Tag Archives: collaborative consumption

Blog

The return of reputational capital: Why credibility is once again your best investment

Invest in yourself: Your credit score is probably less important to your long-term economic success than your online reputation (image credit: wynlok)

My little sister is adventurous, generous and, in the best possible way, idealistic. As I write this, she’s volunteering as a counselor at a Palestinian summer camp. So I wasn’t surprised to learn that she recently traveled to Cyprus. Nor that she stayed with a complete stranger she met online through CouchSurfing, a website—make that movement—for finding accommodation and creating a better world “one couch at a time.”

But I was somewhat surprised when I saw pictures of her accommodations. Rather than the dirty hovel you might expect from a service targeting frugal travellers, her room was spacious and immaculate, the fortunate side-effect of staying in the home of an architect’s son. And, exceeding even the common generosity of the CouchSurfing community, her host even offered use of his car, a convertible Mazda Miata perfect for booting around in the Cyprus sun.

It’s the kind of accommodation and transportation that could set you back some cash. Except for one thing: you couldn’t buy it if you tried, because CouchSurfing’s rules expressly prohibit such commercial transactions. So whereas a decent hotel in Cyprus might cost you $100 a night, an architect’s house and a convertible (not to mention meals) are free.

Free, that is, if you have a good reputation, and the right attitude. Because while CouchSurfing doesn’t allow commercial transactions, it does require you to have credibility. If fellow CouchSurfers give you a poor rating, you’re out of luck. Violate core principles, and you’re out of the community completely.

CouchSurfing’s just one example of a growing reputation-based economy. Science fiction writer Cory Doctorow’s “whuffie,” a digitally tracked future currency based on reputation, now seems one of the more prescient predictions in recent years. A confluence of developments including information (and general) abundance, social media growth and transparency, and an increasingly unreliable financial credit system have driven the trend. Make no mistake: your reputation (and, particularly, your digital reputation) is now as important to your economic future as your credit score—if not more so.

From handshakes to credit score—and back

Long ago, in the dark ages before MasterCard, personal integrity was your credit score. We didn’t need elaborate algorithms for calculating your worthiness of a loan. If you had a good reputation, you could borrow from family, friends and the community. If you had a bad reputation, you were marginalized. Your handshake was worth more than gold. And the community’s memory rivalled that of a bank mainframe. People didn’t forget. If your grandfather’s grandfather screwed people, you were born tainted.

But for most of the 20th century, we disconnected personal integrity from credit worthiness. Your credit score was largely determined by things like your equity and, bizarrely, the amount of debt you were already carrying and able to manage. One of my older sisters (not the CouchSurfer; I have three) never claimed one of those ubiquitous student credit cards while at university. When she graduated, despite having a steady job with the government, she struggled to get credit. With no history of debt, she was essentially blacklisted. Meanwhile, the Kenneth Lays and Bernie Ebbers of the world had no trouble accessing capital, despite character flaws that would ultimately lead to their undoing.

What happened? As communities grew and dispersed, our ability to track reputation disintegrated. Doing business with people overseas, for example, it’s hard to know their reputation, particularly if you don’t speak their language or know anyone in their community. Ditto when our communities grew beyond the few hundred people our brains evolved to track. And then there’s the fact that integrity is a tough thing to measure. It’s pretty hard to track how many promises or handshakes people betray.

But it’s fairly straightforward to track people’s financial transactions. So why go through the arduous process of assessing character when you can much more easily track earnings, equity, debt load and repayment history? Hence your credit score became far more important than your reputation, allowing for national and international financial institutions to build obscenely lucrative businesses by extending credit to people they’d never met, and didn’t need to.

But all of that is starting to change.

From Visa to Facebook

Something’s happening now that’s returning us to a more communal, reputation-based economy. The massive growth in goods and services sharing—things like car sharing and couch surfing—is some of the most tangible evidence, as sharing doesn’t work without ways to measure and monitor reputation (as noted by collaborative consumption guru Rachel Botsman). Then there’s the explosion of interest in personal branding, the art of managing your image the way corporations manage theirs. In fact, there are now even entire businesses built to protect your reputation.

As I see it, there are three main trends driving the return of reputational capital:

