It Stinks to Compete on Price

Falling Prices AheadThe implication of the trends discussed in my last post, Hey Stop Copying Me! is that many business-to-business products and services are struggling against commoditization and must, by default, compete on price. When you boil down all the problems and challenges affecting the health of these companies past, present and future, it comes down to commoditization. That is the fundamental threat.  And it becomes even more dire in the face of a sudden drop in overall market demand, such as in a recession.

Don’t just take it from me, though. Hear it from your peers.

I’ve formally and informally interviewed thousands of senior executives in the sectors I listed in Who’s at Risk.  I’ve asked for one sentence or phrase that sums up their biggest business problem. The refrain has not changed in twenty years. Here is what they say:

  • “How to escape commoditization — It’s become very difficult to differentiate ourselves from the competition.”
  • “How to protect our margins —   We have to be competitive, and clients are pressuring us to reduce our prices.”
  • “How to establish awareness in the marketplace — We are a well-kept secret, but it’s been hard to stand out from the crowd.”
  • “How to improve our business model to do ‘repeatable projects,’ so we can leverage our experience and reduce delivery costs.”
  • “How to attract and retain the right people.”
  • “We are completely skill constrained, because we’re competing with so many companies that need exactly the same skills.”
  • “We have a lot of business…it’s just not necessarily the right business — it won’t build our future.”

Commoditization is a gigantic issue that plagues executives everywhere, and almost no one worldwide is immune in today’s global economy. For example, the United States has seen thousands upon thousands of even high-skill jobs move to India, because labor is so much less expensive. But in a dramatic twist of fate, even India is feeling the squeeze.  According to Quantum Information Services, “Increasing competition, pressure on billing rates and increasing commoditization of lower-end application development and maintenance services are among the key reasons forcing the Indian software industry to make a fast move up the software value chain.”  In other words, for the types of businesses we’re talking about in this blog, someone will always find a way to look like you or be cheaper.

Find out why in the next post: Where Are You on the Commodity Curve?

Service providers: I’m interested to hear from you. Can you relate?  What’s your biggest business problem?

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