There is a new threat on the horizon for local businesses: online marketplaces for local services.
Online Marketplace for Local Services
These new marketplaces are similar to the online marketplaces that have closed thousands of Main Street retailers over the last decade but selling local services. Think Amazon selling moving services or Houzz selling general contractor services or Angie’s List selling plumbing services. These are marketplaces where consumers can now shop for local services.
Today, these sites are mostly set up as “deals” businesses. This was the industry that Groupon made popular with consumers. However, coming soon, these companies (and several others) will be offering price comparison and the ability to book services directly creating an online marketplace for local services.
So why are these companies a threat for local businesses? The situation is clearly different than retailers where online price shopping has revolutionized the distribution channel for most products. While hiring a plumber is different than buying a toaster, new customer acquisition is a substantial part of the value equation of any business.
Here is an example. Lets say you are a offering a local service (e.g. plumber, auto repair, lawyer, doctor, etc.). You know that on average it will cost you $100 to provide the service (cost of labor, materials, etc.) and, on average, you will bill $200 for that service resulting in $100 of profit. Now the interesting part:
- If a company offers to sell you access to that new customer (e.g. a “listing fee”, a transaction fee or a membership fee, etc.), how much are you willing to pay? Said another way, how much are you willing to cut into your profit percentage to get more profit dollars?
- Imagine that all of your competitors are also on this network and imagine that the online marketplace starts to increase fees. Do you have some aggressive competitors in your local market that are willing to pay more than you are to get that new customer?
- Now imagine that the majority of all of your new customers are coming through this channel that will likely have a very low, or even negative, profit margin.
In this scenario, a local business owner’s choices are stark: either give up much of the profit of each new customer or give up getting most of your new customers. But is this really a threat or just one more item on a long list of problems that might “one day” happen?
Today, it is a non-issue. However, when Amazon, Yelp, and several others all push services in a direction that could have a substantial negative impact on your profit margin, its time to pay attention.
How to Win in This Game
This may or may not be the way that local services are sold/bought in the future. However, if this trend starts to take off, here are somethings you can do about it:
- Stay in the game. As marketplaces begin to gain traction, make sure you are listed and generate transactions in each of the major marketplaces. Pay careful attention to your cost to capture a new customer in each of the marketplaces. For most local businesses, it will be worth being aggressive in paying for new business if you are…
- Get VERY good at getting repeat customers. To me, this is the main take-away of these marketplaces: they are a great way for local businesses to generate new customer flow but you could easily go bankrupt if you are not good at capturing the contact information of your customers and marketing to them to generate repeat business from those customers. Because much of the profit will be taken out of the first transaction with a new customer in the form of lead capture costs paid to the marketplace, the profitability of your business will mainly come from repeat customers with a much lower marketing cost per revenue dollar.
As early Groupon customers learned the hard way, if you do not create a strong system to market to past customers, you are destined to be stuck on the hamster wheel of low-margin new customer generation.