  1. Reputation helps us curate abundance. In his excellent book Free, Chris Anderson describes how an abundance of information on the internet helped give reputation monetary value. How so? With so much information, what’s scarce is attention. We decide what information to attend based on reputation. (That’s how Google works, for example; sites with many high-quality inbound links have a good reputation in Google’s eyes, hence rise up the search ranks.) When you have a good enough reputation to attract attention, you can monetize that attention with products, services or ads. But information isn’t the only thing that’s abundant these days. In industrialized nations, there is a general abundance of goods and services to meet our needs. We’re overwhelmed. So we determine what goods and services to attend based on reputation.
  2. Transparent social networks allow us to measure and track reputation. And if you don’t think this is important, note that nearly half of employers review job candidates on social networking sites. Of course, bulletin boards, forums and chat rooms have been around awhile. What’s new, as noted by David Kirkpatrick in The Facebook Effect, is the level of transparency we now have with social networks. On Facebook, you use your real name and connect (mostly) to other real people. Ditto with services like LinkedIn. Everything you share there is recorded for posterity, and we’re becoming increasingly comfortable sharing a lot. Now add rating and “liking,” and you have a way of keeping score. You can try to avoid it by abstaining from social networks. But for many industries and jobs, the benefits of social networking—like the ability to use your reputation and network to attract business—outweigh the risks. It’s now much easier to track handshakes, no matter the number, distance or language of your connections.
  3. Our relationship with credit is on the rocks. After the recent financial apocalypse, a lot of people have basement-dwelling credit scores. Hell, a lot of countries have basement-dwelling credit scores. And as much as governments try to stimulate economies with more borrowed cash, it’s doubtful the days of delirious debt spending are coming back. Americans in particular are maxed out, with the US now having the lowest savings rate—recently dipping into negative territory—since the Great Depression. (China’s savings rate, by comparison, is 30% to 40%, which the US has, oddly, tried to partly blame for the recent financial crisis while further spending itself into debt.) With credit no longer a clear marker of borrowing worthiness (especially in places where people have negative home equity due to the financial crisis), reputation has returned in importance.

Unlock wealth with your name

All of this suggests that cultivating a good reputation (and, generally, being a good person) could provide greater return on investment than most financial investment vehicles. For example, sellers on eBay with a good reputation tend to sell items at a higher price. And people who contribute to open source projects, like Linux, can translate their reputation-building contributions into lucrative jobs.

Let’s take a more concrete example. Imagine you put $1,000 today into an impossibly high-interest 12-month investment. Go nuts and imagine 10%, even though the highest guaranteed 12-month investment you’re likely to get with any bank right now is less than 2% in Canada. One year from now, you’d have yourself an extra $100. Which is about the cost of a one-night stay in a Cyprus hotel. Cultivate a reputation on CouchSurfing like my sister, however, and you could get yourself a weekend’s accommodation free, with food and, in at least one case, a car. Which, even just considering a two-night stay, is worth at least twice as much as your unrealistically high 10% interest return. Better yet, you need no principal (unless you want to build your reputation by hosting guests), meaning all you need to invest is your time.

So clearly, your reputation is worth something. Build it up. And try not to max it out.

Blog

A transumer manifesto: Why collaborative consumption is the new ownership

For Rent sign (credit: Quinn Anya)

Why own when you can rent? A growing trend provides viable options for transportation, fashion and more (credit: Quinn Anya)

Imagine winning $10,000 a year for life.  It doesn’t seem like much, but over 25 years, you realize that it’s a quarter-million dollars. Then you sit down and calculate the compound interest. At a conservative 3% per year, you’re looking at about $375,000. Not bad for free money.

That’s roughly the calculation I did a few years ago when I sold my car and switched to public transportation and car sharing. With lease, insurance, gas, maintenance and parking, I was paying about $15,000 a year. Granted, it was a sports car. But, depending on how far you drive each year, you’re probably paying $10,000 to $15,000 a year, or over $0.50 per mile. And that doesn’t include externalities like the environmental impact of car production and use.

I’m no saint, and admit to a bit of a gadget fetish. But since I sold my car (and my wife sold hers), and took what many would consider a step back—owning a car, after all, is a right of passage in North America—I’ve felt as liberated and free as the owner of a new convertible sports car is supposed to feel.

And increasingly, I’m not alone. From cars to designer clothes to children’s toys, there’s a growing trend towards “transumerism” and “collaborative consumption,” which emphasize sharing, renting and experiencing over owning. Is it just a fad? Or is this a significant trend that will reshape our approach to goods and commerce? I’ve pondered what I call “cloud living” before. Now let’s dig deeper.

Transumerism taking off

You need not look far to find examples of this trend. Parking lots in urban areas host cars from car sharing services like Zipcar and AutoShare. If you want a more upscale ride, services like Extreme Car Share and DFW Elite Car Club will get you into a Ferrari, Lamborghini or other midlife-crisis resolver. Want to fly? Try Net Jet. Prefer human power? Try a bike-sharing service like Bixi.

And while the trend seems to have taken off with transportation (likely due to a combination of high transportation cost and intermittent need), it’s by no means confined there. In fashion, there are services like Wear Today, Gone Tomorrow for clothes, Bag Borrow or Steal for handbags, and Borrowed Bling for jewelry. Have a child? Then you might be interested in toy rental services like Kids e-Toys and Lucky Duck Toy Box (choose toys, rent toys, return them when your child grows out of them, get new toys for their next phase). There are even entire publications now devoted to the trend, such as Shareable.net.

