Vertically Integrated Services — Efficiency, Transparency and Customer Comfort.
In my previous essay, I was talking about vertical integration in the goods markets (i.e. eye glasses, clothes, …). In this essay, I would like to provide you with the topic regarding the vertical integration within the market of services. My goal is to explain you, why can internet increase efficiency, transparency and customer comfort if it is used properly in a proper services vertical.
As in most areas of life, the interest in fast and digital solutions is also becoming increasingly important in the area of the search for the service providers. The reason is an increasingly digitalised user. Whoever is looking for a service is to go the first online, instead of informing himself about the traditional way. This creates huge opportunity that i would like to elaborate further on.
Let me start with general definition of service verticals, that can become a good target of digitalisation and vertical integration. These industries exhibit the following features:
- Fragmented industry: Industry in which there is no clear market leader. Industry where exist many subjects with low market-share and possibly there is not a household brand on the market.
- Low Transparency: Industry in which it is not clear what service provider will do his job on a professional level. Industry with plenty shadow-workers and unprofessional service providers for whom the money from the service provision is not primary source of income.
- Underutilisation: Industry where service providers possess free capacity that are unable to utilise due to lack of customers/inefficient marketing and capacity management.
- Low efficiency: Industry where service providers do not manage their companies through a software solution but through the ink and paper or in better case through excel spreadsheets.
So how does the digitisation of service industry evolves over time and where is it heading to?
The first steps towards digitisation within the service industry were done with the rise of service/company-catalogues, for example www.firmy.cz or www.sluzbomat.cz. These websites help users to quickly filter and search through their databases of companies operating in various industries. These websites, however, say very little about quality of service, customer feedback, pricing or range of services. The user is therefore left out with a list of companies that he has to call and ask at the end of the day. Thus, the value that these internet catalogues actually bring to users is not significant, neither convenient.
As I stated, modern consumers want a quick-access to a service they are looking for. They do not want to search and call individual companies. Logical next step towards customer satisfaction and experience was done by introduction of comparison portals. The value they brought to the consumer is quite clear. In the comparison website (such as www.nejremeslnici.cz, www.poptavej.cz) the users usually receive a limited number of quotes by service providers, usually competing by the price they are willing to conduct the service for. Users are also able to read customer reviews which adds to transparency and creditworthiness. The main consumer value proposition for the customers is that they need not have to call around and compare prices by themselves. However, consumers have to decide by themselves which service provider to use and manage the relationship on their own, that is, not on the platform on which they contracted the service providers. On the top of that, the quotes are always imprecise as consumers do not state their need in detail and the mediation platform is rather generalist, providing wast array of services, not specialising in any specific vertical. The business model is often simple subscription fee for service providers, not the fee for the lead or success fee. This kind of business model drives the platforms away from focusing and integrating any specific vertical but rather to grow into many verticals acquiring as many subscribers as possible.
So, what do we actually mean by vertical integration of services using internet platforms? Very nice example might be German online moving platform Movinga.de. The platform provides its users an interface for booking a full relocation service. The moving industry is a typical example of industry that can be disrupted by internet platforms, namely for the following reasons:
- Fragmented market: Many local moving companies with. The biggest company in the segment only has few percentage points of the market share.
- Low transparency in pricing: Quotes from the local suppliers may differ by hundreds of percents (500EUR vs 2500EUR) for the comparable service.
- Free moving capacities: Moving companies often have free place in their carriers and conduct empty rides (returns to their local branches with empty trucks).
- No or limited online presence and no skill in the internet advertising/online communication.
Internet platform can solve many of those issues and provide a value to both consumers that need to book a move and to moving companies that can acquire and manage their capacities more efficiently. Given the fact that the platform aggregate demand and supply, it can also efficiently assign moving capacity, lowering empty capacities of moving companies. Scale is achieved by onboarding new moving companies thus it can actually become very strong, likely the strongest, player on the market as it can satisfy a move from any place at any time. Therefore, the traditional, locally offered kind of service can become a market leader at scale.
Needles to say, the platform facilitates the service, manage the customer satisfaction and control the cash-flow through their online payments. More importantly, they possess very valuable data about their customers and the moves, that can be utilised for example for launching their own fleet of moving trucks on most-profitable and demanded routes. This company can effectively control the entire supply chain and optimise the service according to their customer feedback and ultimately become the Go-to “Brand” in the entire industry.