Homejoy: A Silicon Valley darling’s path to the grave
Homejoy was one of the first platform companies to disrupt the $400 billion home cleaning market. The company aimed to create value by using algorithms to connect homeowners with cleaners and by scheduling cleanings, all of which could be done by homeowners from the comfort of an app. Homejoy had the potential to become Silicon Valley’s next unicorn; it raised $40 million from sources including Google Ventures and Max Levchin, PayPal’s cofounder. Nevertheless, the company was shut down less than 2 years later and turned into a cautionary tale for other platform businesses.
What killed Homejoy?
Adora Cheung, cofounder and CEO of Homejoy, claimed that the “deciding factor” that led to Homejoy’s failure were worker classification lawsuits. According to the lawsuit, Homejoy treated cleaners as independent workers, thus depriving them of reimbursements and overtime wages. However, further research suggests that lawsuits were not the primary reason for the company’s demise. Homejoy failure was attributed to mounting losses due to high customer acquisition costs, poor customer retention, a strategy focused exclusively on growth, competition, and poor worker retention.
- High customer acquisition costs: A cleaning company typically charged at least $85 for a 2.5-hour house cleaning, but Homejoy offered new customers a promotional price of $19 per cleaning. While many platform companies have subsidized products and services (or offered them for free) to fuel growth, Homejoy’s promotional price led to substantial losses since 75% of its booking came from discounts as opposed to referrals or organic traffic.
- Poor customer retention: Homejoy’s growth-focused strategy may have worked if Homejoy had been able to retain customers, but most customers never used the service again and did not stick around long enough to become profitable—in fact, a third-party analysis showed that only 25% of customers used the service after the first month, and fewer than 10% used it after 6 months. This was attributed to several factors:
- The promotional rates attracted the wrong customers: homeowners who were not willing to pay the full price of $25-35 an hour.
- The service was hit-or-miss. Since cleaners were independent contractors, Homejoy could not provide them with training, thus affecting the quality of the cleaning. Furthermore, Homejoy’s focus on growth led it to deprioritize technical issues, such as a glitch in the algorithm that did not provide cleaners with sufficient time to transit from one house to another, thus causing them to arrive late to their appointments.
- Exclusive focus on growth: Pressure from investors led Homejoy to expand too quickly and incur substantial costs. At one point, Homejoy was operating in more than 30 cities including New York, London and Berlin. The company’s focus on growth caused it to neglect basic supply chain and operations, especially when entering countries with different languages, cultures, and customer preferences, thus contributing to a suboptimal customer experience.
- Competition: The existence of rivals such as Handy led Homejoy to make unsustainable, unprofitable offers and provided customers with multi-homing options.
- Poor worker retention: Several reasons contributed to Homejoy’s struggle to retain high-quality cleaners, including lower pay than competitors and disintermediation whereby workers set up direct cleaning arrangements with clients. Some cleaners attracted enough customers to start small cleaning businesses.
In addition to the reasons outlined above, Homejoy ultimately failed because it failed to deliver on its value proposition. Anton Zietsman, Homejoy’s former West Coast operations manager, summarized it best: “We were trapped between being accountable to our customers and not being able to take much responsibility for quality of service.” This should serve as an important learning for future platform businesses aiming to disrupt an industry.
Student comments on Homejoy: A Silicon Valley darling’s path to the grave
This is a really interesting application of a lot of the topics we have covered in class. If I think about HomeJoy, I would classify it as a business model where there are modest network effects (so long as there are enough people on the platform on both sides for liquid matching the service works fine but there is no benefit to data and no direct benefits to me if my friends join). Multihoming would also be quite easy for both cleaners and homeowners. The combination of these two characteristics reminds me of the scenario in the simulation where it wasn’t necessarily a winner take all market and therefore the path to hockey stick growth was not absolutely critical to survival. It seems to me the right approach here should have been a moderate push for growth, focusing on creating a differentiated service that could overcome disintermediation rather than the path of reckless growth you describe here.