And I haven’t even yet mentioned computers yet. What is “the cloud” if not a prime example of transumerism? With cloud computing, you get computational services on demand. Why buy a server with set storage space and processing power—the former of which you’ll have to grow into, the latter of which you will always use sporadically—when you can get storage space and processing power on demand, paying just pennies for gigabytes and cycles as needed?

Indeed, I believe one of the biggest drivers of the transumerist trend is computer technology. First, as we increasingly use the web on a transactional basis—loading and retrieving content like photographs as needed—we’re being trained into a transumerist mindset. Second, as we utilize crowdsourced services such as Wikipedia, we recognize the power of collective ownership and contribution, and see how shared resources can actually be better than individually owned resources such as a thousand-dollar set of encyclopedias. Third, the increasingly social web has made us comfortable sharing—including with random strangers. Fourth, web technology has enabled services that would otherwise be impossible or difficult to use—to book a car with AutoShare, for example, I can just open the iPhone app, pick a time and a car, and press “Reserve.”

But computer technology isn’t the only factor. Rather, several social and economic factors have also converged to make renting and sharing more attractive, in many cases, than ownership. First, we are becoming an increasingly mobile society, including with jobs (fewer of which require fixed machinery), and owning more stuff makes mobility more difficult. Second, the generation now entering the workforce has different priorities from previous generations, emphasizing experiences and work-life balance over material possession. Third, economic instability has made ownership of even traditionally sound investments (like homes) less desirable—after the recent financial calamity, many Americans are now burdened with negative home equity. Fourth, environmental sensitivity (no doubt heightened by high-visibility ecological disasters like the Gulf oil spill) has made people more sensitive to purchasing new goods, leading to lots of goods exchanged for free through Craigslist and services like Freecycle.

And that’s just scratching the surface.

Guidelines for collaborative consumption

Seeing all this happening, and experiencing the benefits first-hand, I’ve become somewhat of a transumerist evangelist. (I also keep pondering entrepreneurial opportunities in this emerging space—what’s next to move from ownership to sharing?) While there are no hard and fast rules for the emerging transumerist worldview, I wanted to capture some of my own changes in mindset:

  1. Ownership is a last resort. The question used to be, “Why rent when you can own?” This most often applied to homes, but people would often apply it to other possessions as well. I would now ask the opposite question. Why own when you can rent or share? The primary reasons to own, in my opinion, are appreciation in value (if that appreciation offsets negative implications of ownership) and high frequency of use. Most other benefits usually aren’t worth the tradeoff. Which brings me to the next point.
  2. Ownership is a tradeoff. One of my favorite lines from the movie Fight Club is this: “The things you own end up owning you.” (Followed by: “It’s only after you lose everything that you’re free to do anything.”) We’re saturated in marketing messages (and I’m a marketer, so am partly responsible) that describe the benefits of ownership. Why own a car? Well, freedom, of course—freedom to go where you want, when you want, while attracting the hottest members of the opposite sex. No successful marketing campaign will promote the risks, side-effects and negative repercussions of ownership (except, perhaps, when compelled by law, such as with medications). But they’re always there. With cars, for example, there are things like maintenance costs, depreciation and, of course, worrying about things like theft. Because of these concerns, the car you own, which promises freedom, will always own you and, in some way, restrain your actions.
  3. Ownership always looks better in hindsight. One interesting finding from research in behavioral economics, and documented in Dan Ariely‘s excellent book Predictably Irrational, is that we overvalue things we own. This includes material possessions, as well as our ideas (admittedly including my ideas in this post). Why, when selling something, do you usually think it’s worth more than when you’re buying something? Because we become quite irrational about things we own.
  4. Experiences provide more lasting happiness than material possessions. Research on well-being has long attempted to correlate material wealth with happiness. And findings consistently show that money only makes us happy to a point (about $60,000 per year, according to some research). What’s more, purchasing experiences make us happier than purchasing material stuff. One of the reasons is that our nervous system becomes accustomed to our stuff, the way drug addicts become accustomed to their drugs and must increasingly up the dose to get high. A Porsche in the driveway will make you happy today, perhaps, but one year out you’ll be pining for a Ferrari. But you’re just treading water; you have to keep upping the ante just to maintain the initial high. Experiences, like travel (and, say, having access to, but not ownership of, cool cars), are different. They appear to provide lasting value, in part because they give us stories to tell repeatedly, and because they often form the foundation for happy memories.

Of course, transumerism is no panacea for all social, environmental and economic ills. It’s hard to see, for example, how a luxury car sharing service is better for the environment or your wallet than owning and riding a bike instead. What the trend should increasingly bring, however, are options, and perhaps a growing consciousness of ownership’s costs. Will I ever buy a car again? I can’t say for sure, but right now, I hope not. I’ve become far too accustomed to the freedom of not owning one.

© 2000-2014 Simon Smith All Rights Reserved