CASE 2

What Move Loot Learned the Hard Way about the Economics of a Business

Move Loot was started by Jenny Morrill, Bill Bobbitt, Ryan Smith, and Shruti Shah. The foundersparticipated in the prestigious Y Combinator Accelerator program in the Silicon Valley. Thebusiness idea was to make the process of buying or selling secondhand furniture seamless andfun. Instead of placing an ad on Craigslist and hoping that the person that buys your furniture can pay in cash and has a truck to take it away, Move Loot's solution was to take the furnitureoff your hands, professionally photograph it, advertise it for sale, store it, and deliver it once the sale is complete. Move Loot would make money by taking a 50 percent commission on the sale.The secondhand furniture market in the United States is worth about $3 billion per year.

Move Loot launched in October 2013 and got off to a fast start. It started in San Francisco. Earlyon, Move Loot grew by more than 25 percent per week. Unfortunately, in mid-2016 Move Loot shut down. While the company's founders have not weighed in on why Move Loot failed, a look at the economics of the business provides clues as to potential trouble spots.

Move Loot had two revenue drivers a 50 percent commission on each item sold and a deliverycharge for items under $500. On the expense side, Move Loot had to do sufficient marketing toget people to sell secondhand furniture through its service and to attract people to buy secondhand furniture through its service. Like all "two-sided" markets, the service wouldn't workunless there was a large enough critical mass on both sides of the equation. Once Move Lootgot a client who wanted to sell a piece of secondhand furniture through its service, think of whatit had to do to earn a commission.

1. Send a driver, a truck, and a crew to a customer's house.
2. Pick up the piece of furniture and transport it to a storage facility.
3. Photograph the item, write a description, and list it for sale on its website.
4. Screen offers for the item. If a buyer didn't like the price, he or she could submit a lowerbid.
5. Store the item until it sells.
6. Collect the money once it sells.
7. Deliver the item to the customer's house.
8. Pay the original owner of the item.

That's a lot of work to earn a commission on a secondhand piece of furniture. On top of that, if an item didn't sell, unlike a furniture store, Move Loot couldn't discount it until it sold thefurniture belonged to the client. It gave the buyer 60 days for an item to sell. If it didn't sell thebuyers could pay to get the furniture returned to them, donate it to charity, or request more time.Move Loot essentially had both high fixed costs and high variable costs. Its fixed costs consisted of its trucks, routing system, storage facilities, and equipment, such as the camerasneeded to photograph the secondhand furniture and the servers to support its website. When itclosed. It had expanded to several cities beyond San Francisco. Its variable costs consisted oftruck drivers, dispatchers, the employees who moved the furniture, the storage facility employees, the employees who managed the sales, and the costs of running the storagefacilities. All-in-all, this is a lot of overhead for what was essentially a secondhand onlinefurniture store. Move Loot most likely was caught in a situation where it had narrow margins,high fixed costs, high variable costs, and some inventory that didn't move quickly. This is a hardcombination to make work, the "economics of the business" just weren't good.

In the months prior to closing, Move Loot iterated its business model more than once. In November 2015, it broadened its marketplace so that other stores, like a local antique shop, could post their items on Move Loot's website. In March 2016, it switched to a model where anyone could upload their own photos to the site, and then Move Loot would take care on onlythe pick-up and delivery part. Neither these moves were able to save the company.

The Move Loot story is a good reminder that the fundamental "economics of the business" is animportant part of a start-up's business plan.

Source: Adapted from Entrepreneurship Successfully Launching New Ventures, Pearson Education 2019.

Once a piece of secondhand furniture was listed on Move Loot's website, if a customer didn'tlike the price, he or she could offer a lower amount. Move Loot's 50 percent commission wasbased on the final selling price. This must have made it difficult for Move Loot to forecast bothits gross margin and its contribution margin on individual sales.

1. In your opinion, do you believe this was a problem for Move Loot? (6 marks)
2. In your opinion, do you believe Move Loot's business model was doable? (4 Marks)
3. in your judgement, were the "economics of the business" seem reasonable for Move Lootfrom the beginning? (2 Marks)
4. How could Move Loot establish its business in a manner that the economics of the businessmade more sense?
5. (3 Marks)
6. What can all start-up founders learn from the Move Loot case? (5 Marks) (Total: 20 Marks)