 5.5 percent of revenues, according to one recent study by the research firm FRANdata.

In exchange for the franchise fees they take, franchises offer operations manuals, training and so much more to franchisees. On-demand platforms, on the other hand, leave members on their own, for the most part. But they also take away some of these independent entrepreneurs' autonomy.

For instance, the platforms set the rates independent operators can charge but without the extra benefits franchisees receive to make the trade-offs worthwhile. Local business owners also lose control of their brand experience when working with an on-demand platform.

"The on-demand craze is undoubtedly disrupting markets and providing quick cash to independent operators. But if ... these operators start doing the math, ... they may find that they are not making a profit." -Court Cunningham, CEO of Yodle

The on-demand platforms may not offer sustainable work, either. While many consumers gravitate to on-demand platforms in search of cheaper prices—just as they flock to stores like Walmart—there are plenty of others who prefer to spend their money with independent businesses in their community whom they know. That's why the Buy Local movement is going strong. Because of this, franchises haven't squeezed out independent businesses and ultimately, neither will on-demand platforms.

More profitable alternatives

Granted, on-demand platforms do play a role in the small-business ecosystem. For solo operators, there are not many barriers to entry. A driver for Uber has to own a car and a phone—but not save up for a pricey taxi medallion. However, many independent businesses can be started and run with very little overhead from someone's home these days, thanks to better technology—and the owners don't have to pay the commissions the platforms charge. House cleaning and home-repair businesses frequently are good examples.

The on-demand craze is undoubtedly disrupting markets and providing quick cash to independent operators. But if many of these operators start doing the math of working for the platforms, they may find that they are not making a profit after they cover overhead and their taxes. And if they can't turn a profit, why not do something else where they can—like run a business that is really their own?

By Court Cunningham, CEO of Yodle, an online marketing company that helps small businesses find and keep customers simply and profitably.