After a too-long hiatus due to client demands, I am getting back to work on my book. Here is Chapter 1 in rough draft form. I’d love to get any comments or feedback on it. This chapter is dedicated to me-too companies and executives – my hope is to convince you that there is a better way. [Pardon the overlap with themes from prior posts…]
Disclaimer: This is unedited draft material that is a work in progress. The book will contain revised and refined material with additional citations.
Commoditization is Enemy #1
If you have a great offering but still find yourself competing on price in a crowded field of me-too competitors, you’ll relate.
I once spent a Saturday night in Atlanta’s Fulton County jail with renowned actress Candice Bergen. We had both been arrested.
When the guy on the other side of the bars yelled, “Cut!” it was a relief to step out of that nasty, smelly cell. The outcome of that evening was a really bad, low-budget movie called, “The Mayflower Madame.” Fortunately, the scene was short. If you blinked, you missed me.
By day I was a buttoned-up young management consultant doing communications company billing system design for Accenture clients. By night, I fed my creative side with acting and improvisation lessons. It was in this offbeat world among my eccentric acting friends that I learned some of my most powerful lessons about differentiation when you’re marketing something intangible – why it’s hard to achieve, why it’s even harder to sustain, and most importantly, why it’s so crucial to survival in a competitive environment.
One of my first big insights was in going to acting auditions and having no real way to obviously stand out. I remember the irony of one audition in particular. It was for a television commercial. The character was a young corporate type exactly my age, and those auditioning were to wear formal business attire. Easy for me. I just took a break from work and arrived in my regular dress-for-success uniform – suit, blouse, high heels. I looked very prim and proper. I thought, “How hard is it going to be to play myself?”
I received a script with just one line of dialogue. They provided no story or other context about this person or situation, except this: I was to run from one corner of the room to another carrying a football like a running back, while shouting, “Get out of my way!!!!!!”
The worst of it was that at least 40 other actresses showed up looking just like me. We all wanted to think we were different, but we weren’t. Short of being obnoxious in some way, there was nothing any of us could do to stand out and increase our odds of being selected for the part. Yes, we all had relevant experience, training and talent; but those were our tickets to entry, really. You didn’t get invited to the party if you didn’t have the requisite credentials. We were complete commodities with zero control over our destinies. There was no way to be memorable or offer more value than someone else. It was a crapshoot. I’d have had better odds playing the lottery.
I found that aspect of the acting world to be completely absurd. Half the time, judging from the array of people at a given audition, the directors didn’t even know what they were looking for – they’d “know it when they saw it.” I understood that it was just how the game was played, but I quickly figured out that going from one cattle call to the next wasn’t for me. There was no going-in advantage, no control, no way to distinguish yourself in advance or afterward, no way to get your distinctive qualities across (as if they mattered), and low odds of success relative to the investment of time, energy and ego required.
Years ago, the global management and technology consulting firm, Accenture, was losing competitive opportunities to install SAP software at very large companies, a service that had become quite commoditized, despite the high degree of expertise required. Accenture had what it felt were superior credentials, so the company decided to dig into what was happening. It hired an outside firm to conduct some win/loss analyses and prepare a report it called, “A Primer on How to Beat Accenture.” The outside firm interviewed client people involved in evaluating proposals, and this response from one executive summed up the problem:
“Our evaluation of a variety of things that all the vendors threw up was that they were pretty much equal on them. For example, when you talk about tools, software development tools, development centers, client lists, the pace of their approach, and even things like what Accenture would call Business Integration. We found that all the respondents were the same. And we rewarded zero points to those.”
When you look and sound like everyone else, then promoting your company story in the market place or selling to a prospective customer feels a lot like those cattle-call auditions. Like 99% of the companies out there, you are failing to differentiate in a way that’s blatantly obvious to customers, which makes you a Me-Too commodity forced to compete on price when competition increases and/or demand ebbs.
