If you walk into any major urban center in America, you’re bound to find young people glued to their smartphones. But they’re not always just texting or checking up on social media — they’re also taking advantage of a wide range of lifestyle apps, which offer everything from ride-sharing services to online shopping to rewards for engaging with local businesses. Most of these apps, which are generally available cheaply or for free, are created by businesses started in Silicon Valley, where implementing a unique idea and cultivating an audience is often considered more important than generating profits. These consumer tech companies are generally funded by wealthy investors looking to capitalize on the explosion of technology present in the everyday lives of millennials, effectively subsidizing the products in question and enabling an artificially low cost for the consumer. But the venture capitalists who make this app-centric lifestyle possible are effectively placing a bet on the long-term financial viability of the innovative businesses they invest in, with potentially disastrous consequences for everyone involved.
Any number of examples of these apps, produced by businesses that are not currently making a profit and perhaps never will, come to mind. Casper, a mattress company that operates online and ships compressed mattresses directly to customers’ homes, is expected to lose money this year, as are the tremendously popular Uber and Lyft ride-sharing platforms. DoorDash, a service that delivers food from a variety of eateries, is not profitable, and neither is Seated, which gives discounts to restaurant-goers. Perhaps most notably, the platform WeWork, a business that rents out office and living space to small businesses, recently attempted to go public, a disastrous decision that resulted in financial turmoil for the company after potential investors raised concerns about the company’s path to profitability and its’ CEOs questionable antics, which included smoking marijuana on a private jet and serving tequila shots to employees after discussing layoffs. Amidst this controversy, Adam Neumann stepped down from his role of CEO of the company, and WeWork’s future remains unclear.
In general, companies such as these provide non-essential goods and services, offering their customers convenience for an affordable price rather than the necessities of life. This convenience is made possible by technology, as smartphones are always connected to the internet and provide companies with information such as a user’s location and other details that are used in innovative ways. Nevertheless, they are built upon attractive and enticing ideas, which capture the attention of investors who rely upon their trust that the companies’ ingenuity and creativity will eventually lead them to make a profit.
Ironically, the most popular online businesses tend to be the least profitable, in what is likely to come as a surprise to their millions of daily users. The well-known Blue Apron, for instance, spends roughly $460 to recruit each of their customers, despite making only around $400 on each customer, as they are likely to cancel their subscriptions after only a few months. As a result, investors quickly realized that the meal-kit company had no viable path to profitability, and the company’s valuation dropped by over 95% since they went public. Because Blue Apron refuses to increase the price of their services, they are unable to demonstrate value to investors, leading to serious financial problems for the company. While Blue Apron may be considered an extreme example, the underlying business model, wherein companies supported by venture capitalists reduce their prices in order to generate an audience, is prevalent throughout entire industries.
The artificially low prices of these new businesses perhaps explains the extremely-connected and online relationship millennials have with tech-savvy startups. But, as companies like WeWork and Blue Apron fail spectacularly despite their large audiences, business leaders are starting to take note. One of the solutions to this inherently problematic business model is simply to raise prices for services in an attempt to generate profits for increasingly impatient investors. But competition is fierce, and millennials are a fickle demographic. Companies that raise prices of services, even if just to break even, risk alienating their base of consumers, who may be drawn to particular products or services for their low prices rather than for their practicality. For instance, if a company that lets customers rent bicycles with their phones raises their prices, consumers may realize that it becomes more economically viable for them to simply purchase their own form of transportation. As income inequality rises and wages remain stagnant, particularly among the millennial class of workers, companies are faced with the difficult choice between continuing to operate at a loss by benefiting from increasingly-wary investors, and raising prices for non-essential goods and services that their consumer base may increasingly be unable to afford.