The Digital Transformation of Services

The service sector was for long expected to withstand a digital transformation. Relatively high entry barriers, such as regulation, education, and the local nature of many service businesses, were supposed to protect services from global digital competition. For example, regulation, such as taxi medallions in the transportation industry, was expected to permanently preserve and defend the competitive position of traditional service providers, and make it impossible for new entrants to succeed.

Yet, the service sector has undergone a major digital transformation over the past decade. Many services, from transportation (e.g., Uber, Lyft) to professional services (e.g., Upwork, Fiverr), are now primarily transacted and exchanged through global digital platforms. Besides many services now being bookable online, also market information (e.g., price, selection, availability) is now digitally available in many industries through such platforms and easily comparable. The service sector is today, thus, as digital as ever before, and the barriers of entry have been significantly reduced – this has many strategic implications for firms of all sizes.  

Our Study

To understand how the platform economy is shaping the service sector and impacting the individual firms or entrepreneurs participating in digital platforms, we gained exclusive access to a Nordic digital platform in the beauty industry. By analyzing the platform’s transaction data and surveying a subset of participating service providers, we were able to understand the market reach and financial performance of participating firms and how this has evolved over time. While digital platforms and the platform economy continue to receive growing scholarly interest, our study is the first with such scope and depth.

Essentially our research shows that digital platforms present a troubling paradox for the service providers participating in the digital platform: despite increases in market reach, in terms of a higher rate of new customer acquisition, those service providers participating in the digital platform (i.e., selling appointments in the online marketplace) have lower sales than others. However, the “dark side” of this paradox is compensated by higher sales for service providers using more of the platform’s complementary services.

Our findings offer much-needed evidence about what digital platforms mean for firms participating or considering participating in digital platforms in the service sector. This research is essential as although scholars are increasingly voicing criticism over the monopolistic rule of digital platforms and the problems associated with platform work, empirical examinations of what digital platforms genuinely mean for the business performance of firms participating in such platforms are yet missing in management journals. However, not only do our findings expand theoretical understanding of digital platforms and the platform economy, but they also provide knowledge of the strategies that firms can take to engage with digital platforms. This is highly relevant and useful information for managers.

Digital platforms are not all bad, as many would expect from the increasing criticism they are subject to in the popular and academic press. Instead, they may deliver many serendipitous outcomes for firms. For example, digital platforms may be a necessary evil for new, yet unestablished firms, to secure market reach and find customers. However, the more dependent that firms are on digital platforms, the worse off they are in terms of financial performance, as evident through our study, among others. Platform dependence, therefore, may come at a high cost to participating firms. 

The Future of the Platform Economy

Today, we are very much at the crossroads about the future of the platform economy. At the same time that national regulators like the EU and the US Department of Justice are becoming increasingly concerned about the potentially monopolistic rule of digital platforms like Alphabet, Amazon, and Facebook, digital platforms are as popular as ever amongst consumers. In 2020, for example, marketplaces like Amazon and food-delivery platforms like Uber Eats and Deliveroo were a lifesaver for many when non-essential businesses closed down, and home-deliveries became the only option to secure the supply of food and other household essentials. Covid-19 has, therefore, only strengthened the global power and dominance of the leading digital platforms.

While our study confirms some of the much-touted negative features of digital platforms, it also offers a glimmer of hope for firms participating or considering participating in digital platforms. Firms don’t necessarily need to participate in digital platforms to survive the growing digital competition. Still, if they do, they need to be wary of their potentially paradoxical influence on their market reach and financial performance. It will be interesting to see what the future holds for the platform economy and how long firms like Amazon will maintain their current market position. The question is, will the power of the regulators or the consumers eventually win? Our study provides evidence for both sides of that debate.

If you are engaged in digital platform research, or a business manager interested in digital platforms and the platform economy, you may find it useful to read our full study on the JMS website: https://onlinelibrary.wiley.com/doi/abs/10.1111/joms.12701

Keywords: Digital, Platform Economy, Services, Strategic Management