For those of you who aren’t wine connoisseurs, can you distinguish between an “oaky” wine versus one that is “reticent”? In a blind taste test, can you tell which is the 98-point wine and which one rated merely 86 points? If you are a connoisseur, how much study and practice – how many sips of wine – did it take for you to start detecting subtle differences? Think of your customers as wine novices. To them, distinguishing your company from the competition is like trying to describe what makes an Alexander Valley pinot noir different from a Russian River pinot. As non-connoisseurs of your business category, the differences are not just subtle, they’re impossible to detect.
We see this all over the place, but intangible products and services are especially susceptible, because differences between offerings are difficult or even impossible for prospective buyers to discern, especially before the purchase. Almost any professional service category is a great example. Go out to the websites of various doctors, lawyers, graphic designers, advertising or graphic design agencies, Silicon Valley venture capital firms, architecture firms, information technology service providers, communications service providers, etc. and try to figure out what makes them unique. Chances are that you can strip the names off the boilerplate paragraphs for companies within a category, mix them up and find it impossible to know which paragraph belongs to which firm.
The Commoditization Nightmare: Can You Relate?
Over the last twenty years, I have had thousands of conversations with senior executives, and when I’ve asked for one sentence or phrase that sums up their biggest business problem, the refrain has remained the same. Here are direct quotes. Note the theme.
“How to avoid becoming a commodity — It’s 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, and it’s been hard to stand out from the crowd.”
“How to get people don’t understand what we do and what makes us different.”
“How to improve our business model to do ‘repeatable projects,’ so we can leverage our experience and reduce service delivery costs.”
“How to attract and retain the right people – we’re competing against other employers for the same, limited skill set.”
“How to get the right business – We have a lot of business, but it’s not of the quality that will build our future.”
The implication of all of these trends is that many products and services, particularly in the business-to-business and technology arenas, 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 in the past, present and future (anomalies like a global financial meltdown aside), it all boils down to commoditization. That is the single biggest competitive threat they face.
Commoditization is a gigantic issue that plagues executives everywhere, and almost no one worldwide is immune in today’s global economy. Even back in the early 2000s when Cisco was clearly the Go-To for routers and other networking equipment, a senior strategic planning executive there told me that the market for “filling space in the rack” was full of me-toos and that commoditization was becoming a huge problem that Cisco was working hard to address. An example that many Americans can relate to on a more personal level is the movement of thousands upon thousands of even high-skill jobs to India, because labor is so much less expensive. But in a dramatic twist of fate, even India is feeling the squeeze from other coutnries, like the Philippines. In other words, someone will always find a way to look like you or be cheaper. Here’s why.
Why Market Forces Are Always Pushing You Toward Commodity Status
Even if you are in the luxurious position of being unique in some way, me-too copycats will always come after you.
Let’s look at how this happens. Let’s suppose that you’ve entered a relatively new market with a unique or proprietary (e.g., patent protected) offering, whether it’s a product or service. Initially, your customers have few options to choose from. You enjoy reasonable market share, are able to charge a healthy price and earn nice margins.
Inevitably, competitors emerge with their own proprietary offerings or copycats of yours. Or perhaps your patent expires. Suddenly, customers have more choices, and providers have increasing difficulty standing apart. The differences between offerings become less and less discernable to the naked eye. At 50,000 feet, customers can no longer distinguish one provider from another. Each sale starts to take longer and cost you more time, effort and money. You start cutting your prices to close deals.
Then the market matures even more and completely fills up with competition. Supply has grown faster than demand, and the market is full of Me-Toos. Everyone looks and sounds the same. It takes a lot of time on the part of a prospect to even begin to understand what makes one provider different from another – more time than they are usually willing to invest. Customers now have their pick of who to work with. They start to put minimal effort into coming up with a short list, and begin operating under the assumption that the offerings are basically all at parity; they start shopping completely on price.
