Commoditizing the "Good Enough"
The effects of imitation and commoditization are happening so quickly that we have started taking them for granted. Remember the first time you left the world of 28K and 56K modems for high-speed Internet access? It wasn't that long ago. Remember the rush, the "wow!" you felt? Now, however, aren't you starting to accept high-speed Internet as a given, whether in your business, your home, or your hotel room? It's becoming a yawner—an undifferentiated, routine service offered by many vendors and, accordingly, driven primarily by lower prices. A slew of small companies like Minneapolis-based Astound can challenge giants like Comcast with significantly lower prices for monthly cable access—and, unlike Comcast, they can make a profit off these lower prices because of their lower overhead and access to the most cutting-edge technologies. Large competitors like the "new" AT&T (the "old" SBC) can put together even cheaper $14.95 monthly packages as loss leaders for other products.2 Moreover, in hundreds of communities, wireless high-speed Internet access is already offered nearly free. Although the cable and telecom companies argue that their quality and service is superior, customers themselves are saying, "Maybe so, but what we got for a near-free price is 'good enough.'"
In today's Copycat Economy, "good enough" is a frequent response from customers and investors—and, as it turns out, "good enough" is pretty darn good. Because they're overwhelmed with high-caliber options of goods and services, customers are no longer easily satisfied. They raise the bar on their minimum expectations of quality and service, and they expect to receive it.
My wife just bought a new dishwasher. I have no idea what brand it is, but the fact that it works perfectly doesn't fill me with delight—and it doesn't differentiate that dishwasher from the rest of the pack. My minimum, commodity-based expectation is that it work perfectly. If it does, I don't think about it. If it doesn't, I'm angry and vow a "never again" revenge on the manufacturer.
As more competitors rush to make incremental improvements of products and services, they get commoditized at a higher level, which leads many customers to conclude that "good enough" is really good enough. The fastest-growing wine in the history of America's wine industry is Bronco Wine Company's Charles Shaw wine. It is sold at the upscale Trader Joe's grocery chain, its customers are affluent and trendy, and its price is $1.99—hence its affectionate nickname "Two Buck Chuck." While Charles Shaw might not ever be confused with a vintage collector's wine, it's good enough for the discerning Trader Joe's customer seeking a casual drink. It's certainly good enough to have thoroughly cannibalized the sales of high-priced wines and skewed the industry's entire price structure. Small wonder that a Wine Observer article noted that the "terror of commoditization is sweeping California's wine producers."
It used to be that if customers didn't pay a premium, they'd have to accept low quality in return. The low-price vendor was, by definition, the low-quality vendor. In the Copycat Economy, that's not true, and I'm not just talking about dishwashers or wine. Witness the financial success and growth rate of many companies as diverse as JetBlue, Progressive Insurance, and Men's Wearhouse, all of which couple low prices with surprisingly higher-end products and service. Rich Walker of the American Architectural Manufacturer's Association, in discussing Chinese imports, concedes, "It's not just that they're cheap. What's scary is that even though they charge one third to one half our price for window framing, they're exporting good-quality product." Last year a young executive at Morgan Stanley Dean Witter wrote me that "over the years, institutional and retail commissions for stock transactions have come down dramatically. Online and discount brokerage firms continue to offer equivalent-quality executions (my emphasis) at lower and lower price points."
The tentacles of the Copycat Economy extend throughout the market, even into "luxury" sectors, as anyone who has bought an authentic Picasso print at Costco will testify. An observer of the private jet market noted in 2002, "After a huge growth spurt in the jet market, the jet manufacturers find themselves with a ton of capacity and product . Business jets are heading toward commoditization—meaning they are becoming essentially interchangeable—because of the large array of models with similar capabilities."
Other pricey items, even those with sentimental value, are now "good enough" to be commoditized. Caskets made in China now sell for 25 percent less than those built in the U.S., and among the six models of coffins you can now buy at Costco (!), one is priced at $925, which is less than half the price of a conventionally priced product.
Imitation and commoditization have always been part of a business environment, but they are now occurring at a scary unprecedented and accelerating pace. As one CEO of a small manufacturing company told me, "It used to be that if I came up with a terrific product, I could expect to enjoy five years of good returns on it. Now I'm lucky if I get 18 months." In many sectors, 18 months is an unheard-of luxury. In the online dating and matchmaking arena, the bigger sites tend to be interchangeable, and the competition is so intense that if one vendor introduces a new function, you can count on seeing the same option pop up almost immediately on rival sites. The very notion of a leisurely planning cycle has disappeared. And the old, reliable cash cows are dodos.
The bottom line? Imitation and commoditization are the most pressing strategic challenges that you will face for the duration of this decade.