I’m writing from the air, descending into the heart of The Great Tech War of 2012: San Francisco. During my last trip here, a few weeks ago, I got a taste of what this battle is all about. My client was a once high-flying tech pioneer now struggling with the erosive power of commoditization. It used to take generations for your core business to devolve from the high-margin cutting edge to a low-price commodity. Now it can take just a few years. What you once sold for enviable profits someone else might offer for free any day now. View my webcast on this topic here.
My recent post about Netflix sparked a heated debate on various newsgroup message boards, and illustrates the dilemma well. There are three ways to price your service: cost, competition, value. When you have no competition your price can soar to just under the value you deliver. Netflix enjoyed those days when it was the only movie-streaming business that worked well. But as soon as direct competition enters, things change. You have to lower your price to resemble the competition’s and often, as in Netflix’s case, start paying suppliers more.
So how can you fight the commoditization? How do you remain extraordinary and profitable in a fast-moving world? There are at least eight ways to do it.
1. Bring back the dead: My wife’s birthday was this weekend and I’m under strict orders not to buy her any more gadgets. But when I saw an old turntable and a collection of vinyl records, I could not resist. Vinyl is making a comeback. Record companies are reissuing albums on the huge black disks and even releasing new albums in the old format. Music fans are turning back to vinyl for nostalgia, because it offers better sound quality, and for the fantastic artwork you just can’t replicate on an iPod. With clever marketing, what is old can become new. What new (or old) reason can you give customers to rediscover your out-of-date product or service?
2. Create new occasions: Walk into your kitchen. Open your refrigerator. Do you see a box of Arm & Hammer baking soda? Arm & Hammer was competing with the ultimate commodity. One type of baking soda is as indistinguishable from another as salt or sand. But the company pulled itself out of a low-price, commodity battle where everyone is the same by creating new uses and occasions for its baking soda. What new uses can you create for your product/service?
3. Become the ingredient: Another strategy that has worked well for Arm & Hammer is to borrow other people’s roads into your home. Today you find Arm & Hammer in toothpaste (whiter teeth!), detergent (cleaner clothes!), and deodorant (fresher smell…!). The beauty of becoming an ingredient is that customers become less price sensitive. They are willing to pay a higher price for your ingredient because it represents only a small portion of their total cost. Whose road can you borrow by becoming an ingredient in their product/service?
4. Move the action: U-Haul is not in the truck rental business. Best Buy is not really an electronics retailer. At least not when judged by profits. U-Haul gets you into their store with the promise of low-cost truck rental. Then they sell you high-margin boxes and packing tape. Best Buy lures you in with competitively priced TVs, and profits by selling you service plans you are unlikely to fully use. To where can you move your profits?
5. Shift the basis of competition: Our 5-year-old Mac just died. The PC in my home office has better specs than most Macs and it cost just $700 from Costco, but we’ll probably end up spending three times that for another Mac. Why? We like the design. The Mac is the only computer you can proudly place in your living room. In commodity games everyone competes on the same basis (performance) so you can distinguish yourself by choosing a completely different dimension (design). On what basis are your competitors competing? How can you compete on something entirely different?
6. Attach a business: Thomson Travel in the U.K. sells cheap airline tickets and tours. It can afford to because it does not depend on these sales for profits. It makes its profits by funneling its customers into Thomson Travel Charter Airlines airplanes. What related high-margin business can you attach to your lower-margin core?
7. Rapid-fire innovation: Trying to simply run faster than your competition is not a strategy I usually recommend, but if you really are swifter, it can work. When Lee Pillsbury was part of the top team leading Marriott hotels, they conducted a massive study to identify the most important factors that drive a business traveler’s hotel decisions–speed of room service, the risk of the hotel giving away your room if you check in late, speed of checkout, etc. They then filled a pipeline of strategies to address each factor and unleashed a stream of innovations on the competition–30-minute room-service guarantee, late check-in guarantee, etc. By the time the competition could copy one innovation, Marriott was already pulling the trigger on the next. Do this long and fast enough and eventually the competition will give in. What are your next 10 innovations?
8. Change the basis of pricing: Xerox grew to dominate the copying business not just by offering great technology, but because at a time when the competition was pricing per machine, Xerox was offering a service priced per copy. Redbox is doing the same in the supposedly now-dead DVD market: pricing per day rather than per rental. Fill in the blanks: “My competition charges $_____ per ______” (e.g., $3 per rental).” Then replace the blanks with something different.
Economists may tell you that every industry will eventually mature into a low-margin, commodity environment. But don’t believe them. If you are willing to resist the pull of consensus, and have the courage to be extraordinary, you can continue to thrive profitably.
[image: flickr user csi_ice]