You’re really in trouble when the procurement department gets involved. In this Design Intelligence article by Joan Capelin, “Confronting Commoditization,” Edward Bond, Jr, CEO since 1983 of Bond Brothers, a fourth-generation construction and construction management company, describes a classic scenario:
“When I first started in the construction industry, I had one energy client that provided 90 percent of my revenue. It wasn’t long before I heard Death knocking at my door. The icy-cold purchasing agent state that my price was too high and that, if I wanted to work with them, I’d have to drop my price. ‘Purchasing’ was clearly not interested in understanding why my fee was what it was; rather, Purchasing’s job was to get the lowest price from vendors and professionals alike. I was cornered without an informed economic decision maker to whom to appeal about value versus cost.”
Meanwhile, your costs have gone way up – you’re having to invest and scramble to develop the next generation of your offering; your sales costs have skyrocketed, as sales cycles get longer; your pipeline of work is spotty, leaving lots of your people underutilized; and industry advancements are pressuring you to invest in skill enhancement for your client delivery people. In short, your margins are sinking like a stone.
This is the cycle you can expect. It’s Economics 101. Without making any fundamental changes to your business, there are only three realistic forces that will allow your margins to temporarily (and only temporarily) go up again without changing anything else: A bunch of competitors disappear (bow out or go out of business); a disruptive technology or trend suddenly removes significant cost (e.g., outsourcing software engineering work to India and China), or demand surges.
Exploding Market, Imploding Margins
History is rife with examples of companies falling into the commodity trap and struggling. Let’s take the late 1990s and early 2000s with the rise of “web integrators,” companies that helped dot-coms and corporations develop websites, build eCommerce capabilities and develop applications that would run on the Internet. This is useful, because we are going to see the same wave, only bigger, with the “Internet of Things”) trend making all devices smart and connected.
The initial web integration market was huge, because dot-coms were popping up all over the place and needed to get their websites up and running ASAP. All one needed in order to enter the web integration business was some web development skill and a business license, so loads of companies sprang up. These web integrators all looked and sounded the same. It didn’t matter, however, because the supply still didn’t meet all of the demand. On July 23, 1999, the trade publication, Computer Reseller News, declared, “Web Integrators’ Revenue Soars.” On November 22, 1999, PC Week trumpeted, “It’s a seller’s market for e-business service providers.”
Then the dot-com market fell apart, and within 18 months of those exuberant headlines, most of those companies had gone under or been acquired for pennies on the dollar. Suddenly this huge collection of Me-Toos had become complete commodities in the face of limited demand relative to the supply. Me-Toos struggled to close deals, the cost of doing business continued to increase, and margins grew smaller over time. Ultimately, many went out of business, exited markets or simply struggled until investors pulled the plug. Only a few managed to survive. I witnessed it firsthand, because I worked for one. We were one of the lucky survivors, only because we took a solutions approach and had begun to target and penetrate an emerging market, what was then referred to as “brick and mortar” companies, as opposed to dot-coms. Even with that, we only limped along. As a venture capitalist so eloquently put it while onstage at the AlwaysOn Silicon Valley Innovation Summit I attended years later, “Those were rough times. The year 2000 really, really sucked.”
Let me give you some examples of how hard it becomes for customers to distinguish one service provider from the next in a market full of Me-Toos. Here are actual elevator statements (taken verbatim from their websites or from statements by executives) of five different companies offering web-related development services. Pretend you are an executive looking for web development help. Would you have any clue as to what separates one from another?
“With a unique combination of strategic thinking, creativity and technological expertise, we design and build powerful, meaningful Internet solutions.”
“Our [branded methodology] approach is really a blueprint for Internet success. We blend strategy, technology and market skill sets to deploy mission-critical Internet solutions. We boil down these three skill sets into best practices and deliverables. I don’t believe anyone in the [Internet services] space has as much of an integrated offering.”
“We work with our clients to create e-transformation. From designing a new breed of business strategy to the rapid deployment of forward-thinking Internet solutions, [company name] offers a comprehensive set of strategic Internet services designed to generate success for our clients.”
