Driving in a big city is stressful. Behind the wheel, a motorist has to constantly watch out for other cars, jaywalking pedestrians, and errant bikers. The mean, congested city streets are full of potholes and construction zones. Traffic jams can pop up at any moment and ruin a trip. The struggle does not end at one’s destination, however. A car must be parked. Finding a legal parking place is a time-consuming and expensive hassle (20 mins based on an IBM survey of drivers around the world), which seems to have become more difficult recently as cities have begun more aggressively ticketing to boost municipal revenues. In this context, a couple of Chicago roommates racked up thousands of dollars in parking tickets and decided there had to be a better way. Mark Lawrence and Jeremy Smith founded SpotHero in 2011 to take the pain out of parking.
The $100 billion parking industry has been waiting at least 25 years to be disrupted. This underdeveloped market for parking is characterized by glaring institutional voids that have attracted some $4 billion of venture capital funding for on-demand parking services. On the supply side, garages are asset intensive structures with high fixed costs, and unutilized spaces are wasted opportunities to generate revenue. Customers who want to be close to a particular location are essentially captive to whatever garage they happen to drive up to because they have no way to know their other options without surveying the area. Importantly, pricing is not transparent in this market: customers pay widely varying hourly rates throughout the day and week.
Alternately described as the OpenTable or Expedia of parking, SpotHero seems to have solved all of these problems by creating a platform that displays all of the participating garages in an area and compares their prices—for a given period of time. Users are able to reserve spots from these garages in advance and pay through the app using a credit card, rather than enduring clunky paper tickets. As a SpotHero user, I can confirm that the service is a dramatic improvement over the status quo. In return for downloading the free app, customers typically receive discounts of approx. 40% and are guaranteed never to pay more than the listed price. The major garage companies partnering with SpotHero are benefiting from the new customers to the tune of an extra $500,000 per year.
SpotHero exhibits classic network effects. Users only want to download and use the app if there are enough garages available in their area to compare and select. At the same time, garages only want to join the network, which provides them with a web interface that can be updated in real time based on their availability, if they see SpotHero as a funnel for new customers. To combat this inertia, SpotHero has adopted a highly local strategy, starting in Chicago and moving into cities one at a time. Sales representatives sign up garages, while the marketing team offers generous promotions to attract customers ($250 for referring friends and 50% off). SpotHero then receives a 15% commission on sales. To keep software development costs and complexity down, payments are processed through Amazon Flexible Payments Service. Today SpotHero has over 1500 locations primarily in Chicago, New York, Washington, DC, and Boston with plans to build out their local hubs in western US cities using the proceeds from their August 2015 $20 million Series B raise.
While customers undoubtedly benefit, it is worth noting that SpotHero has been accused of destroying value overall by enabling price discrimination and facilitating price wars between competing garages. With few exceptions (for electric vehicles, e.g.), parking is a commodity. It is a dubious claim indeed that customers would want to pay a premium for an equally convenient parking spot. To provide differentiated services in this sphere, SpotHero’s competitors provide event parking (Parking Panda and ParkWhiz), as well as personalized valet parking (Luxe, Zirx, ValetAnywhere, Caarbon, and Vatler), some of which provide additional services such as car washes or oil changes. For now, however, SpotHero believes in the power of their labor light, asset light model to improve the parking experience for customers and continue to promote their value proposition as the center of a two-sided network, brokering deals between people and private parking places. This fast-growing company is looking to expand internationally in the future.