Inefficiencies in the services sector

Inefficiencies in the service sector are not easily visible until you have to find a plumber on a holiday weekend or are looking for a story teller who can hold the attention of a dozen easily board five-year-olds.

These inefficiencies are challenging for both the service provider and the customer, and are caused by a number of reasons.

Frequency of use: Most people do not use these services on a daily basis or for that matter more than once a year. As a result, prospective customers do not understand what to expect. Not understanding what deliverable can be expected leads them to question whether the service worth the value being charged.

Information Asymmetry: The customer is not able to know the quality of a service provider’s work until after a contract has been signed. Therefore, customers rely on word-of-mouth referrals (which are inherently inefficient), or on reputation management sites (like Angies’ List – which is subscription based).

Friction points in the sales process: The sales funnel has numerous friction points – and a lot of time is spent by a service provider answering similar questions for each prospect. Advance payments for some services is made through checks in snail mail (which is another obvious friction point), or if a service provider doesn’t take deposits, causes a loss of service revenues through last minute cancelations or no-shows. Unlike airlines or restaurants that can use yield management algorithms to manage no-shows, independent service providers are left with lost revenues if this occurs.

High fixed cost/low marginal cost business: Service providers, like airlines, have high fixed costs, tied to cost of living, which they incur regardless of whether they are serving a customer or not. They, therefore split these high fixed costs across the orders they get over a period.

For instance, if a plumber had fixed costs of $10,000 a month, and charged $100/ hour of labor, and of the 160 hours he works each month, spent 30% of his time answering customer calls, he would make $11,200 or a profit of $1,200. However, if he were to answer all his questions on a website, and enable customers to book his services online, and was able to reduce the time spent answering phone calls to 10%, his profits would increase to $4,400. Even after assuming that he paid $500 per month on the system, he would still have 200% additional profit. His customers would get other benefits like the ability to book and schedule appointments online, and the plumber could pro-actively market things like “winterize your bathroom” specials to customers when he is less likely to be busy.

The problem is much worse if you look at services where customer tastes change rapidly and high demand elasticity exists – like entertainers and venues. Demand elasticity is also much higher than you would see in essential services like plumbing. Also, utilization of services usually centers around weekends – utilization of venues is as low as 15% and is lower in case of entertainers. Increasing utilization by offering discounted prices but which are higher than marginal costs, can ensure significant additional revenues for entertainers and venues.

A number of web-based applications, the growth of social marketing and service providers getting comfortable with this new customer acquisition method will go a long way in correcting this inefficiency.

Integrating front office and back office tools: IT systems for most venues have evolved to encompass most sale and post-sales functionality – like bookings, deposits, printing receipts, accounting etc. However, these systems primarily assume that the customer is booking through telephone or in person. Booking or inquiries through web-based systems are rarely tracked within the system, and generally assume the form of an email notification containing lead information, which has to be manually re-keyed into another system. Integrating search engine marketing tools and lead generation forms with back end processes like instant booking will improve sales for franchises and entertainers significantly.

Online reputation management: Word of mouth referrals, while effective, are rather inefficient methods for generating leads, especially where customer tastes change regularly. Online reputation management is of paramount importance for a service provider who is looking to increase his revenues and decrease expenses.

Comfort with web bookings: Most people under 40 are comfortable using the internet to make purchases, choose restaurants or other services. They also the “instant gratification” of buying or booking being confirmed when they place an order. Service providers should take advantage of this trend and ensure a sufficient web presence to meet the demands of their target customer.