“[Company name] is a leading Internet consulting firm that helps diverse clients in a broad range of industries plan, build, and launch digital businesses… has become a trusted partner to both Fortune 500 and emerging companies. “
“We deliver electronic business solutions to create market leadership, breakthrough positions, and shareholder value.”
As a prospective buyer trying to figure out who to call, you’d basically have to roll the dice. As a company trying to stand out, you have the same odds I did in that acting audition. Getting selected becomes a matter of dumb luck, and that’s no way to run or market a business.
Sadly, nothing has changed. Here are short descriptions taken from the websites of the Automotive Industry practices at three leading strategy consulting firms.
We work with OEMs, suppliers, distributors and dealers on strategic, organizational and operational issues along the entire automotive value chain. We help our clients to build and adjust their growth and brand strategies to cope with emerging challenges.
___ helps automotive manufacturers, their suppliers, and their distribution partners respond to these significant challenges [earlier web site text omitted here]. We do this by providing cutting-edge ideas that reach beyond the limits of traditional business models.
As one of the leading management consultants to the global automotive industry, ___ has helped senior executives at OEMs and suppliers in North America, Europe, and Asia address such critical strategic, operational, and systems issues. ___ has helped clients turn marginal market returns into exceptional returns. It is not just a single service offering, but the resulting integrated changes that truly differentiate players and help clients to not only take cost out but also to attain margin improvements.
Try this in your own competitive sector. Enlist the help of someone not associated with your company but who knows the industry. Give them the names of 5-10 of your closest competitors. Have that person pull from the company websites the one to three sentences that best summarize what each company does, remove the names, shuffle them around, and give them to you. This is what a prospect encounters when shopping for your services, software or products. You will probably be shocked at how me-too all of you sound.
This problem spans nearly every sector in the business-to-business world, most professional services sectors, nearly all technology companies, and even many consumer-oriented companies. For example, I ran into this very same issue in looking for a literary agent when writing this book. One of the big complaints a lot of agents have is that they get inundated with author submissions that are completely inappropriate – genres they don’t represent and material not packaged in the manner they prefer. They also really stress the importance of a great hook in your pitch – your first sentence – in order to get their attention. The industry emphasizes that authors need to stand out and distinguish themselves from the get go. To help me avoid this problem, I did a lot of homework before approaching agents, including buying the standard industry guide, which provides a profile of each agent. In this, agents have the opportunity to specify what they’re looking for.
What was fascinating is that out of the hundreds of agents I read about, only a handful distinguished themselves in any way whatsoever. A good 99% of them all looked and sounded exactly the same. For a group of people so flooded with bad material, you would be amazed at how few agents took the opportunity to be extremely specific as to what they like to represent. I found it really ironic and amusing.
This Me-Too trap is something very few executives in business services, software and solutions companies understand or appreciate. I’ve been watching déjà vu all over again for 25 years.
Why It’s Only Going to Get Worse
Several trends are forcing companies to reevaluate their competitive strategies, what they offer, and the way in which they approach marketing. First, it’s becoming increasingly difficult for customers to see what makes one company different from or better than another. This results in price-based competition.
Second, the barriers to entry are dropping rapidly. In many industries now, especially those that are technology driven, your competitors need almost no capital to threaten you with cheaper or better alternatives. They can launch a website through any number of free services, build an app, or start offering a service. With a 3D printer, they can build sophisticated prototypes at the kitchen table. With Amazon.com, eBay and other online retailers, they can sell and ship products globally. As a result, dozens of new entrants jump into any given market every single day.
Meanwhile, it’s never been easier for your customers to shop around. They literally have access to anyone in the world. Even disciplines we’ve always thought of as high-touch and requiring physical proximity are being off-shored. IBM, Home Depot and many other companies have moved thousands of higher-salaried, professional positions from the U.S. to India, including finance and sales roles. If companies are treating their own employees, who are professional staff, as commodities, you can bet they are doing this to suppliers. Likewise, companies like IBM are feeling the squeeze from their own customers, as they come under increasing cost pressures themselves.
