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Five strategies to slow the race to the bottom

David Heitman //August 11, 2010//

Five strategies to slow the race to the bottom

David Heitman //August 11, 2010//

In nearly every business sector, you hear people talking about the dreaded “race to the bottom.” It’s the price-pressured, loyalty-free, profit-reducing phenomenon that is disrupting entire industries and wreaking havoc on thousands of individual companies.

Whether going up against overseas competitors, addressing customers’ low price expectations or grappling with the next cost-reducing technological advancement, there is a seemingly inexorable force pushing prices and profits downward.

No matter how unique and proprietary a product or service seems at its inception, it is likely destined (some would say doomed) to becoming tomorrow’s commodity. In his intriguing book Free: The Future of a Radical Price, Chris Anderson, editor of Wired magazine, describes this process by which once-proprietary products or services eventually are made so cost-effective by technology and engineering efficiencies that their price declines almost to the zero point.

Similarly, massive availability of data has made formerly proprietary information, held by a small group of insiders, the entitlement of all. This has reduced prices and revolutionized the buying and selling of everything from automobiles and real estate to legal services and private jets.

Credit (or perhaps blame) Moore’s law-computing power doubling every two years for the same approximate cost-for much of this problem, as so many innovations have their roots in digital technology. Yet another challenge-imitation by competitors-is an equally powerful challenge. While imitation is a centuries-old business practice, it has taken on light-speed velocity in a global marketplace. Copying a proprietary idea is now such a powerful, and potentially lucrative business strategy that Harvard Business Review recently published an article by Oded Shenkar and Scott Berinato entitled “Imitation Is More Valuable Than Innovation.”

In our commoditization-of-nearly-everything economy, the customer is clearly in the driver’s seat-exemplified by RedLaser, the iPhone app that lets you to scan a product’s UPC barcode at a store, and then instantly search hundreds of Internet sources for the same product, only cheaper. You can either order it online from your iPhone, or present the screen to the store manager and try to negotiate a better price.

It is incumbent on successful companies to slow this race to the bottom by finding ways to make their products and services as proprietary as possible. Fortunately, there are five strategies that will apply the brakes to this downhill descent.

1. Niche Expertise
Whether you call it blue ocean strategy, creating a category of your own, or merely specialization, people tend to accord more credibility and are willing to pay more for the products and services of niche players whose specialization functions as an insurance policy for the buyer. This is equally true in B2C and B2B contexts. Generalists, be forewarned: you have a greater chance of getting commoditized and sucked into the race to the bottom than your niche competitors.
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2. Bundling
Creatively bundling multiple services-perhaps even those of another company-make it harder for the customer to view the individual components as mere commodities. If the whole is greater than the sum of the parts, and increased value is truly delivered by such bundling, everyone wins. Bundling of services also provides a single point of accountability-one throat to choke-and that’s something that customers are looking for and will reward with greater loyalty.

3. Service Quality
As visionless companies race each other to the bottom, the first thing to go is customer service. Thankfully, there are businesses that still understand that caring for customers is an investment that pays big, recession-busting dividends. From large corporations like Apple and Nordstrom, to small local shops that go to great lengths to serve their customers, the survivors of the recent recession tend to be the customer service leaders of their respective industries.

4. Customer Knowledge
One surefire way to avoid the race to the bottom is becoming intimately knowledgeable regarding your customer’s business. More than just understanding your customer, it’s crucial to know your customer’s customers. You can make the move from vendor to advisor, getting involved earlier in the decision-making process, and avoid being a mere contender on a three-bid list. It can take years of uncompensated learning of your customer’s business and acquiring the “tribal knowledge” of their corporate culture; but the profit margins are a lot better and the relationship can last a lifetime.

5. Creativity
Creativity is the ultimate non-commodity. Whether it’s originality of product design, innovative, new service offerings or the creativity found in marketing and PR efforts. Creativity is the best defense against the race to the bottom. It sets a company apart from competitors, and it sets one marketing effort over and above all the others clamoring for the audience’s attention.

Implement any one of these five strategies, and you begin to feel the car slowing on its race to the bottom. Implement three or four, and you might just find yourself coming to a complete stop and enjoying a sustainable profit margin. Do all five, and you’ll be writing for next month’s Harvard Business Review.
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