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How should customer strategies respond to the rise of peer-to-peer platforms?

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5th Nov 2014
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The word ‘disruptive’ has long been a buzzword within the online start-up community, and for good reason. Along with the recession, the Internet has been responsible for the demise of more businesses than you could shake a stick at, primarily because it has enabled people to reinvent traditional operating models.

One of the biggest upsets was the advent of peer-to-peer file sharing, which proved devastating for the music and film industries. More recently however, peer-to-peer sharing has been playing an increasingly important role in the physical realm, in what is now called the ‘sharing economy’.

The origins of online-based peer-to-peer sharing can be traced back to websites like eBay, initially founded as a basic consumer-to-consumer sales platform. In the 20 years since eBay began trading, the online landscape has undergone such dramatic changes that your average Internet user can now source virtually any type of goods or services direct from another individual, without the need for a middle man.

For example, the highly publicised website Airbnb allows property owners to rent out lodging direct to consumers. Then consider Relayrides, an American website which allows users to loan their cars to others, often at 30% of the cost of a typical rental car provider.

More recently, peer-to-peer websites have become increasingly bold, challenging deeply rooted business practices and consumer mindsets. Zopa, a peer-to-peer money-lending service, and Kickstarter, a crowdfunding platform, are upsetting the manner in which finance is distributed. And sites like Movebubble, which connects landlords and tenants, is becoming a thorn in the side of the traditional High Street estate agent.

In terms of cutting out the middle man, the benefits for consumers vary depending on the service in question. In many cases they could save money. For instance, renters are not required to pay arbitrary ‘administration fees’ every time they check in or out of a new property. Similarly for businesses, in the example of rental cars, lenders do not incur the overheads of a traditional retail lending model (i.e. site rental, staff, etc.) meaning that they can offer competitive rates on car hire, sometimes significantly cheaper than those at rental companies. But cost is not the only potential benefit of peer-to-peer transacting.

Consumers are being given an increasing degree of choice as networks are able to offer a seemingly unlimited network of options. Airbnb, for example, gives travellers access to accommodation in locations unlikely to be serviced by hotels, not to mention a diverse selection of accommodation formats. On the other side of the coin, those offering their services are given access to a vast pool of consumers looking to purchase. This is why Kickstarter has been so effective; it connects entrepreneurs with a far higher number of potential investors than typical finance models.

Yet there are risks, too:

  • Potentially less protection for consumers or sellers. Disputes have to go through a central customer service function (if one even exists) and are more difficult to resolve. However, many of the peer-to-peer platforms have processes in place to mitigate against risk for both buyers and sellers, developing better built-in protection policies.
  • Product inconsistency. You may not really know what you are buying until you see it. When you book a Hertz hire car, you can almost guarantee a particular level of service (car cleanliness, etc.). This is more difficult to execute on a peer-to-peer platform.

There’s no question that peer-to-peer sharing is a hot topic right now, but the real question lies around scalability. For the most part, these businesses currently occupy relatively niche segments of the market, but as consumers become more comfortable with the concept of buying obscure goods and services online, there’s no telling how mainstream they will become. The key thing for incumbent operators is to maintain their point of differentiation; in this case, that means offering consumers the benefit of customer service and expertise unavailable to those shopping direct.

Fight or flight

So can established players combat the threat these start-ups pose, or exist harmoniously alongside them?

It depends. For example, a start-up might act as more of an alternative to the incumbent proposition than an out-and-out replacement. Some have arguably even created new market places e.g. Kickstarter: how many campaigns have been funded by individuals who had never previously made any investments?

Many other incumbents might also consider themselves to cater to different customer needs than peer-to-peer platforms. Renting someone else’s home on Airbnb is a different experience to leasing a dedicated holiday apartment, for example.

Incumbents should be more concerned, in my opinion, where there has been a more direct replacement of a service, but many of these are still in their infant stages. It’s unlikely that online-only estate agents currently have the scale to be considered a major threat to the traditional estate agent. But, as history has taught us, this complacency could ultimately prove their undoing.

Established players should consider a strategy that either:

  • differentiates their proposition against start-ups; achieved through better customer services and premium experiences that are hard to replicate on a peer-to-peer platform. Airbnb hosts, for instance, are not aiming (or able) to offer five-star luxury or a 24-hour concierge service; or
  • makes pricing more competitive pricing to combat peer-to-peer services undercutting them. Hertz, for example, launched its budget car hire service ‘Firefly’ last year, increasing its ability to defend against peer-to-peer services, as well as other new rental models like Zipcar.

In both cases businesses need to identify the key elements of their offer while being aware of their customers’ specific needs. The next stage is to incorporate these aspects of the product or service into their proposition, or simply to deliver them to a superior standard.

The peer-to-peer platform has created its own niche, so both types of operator are able to co-exist harmoniously. But if the market entrant’s proposition is more aligned to the established player’s, the incumbent brand may need to rethink its strategy.

Charlie Beharrell is senior analyst at Pragma – a St Ives Group company.

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