For business-to-business sectors, enterprise business problems, processes and technology infrastructure have become so complex and interdependent that customers want vendors to bring them complete, integrated business solutions, which are often a combination of products and services. Sometimes, they’re even provided by several companies partnering together. This requires a business model that’s very different from what most companies have.
For emerging sectors such as “green” products and services or the “Internet of Things,” there is a significant market development challenge. Providers are rapidly introducing new technology or new ways of doing business; they are asking customers to buy an entirely new type of product, such as solar technology; they are asking customers to use familiar products in new ways, like controlling one’s home security system from a mobile phone app; or they are somehow changing the customer’s business processes. This calls for positioning and marketing practices that go beyond traditional approaches.
Another challenging trend is the speed at which some markets and competitors move. Software providers, particularly those offered as a service via the Internet, can match one another on functions and features in a matter of hours or days. Even highly specialized products such as optical technology or telecommunications routers and switches rapidly become commodities. These companies are so accustomed to operating in fiercely competitive environments that they are very nimble and responsive to market changes. As soon as one competitor adds a new product or set of features, others match it.
Many products are software driven, meaning what used to be physical features are now software. A simple and very familiar example is smartphones, but it’s happening to devices and products anywhere and everywhere. Before, a change in a product feature set meant a change to the manufacturing process and possibly even the supply chain. Changes were not easy to make, so competitors couldn’t match each other quickly or easily. Even if they could, they still had to get customers to buy the new version of the device. Now the competitor just modifies software code in one place and pushes it out to customers’ devices. Function and feature barriers have almost evaporated.
Why Blurring Market Boundaries Make It Worse
If you think you have a lot of competitors now, just wait.
It used to be that the distinctions between market categories were very clear. Let’s take the marketing arena, for example. An “advertising agency” once just did ads, which ended up on TV or in print. In order to come up with the ads, they had to figure out how to boil your message down, so by default, they also created your positioning, tagline, etc. A “public relations” agency dealt with the media, events, and market influencers. A “direct marketing” company put together your mail pieces or catalogs. Your printer was down the street, because you had to be able to go to where the equipment was and check the “blue lines” (industry jargon for a test run), before they started the presses and printed 30,000 copies. A graphic designer helped you with presentations, documents and brochures. A photocopy company serviced your copiers or you used a service down the street. Your sign company was also down the street. When social media first came along, there were people who specialized in just that.
Today, all of the above do all of the above. FedEx stores are a source for printing, high-volume copy jobs, graphics support, signage and more. Ad agencies do online advertising and other interactive marketing. Interactive agencies give advice about how to integrate print and package design with online campaigns. Almost any company involved in marketing execution does social media. Someone in India can design a new logo for almost nothing.
In the IT industry, it used to be that services, software and hardware products were three distinct sectors with very different business models operating fairly independently of one another. Customers bought each individually and then put the pieces together themselves. That’s no longer the case. Business problems, processes and technology infrastructure have become so complex and interdependent that customers want solution providers – vendors that will bring them complete, integrated business solutions. They also expect vendors to understand the unique intricacies of their industries and businesses. This is forcing vendors to change their business models and/or partner with others, including, on occasion, competitors. Therefore, the definitions of these companies have blurred as they operate across multiple categories. Most business software companies also offer professional services; many business services companies also sell their own or partners’ software or products; product companies go to market through value-added resellers, offer some services of their own, and partner with other companies. We should now really refer to this collection of sectors as the “solutions provider industry.”
Many software and product companies are finding that associated support services are not only in demand by their customers but can also offer higher profit margins and strong cash flow. They are increasingly adding services to their solution portfolios, yet the requisite marketing and operations approaches are much different from those of pure products. These professionals are often not aware of what these differences are or how to implement them.
