Just
another pretty face
My client's face was stuck somewhere between horror, disbelief,
and anger after I said "Over time, all products become commodities,
including yours." Then again, most people take bad news poorly.
However, this is a basic fact of life in all industries: left to
the competitive strains of a free market, all products will be reduced
to a commodity over time. In high tech, it simply happens much more
quickly. And in the case of Open Source software, the industry started
as a commodity industry and had to find ways of breaking their "for
free" image.
Given that commoditization is as inevitable as death and higher
taxes, you need to review your strategies on how to deal with this
transition . . . without resorting to denial, anger, bargaining,
depression and acceptance. Below are a few strategies, and one reversible
non-strategy that you can choose from.
Incremental enhancements
In high tech, the classic response to commoditization is to create
small differentiating features in products. This is often called
"adding +1 features." Doing so allows a company to avoid
dropping prices to attract new business, and adding functionality
that in some small way attracts customers or converts.
An ongoing example of this strategy can be found in the Windows
personal computer market, where the standard entry-level box sells
for $350 and has almost 100 times the horsepower of the navigation
computers on the Space Shuttle.
This is a good strategy for high volume markets that are expected
to last indefinitely. But it leads to a constant escalation of features,
and an equally constant downward pressure on prices and profits.
One of the oddest things to happen in high tech has been Linux,
which started life as a commodity product. Each commercial distribution
began grabbing every piece of Open Source software and dumping it
onto the CD as a way of creating more value for an inherently commodity
product.
Bundle your cow
Some products, especially software, simply work better with other
products. When a product can not usefully be enhanced with more
features, or doing so would take too long or cost too much, bundling
it with compatible products can create point-of-purchase differentiation.
This strategy is often adopted in the early stages of commoditization
by software vendors, who toss in demo versions of every remotely
compatible product on their "strategic partner" list.
Often this "shovel-ware" becomes little more than land
fill fodder, but it does sway buyers during that vital last moment
of comparison shopping.
Brand your cow
The trickiest strategy, but the best for long term profitability,
is to brand you way to success. People - even IT executives who
are rumored to be people themselves - have brand preferences. In
a market where there is no discernable difference between two products,
brand preference will determine which is bought.
There are two problems with this strategy. First, few marketing
professionals in high technology really know how to create brand
differentiation. They still think that only features sell products.
Thus, they are not mentally prepared to find non-technical motivations
for creating buying preference.
The second problem is that branding is not a cheap or fast process,
and when commoditization happens, most executives are looking for
fast solutions that can be done with less budget because the product
line is suddenly not as profitable as it once was. If your market
is expected to be long lived, you need to create a better brand
to keep from sinking into unprofitability.
Cash your cow
One overlooked option is to not do much of anything - to milk your
cash cow for everything it is worth while planning your next product
or exit strategy. Computer Associates has made a handsome living
from buying orphaned technologies, doing little or nothing to improve
them, then charging steep maintenance fees while their acquired
customers engineered their way out of vendor lock-in.
This strategy is a two-edged sword. The up-side is that it is simple,
cheap, and profitable. Hewlett Packard did this with their obsolete
HP3000 line for years before announcing they were killing it off
(my guess is that in the late stages, it became unprofitable to
even maintain the HP3000).
The down side of this strategy is that it leaves a bad taste in
the customer's mouth and damages corporate branding. If your long-term
goal is to keep and grow your company, then you have to weigh this
option carefully, and manage the fall-out if your cash cow gores
your customers.
Morph the core
Some commodity technology products have a central core that is
the foundation of the product. On rare occasions, that core technology
can be used for a related, or even a completely different product.
3am Labs is an interesting example as they leveraged their core
remote PC management technology to create a tool to allow road warriors
to use their office-bound PCs while they were away from the office.
Morphing the core has two distinct advantages. The first is that
the cost for developing the new product goes way down as you have
a mature and paid-for foundation on which to build. The second benefit
is that you can often find synergies between the old and new products,
and even sell the new product to old customers.
One huge downside, however, is technology myopia - a situation
whereby your company and your engineers quit looking beyond their
safe and familiar point of expertise. The long term effect of this
is not too removed from a hermitage - an eventual isolation and
stagnation that either causes premature corporate death, or at least
the desire for it.
Just move on
Walking away from a product or a market should be like ending a
romantic relationship: bittersweet with fond memories, and an active,
earnest hunt for your next lover.
There can come a time when the best thing for a company to do is
to kill its product and build the next one. When an old product
has become a commodity, when the competitors have built a better
brand, when price cutting and discounts become the norm . . . in
short, when you're in a bad market . . . it may be time to reinvent
yourself. This won't be easy or cheap, but it may be your only choice.
And, a reverse non-strategy - cutting prices
There is one so-called strategy that too many firms employ to their
own self destruction - cutting prices. With technology companies,
this usually starts innocently enough with deeper than average discounts
to "important customers." But it soon becomes the norm
with sales and marketing forming a death pact over price cutting
to "shut out" the competition. This process accelerates
as the primary competitors do the same, and all participating companies
spiral down into the abyss.
But if you see this happening, watch the market carefully. There
is always one company that either refuses to cut prices or always
comes in a few dollars above the competitors. This is a sign of
a company that understands the inevitable end of a price war and
chooses not to play the game. They will accept temporary lean times,
and even spend more on branding and marketing during a price war
to create a sense of superior value. These are companies that read
Sun Tzu's Art of War and took seriously the passage "If you
stand by the river
long enough, you will see the bodies of your enemies float by."
In this case, the smart marketer will use price cutting as a weapon,
not by cutting their prices, but by encouraging their competitors
to cut theirs. If you can convince your opponent to commit suicide,
then you win the battle. In a commodity market, simply staying alive
can be a winning strategy.
Guy Smith (guy@SiliconStrat.com)
is the principal of Silicon
Strategies Marketing. Guy specializes in strategic marketing
and market development for technology companies. Aside from his
marketing successes, Guy has a background as a technologist for
NASA, McDonnell Douglas, and Circuit City and remains active in
technology, primarily within the Open Source Community
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