SBP 6b: Competing With Customers

This principle occurs because the customers have absolute access and control of the primary process inputs–their selves, their belongings, and their information (as per the Unified Services Theory). Customers can thus decide to retain the inputs instead of turning them over to the service provider.

Another way to look at this Service Business Principle is from the perspective of “make versus buy decisions.” The traditional make versus buy decision in manufacturing is to decide whether a manufacturing company should make the components itself, or buy the components from outside suppliers. For example, a computer keyboard manufacturer would need to decide whether to obtain the ability to make plastic key caps in-house, or whether to hire an injection molded plastic company to make them. The in-house (make) decision would represent higher fixed costs but lower variable (per-item) costs than they buy-from-a-supplier decision.

With service companies who lack manufacturing expertise, the decision to make or buy facilitating goods or other physical items is a moot point–they could probably not make them even if they wanted to. For example, how many dental clinics make their own dental equipment? How many law firms make their own bonded paper? How many trash collectors make their own trucks? In most cases the answer is probably none. The reason is that service providers typically lack the skills and specific resources needed to manufacture the various process inputs. (There are some exceptions to this, such as AT&T, who supposedly manufactures its own telephone switching equipment. However, in this day and age it is rare for even telecommunications companies to manufacture their own equipment.)

Therefore, with services we are generally not laden with a supplier make versus buy decision–the decision is “buy.” The make versus buy decision that challenges service providers pertains not to suppliers, but to customers. The customers have to decide whether to hire the service or provide the service for themselves. By serving themselves, potential customers are in effect eliminating the service-provider “middle-man.” A common way that these customers accomplish this is to go directly to manufacturers for the equipment and supplies needed to meet the particular need. Here are a few examples: a customer may buy a car from an auto manufacturer instead of hiring a taxi, or buy clothes washing equipment from an appliance manufacturer instead of hiring a laundry, or buy yard tools and machines from manufacturers instead of hiring a landscaping company. So, in some sense, when a service provider is competing with customers, they are in fact competing with manufacturer-suppliers as well, who may sell the tools of the trade directly to customers. (It sounds almost like the customers and manufacturers being in collusion to eliminate the service-provider in the middle!)

Customers gain certain advantages by serving themselves, as described in this Service Business Principle. They have extreme personalization, or the ability to treat themselves as an individual and not like everyone else. There can also be convenience advantages-since the customer is typically always available to serve himself should the need arise. This is a reason why people buy cars when they could take taxis everywhere-a car is there waiting in the driveway to fill the transportation need on a second's notice. (Of course, there are other advantages of owning a car.)

However, service providers have certain advantages over self-serving customers. Service providers specialize, which promotes expertise. Also, service providers can have greater utilization of service capacity, since they are using their fixed-cost equipment to serve a number of different customers. Thus, service providers can have some advantages in economies of scale. Also, customers are generally not required to make the large fixed-cost investment themselves, since the service provider simply amortizes (or spreads out) its fixed-cost investments over all of the customers. Perhaps the biggest advantage service providers can have over self-serving customers occurs when the customer considers their own time to be extremely valuable. Service providers can be real time savers due to their expertise and efficiencies (such as by employing low-cost labor, if possible).

The following table summarizes some of the costs of customer “make versus buy” decisions:

Examples of these various costs will be listed below.

The service provider needs to decide how to position itself relative to this chief competitor: the customer.

If customer-competitors do appear to be a real threat, the service provider should consider its positioning relative to self-serve customers. This includes considering the costs to customers of either “make” (doing it themselves) or “buy” (hiring the service provider). An important cost to consider is the cost of the customer's time, and any time savings the service provider might offer. (Time itself is becoming more of a strategic issue as time goes on.)

Even something as complex as legal or personal tax accounting services can find that potential customers are primary competitors. These days there is computer software available that will guide an individual through all of the legal mumbo-jumbo of completing basic legal documents or tax forms. If those software developers can enable customers to have equally high-quality legal or tax service with little time expenditure, they can pose a great strategic threat to legal and tax service providers.

Indeed, one of the biggest threats to knowledge-intensive services is technology that enables customers to serve themselves. The following is a summary of costs to a customer of having income taxes done.

So, how might customers be convinced to hire a tax accountant rather than do their own taxes. The advantages to customers of hiring the tax accountant include low fixed $ and time costs, low variable time costs, and high quality. The only disadvantage of hiring the accountant is the variable $ cost, which is the fee to complete the tax filing.

Successful restaurants are able to effectively deal with this issue of competing with customers, who can prepare their own meals. They typically do this by leveraging the quality and/or time advantages–the restaurant provides a quality of food that the non-expert customer is unable to match, and/or provides the food with much less time investment than the customer would spend on his or her own.

Restaurants can emphasize the high costs of customers cooking at home. In particular, many restaurants focus customers' attention on the high time costs of cooking their own meals, emphasizing the speed and convenience of letting the restaurant do the cooking.

The Vice President of Operations for a discount air carrier that was acquired by Southwest Airlines said that their chief competitor is the family station wagon. What he meant by this is that the airline assisted families in taking trips and vacations, and passengers' primary alternative was taking a driving trip or vacation. Driving the car on vacation can save monetary costs for the trip (the variable cost), although some recreational vehicles can be quite expensive (a fixed cost). Flying to a vacation destination will usually have a much lower time cost to customers than driving. For many trips, the “quality” of a flight can be much higher than the “quality” of riding in a car for hours or days, but that depends on the traveler's perspective.

With manufacturing, we would seldom find consumer goods producers competing with individual customers– it is generally not practical for a customer to make their own goods. (How much would it cost for an individual to make his own car? his own washing machine? his own tube of toothpaste? his own pencil? – having those items manufactured saves many times their costs.) Industrial suppliers may compete with customers who decide to vertically integrate (or make their component parts themselves). Nevertheless, forces such as economies of scale often provide a strong advantage to letting the supplier produce.

1. Are we worried about customers providing the service for themselves? How likely is it to happen? How would it happen?
2. What advantages do we have as a service provider over customers serving themselves?
3. What disadvantages?

Do a make (i.e. self-serve) versus buy (i.e. hire service provider) analysis from the perspective of your potential customer. Describe what would be involved in a customer serving herself without hiring the service provider. What are the costs in time, money, quality, risk, etc. of the customer performing the service herself? What are the corresponding costs of the customer hiring your company to provide the service? List specific costs. (You may decide to construct a table as with the examples listed in this Service Business Principle.) Which of these costs would tend to dominate? Why? How can the company use this knowledge to have contributive advantage relative to the self-serving customer? (i.e. how the company can contribute in a way that the customer cannot)