Let’s look at an example of all of this blurring in the real world. Suppose you’re looking for a company that can help you do some online marketing to your extensive customer database. You aren’t quite sure what you need, so you find some rankings and pick three companies from each of the following categories: interactive agencies and database marketing service providers.
Here is what you get from their websites, but the names got separated from the descriptions. Are there any meaningful differences between them?
___ is the first global interactive agency network, leading a new generation of creative marketing and media agencies designed to unleash the full possibilities of a digital age.
_____ is the largest independent interactive agency in the world, and the first of its kind. We’re the only interactive agency to take creativity, strategy, and technology out of silos, and develop a truly blended approach to creating emotionally resonant, online brand experiences. Our creative studios – spanning from (list of cities) are home to award-winning creative strategists, designers, writers and developers, singularly focused on initiating and perpetuating a mutually beneficial dialogue between a brand and a consumer.
____ is a leading database marketing agency. We offer quantitative, information-based solutions that maximize return on marketing investment (ROMI). ____ provides the framework for organizations to aggressively apply database marketing strategies to their marketing programs. For over a decade, Our [brand name] approach has produced superior results for many world-class marketers. The core of our solution is our highly-flexible and scalable marketing technology platform coupled with our award-winning analytics and creative, driven by our highly-disciplined consultative approach. It is the integration of these competencies that creates superior results for our clients.
___ helps industry leaders build great brands by creating engaging experiences for consumers wherever they live in the digital world, ranging from Surface screens to blogs. We believe the future of marketing is not about recycling TV spots or banner ads on websites. Marketing is all about harnessing the social and immersive nature of digital to build memorable experiences with consumers and empowering those consumers to share your brand with each other.
___ is a Marketing Optimization solution provider that leverages predictive intelligence, strategic and analytic services and marketing automation to maximize marketing spend productivity, strategy and results for its clients. Founded in 1984, ___ has built core competencies in data management, database services, analytics and strategy which are delivered by highly skilled professionals. ___ supports over 250 clients across its marketing services, vertical industry solutions and teleservices business units.
Are You A Me-Too?
“All in all, you’re just another brick in the wall.” Pink Floyd
This quote may seem like a rather cold thing to say to someone, but when it comes to business-to-business companies, it is ohhhhh so sadly true.
Let’s look at consulting companies as an example of what goes on. They provide lessons for all businesses, because services are becoming such an integral part of product company offerings. This will especially be true in the Internet of Things era.
I’ve had many a debate with consulting colleagues and clients who insist that they are absolutely different from the competition. When I ask, “How?” I get one of two responses. Either they give me the same spiel I hear from every other company in their space (a la the above), or it takes them about 20 minutes to explain it to me. The most common refrain is “best people and track record of client experience.” Yeah, right. So, does your competition say, “We hire crappy people and have no relevant experience”?
I can almost guarantee that if you and one of your competitors each sent over a team of people, it would be impossible to tell which team came from which company. Their resumes would look the same, the people would look the same, they’d probably even be dressed the same and spewing the same jargon. Sorry, “best people” doesn’t cut it as just one point of differentiation much less your overall positioning.
The same goes for your project management methodology, your creative abilities, your technology skills and fundamental infrastructure, your approaches to change management and strategy. If you are a software company, it’s highly likely that if your competitors can’t already match you on functions and features, they’re only a few months away. In many cases, ditto if you are a product company, especially if you sell to enterprises.
The bottom line is that if you can’t convey what makes you unique and of particular value to a particular market in only a moment, you are a me-too in the eyes of the market, which is the only place where it matters. If a prospect, a market influencer, a prospective employee, a supplier or someone who could potentially refer you to a possible buyer can’t quickly figure out what makes you special, you’re a me-too.
Were you able to answer these questions differently from your competitors in a way that would make it obvious to prospects? And in a way that is valued by prospects?
If you’re feeling a little beat up right now, don’t, because it’s really tough to stand out in a market like yours. Let’s find out why.
