Utility-Providers — road to sustained customer traffic

Source: https://www.eff.org/deeplinks/2018/03/will-big-content-derail-argentinas-new-intermediary-law

Before delving deeper into details let us formally define what I mean by utility-providers:

A utility-provider is a company which offers intermediary services like travel booking (e.g. Booking.com, Expedia), books (Amazon) and two-sided marketplaces like eBay, Google and Airbnb.

I bucket many businesses under utility-provider category. These are companies which provide essential services but users are not attached to a brand. Over the years, these providers have scaled up to fit needs of many users and thus provide a suite of generic services. But, the market dynamics are fairly different depending on the market share and size for a utility provider.

We can further classify these utility-providers into following categories:

  • Small-size and small-market share companies
  • Large-size and relatively large market share but has similar size competitors (existing in an oligopoly state)
  • Large-size and large-market share
The companies roughly placed based on their market share and company size.

Consider the companies in the top right quadrant like Google or Amazon these are the companies with a large market share compared to their competitors (Bing or Walmart respectively). Over the years, these companies have enjoyed healthy profits margins mainly due to their constant innovation and service development/enrichment. This has helped them build an ecosystem of services making them more accessible and available - which in-turn led to increased market share.

The switching cost for a customer between utility-providers has always been minimal e.g. you can very easily go and visit Bing or DuckDuckGo for similar search results. This is where the companies in top right hand quadrant really shine. Think about the massive $12bn spend by Google to remain default search on Safari browser or Amazon’s dash button to order. The new stream of home automation products powered by Alexa or Google assistant. These companies have not only stayed on top because of their massive size but because of their constant push to be users default provider.

Moving our attention to companies in oligopolies (right-center) like Booking.com and Expedia where both offer similar set of services leading to price-play as the last measure available to attract customers. The users are at an advantage here with low switching cost and competitive prices given the fierce competition.

Companies in this state spend huge sums of money to attract customers. Continuing with example of Expedia and Booking which collectively spent around $10bn on marketing in 2018 fairly matched between both at $5.68bn Expedia and $4.96 Booking.

This is the Achilles’ heel for utility-provider given very low brand loyalty among customers, the customers can very easily move to another service provider if it offers similar service at a lower rate.

The only competitive advantage these companies chase is scale and price competition is inevitable in many cases. Unfortunately, this leads to loss in profits and questionable effectiveness from advertisements.

How can companies in this state move to upper right hand corner and reach a near monopoly position enjoying healthy profit margins? I assume the answer lies very much with another dimension between scale and price which is accessibility to users.

Google and Amazon have put in a lot of investment to make it effortless for customer to use their services and be within their reach in numerous ways - think Alexa speakers, Nest/Google Home devices, Sony/Bose headphones with Alexa or Google Assistant and Alexa enabled glasses etc.

How important is this omnipresence you ask?

Very! If utility-provider with large market share start to push towards default providers - they can capture the customers at the root which inturn helps them reduces customer drop rate (considering user funnels) and exert more control on the overall system.

So, my recommendation for companies like Expedia, Booking is not that they stop spending on ads — given its still one of the proven medium to reach users (Google is still the gateway for many to the internet). But to start experimenting and investing into development of new platforms. This can be in forms of services on voice enabled assitants like Alexa powered home automation or own physical hardware like kiosk (recently used by Uber). Finding new ways to reach the users and availability not just 24x7 but also across devices in this new digital/IoT era will help these companies reach the upper right quadrant. At the end, cutting a step in the user funnel is all what it takes to sustainable customer traffic.

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Engineering Lead @ Expedia

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Nitish Agarwal

Nitish Agarwal

Engineering Lead @ Expedia

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