How To Tell Whether You Are Headed For Me-Too Status
Let’s look at how most companies in a small sampling of sectors typically state their differentiation and why it’s not adequate. If you don’t believe me, check out some websites and see whether you can figure out what makes one company different from another.
Imagine you’re a prospective buyer, and see whether any of these turn you on.
Most of these claims to differentiation are meaningless, because everyone else makes the same claims. None are sustainable, because competitors can easily match you and invariably do so. What you end up with is a serious outbreak of Me-Too Syndrome. Everyone in the space is basically offering the same thing. Everyone looks and sounds the same.
Commodity status is like a nasty undertow pulling at your business. It will always be there. The key is to understand it, accept it, and have a game plan in place for dealing with it.
The Me-Too Death Spiral
The Me-Too Death Spiral is a matter of simple arithmetic and economics. Revenue minus costs equals profits. If revenues are increasing at a greater rate than costs, profits are rising. If revenues are decreasing at a greater rate than you can decrease costs, then profits are shrinking. We all know this. But here is the rub. The cost of skilled people rarely decreases and usually increases over time.
If you provide any kind of service; if you have a product that is highly variable from customer to customer; if human expertise is a big portion of your value proposition, you have a business that is dependent upon highly skilled people. Your costs will always rise. You will need to continually be training and developing your people in order to keep up with industry and market trends. Your people will need, at a minimum, cost of living raises. If you want to keep them motivated, they’ll need more than that. Employment overhead such as taxes, healthcare, insurance and so forth rise over time.
The people are just one dimension of your cost structure. Growth costs money and requires investment in R&D. You likely operate in an industry that changes rapidly, particularly on the technology front. It takes investment to keep up with advancements if you want to remain relevant. Factors such as facilities, support infrastructure, and other operations costs also creep up over time. In any highly competitive environment, you need to invest properly in marketing and sales support unless you want to rob your future. While you may be able to find ways to cut in the short run, long-term costs will only rise.
Meanwhile, cost-based pricing doesn’t work in a business like yours, if that means you’re going to raise prices every time your costs go up. Business customers will revolt. They only pay higher prices when they’re receiving higher value. Sure, they may accept it to a point, but a comparable provider has only to swoop in and offer a slightly lower price for the same value, and you’re sunk.
I experienced this when I moved the Lina Group, Inc. base of business from Atlanta to Silicon Valley. Do you think our existing Atlanta-based clients were willing to absorb a 100% increase in prices just because some of our costs suddenly increased 100%? Of course not. It sounds like an absurd question, but providers try to do this to their customers all the time. Perhaps the methods and messaging are more subtle, but that’s what it fundamentally boils down to.
Bottom line: Since your costs are always going to rise at least linearly, if not exponentially, you had better be doing one of two things, if not both: figuring out how to raise the value of your services proportionately in order to raise your prices at least proportionally; and figuring out how to get the most leverage possible out of your intellectual property and people. For example, if you currently provide professional services and bill by the time unit (hour, day, etc.), you can start providing services that enable you to price based on the service you provide, rather than the time you spent doing an activity.
If you don’t figure out a way to justify higher prices and/or reduce what it costs you to deliver your products and services, you are slowly, if not quickly, on your way out of business.
When I share these stories with others in the industry, they nod their heads. “That should have been us on that conference agenda!” The person next to you on the plane exclaims, “If only we had known about you. We just hired some consultants to do…” Yes, everyone can relate. It’s frustrating, unnecessary, and worst of all, the opportunity cost of not being differentiated, not standing out, is huge.
But suppose you were given a choice. You could continue to look and sound like everyone else, compete on price, and scrape by for each dollar of declining profit you earn until you finally go out of business. OR you could be absolutely unique in a particular market, offer something of very high value that is in high and urgent demand, and charge high prices while prospects line up at the door. Which would you choose? In case there is any hesitation, let’s look at what the latter offers.
(Up Soon: Draft Chapter Two – The Remedy: Be the Go-To for the Solution to a Business Problem)