The Blueprint

How to Compete with Low Cost Providers

Harvard Business Review’s December 2006 publication has an interesting article “Strategies to Fight Low Cost Rivals”.  Unfortunately, the article was a bit of a downer.  Don’t read it looking for the magic bullet.  There is some clear analysis, interesting strategies and relevant case studies, but overall the message is – low cost providers are here to stay.  You MUST transform your business or see your business eroded by the low cost providers.  Many would like to believe that low cost providers will go out of business because they can’t sustain this model.  I have made some references to this myself in this blog, but it is a complex issue.  No business can sustain itself if it is selling below its cost, but a business that can operate a different model with a lower cost structure can be hugely disruptive to a mature market operating with a much higher cost structure.

This article shows excellent examples of how these low cost providers do not go away.  If an incumbent company is successful at squeezing the low cost provider, there are others low cost providers right behind them.  It is a long term trend.

The article does give practical strategies to compete, but they all require a fundamental transformation of your business.

Get Rich…Be a Low Cost Provider

In Forbes 2006 list of the world richest people 12 of the 25 billionaires derived their wealth from disruptive low cost businesses.

Marketing 2.0

John Dodds has a blog called "Make Marketing History".  He has some great posts and great insights.  I particularly like his post called "Marketing 2.0 Minifesto". 

For those of you who are rethinking their marketing strategy (or getting into marketing for the first time), I believe he succinctly defines how to market in todays business environment.  The old marketing practices don't work any more.

WKRP Turkey Drop

Here is a little Thanksgiving comic relief.  A classic Thanksgiving segment from WKRP in Cincinnati.

Google Acquires YouTube $1.65B...So What?

I'm sure everyone has heard about Google acquiring YouTube for $1.65B.  You may have said "Wow...that's unbelievable, but what does it have to do with me?"  It may not directly affect you, but you can take advantage of this wave of innovation.  This is just the start of something bigger.  It has everything to do with the Long Tail book I mentioned in a previous post.  One of the cornerstones of this theme is "User Generated Content".  It is now easy for anyone to create video content and put it on line.  The first wave is people posting scenes from the Daily Show, Borat, or college kids sharing videos with each other.  The second wave will be businesses using this technology in some profound ways.  Scott Sheppard, AutoDesk Engineering Project Manager, points his blog readers to a YouTube video that shows how to create a DWF file.  I can embed the same video in my Blog by simply copying the hyper-link from YouTube.

Do you think this technology could be useful to you?  How much time do your employees spend training customer to create plot files, DWF files, or PDF files?  How much time and money would you save if more digital files were delivered correctly?

How about a video to show a customer how to order plans from your plan room?

How about a video to show your employees how to perform simple equipment maintenance tasks?

The technology to do this is easy and it is getting easier every day.  Here are some links:

• Recording screen actions to a digital movie - Camtasia
• Hosting your own private video - VideoEgg
• Capturing movies - any digital recorder - CNET Recommended budget - Cannon Elura

Gotcha thinking?

Nickel and Diming

This is an interesting concept.  We have all heard the term and most of us have used it.  I am sitting on an American Airlines flight and the flight attendant is walking through the aisles asking if people would like headsets.  The gentlemen next to me motioned that he was interested.  The flight attendant said “that will be $2”.  He said no thank you and shook his head in disgust.  He thought he was being “nickel and dimed”.  The people in the row behind me bought headsets.  I am in the bulk head seat.  I noticed that everyone in first class received free headsets.  Do I feel “nickel and dimed”?  No not really.  For about $150 I am flying 1,500 miles.  The taxi cab that drove me 15 miles cost $30.  If I had paid for a first class ticket (of which I have never done so, because I believe it is a waste of money), or been upgraded (because I fly a lot) then I would have expected headsets and a lot more.  I have a choice.  If I want headsets and I have a choice.  If I want a meal I have a choice.  I have a lot of work to get done, and would prefer not to have the distraction of a meal or a headset.  If American Airlines was giving this to everyone as part of the standard service, they would have higher costs (headsets, food, flight attendant labor, disposal, etc.).  Many people would have taken the food, eaten a little and throw the rest away.  They weren’t really that hungry, but felt obligated to take the food because they “paid for it”. I recently went to Hawaii for a conference.  The hotel wasn’t cheap.  When the bill was delivered at the end of the stay it had a $15 per day “resort fee” on the bill.  It wasn’t a tax, there was no real good explanation for it, and it wasn’t optional.  Now this is “nickel and diming”. I believe that the litmus test to determine if you are being nickel and dimed is the following criteria:

1. Am I buying a commodity product or a premium product?
2. Is the incremental service optional?

Am I being "nickel and dimed"?

     

	Commodity	Premium
Optional	No	Maybe
Not Optional	Maybe	Yes

Golaith Isn't Embracing Digital Services

Below is a comment from a subscriber to my post on conditioning customers that prefers to remain anonymous.

 
A large competitor of ours preaches charging for digital services, but continues to give these digital services away for free. They recently expanded their market footprint by absorbing another large company. I had high hopes that when branch #2 was absorbed they would start charging some sort of minimal fee for posting projects, but they have not. They merely charge for scanning and any additional indexing beyond 3 fields. This is extremely frustrating.

 
You write, "The first step is to have faith that the market will converge on the best practice. Those who don't charge will see their profits erode to the point they can not sustain their business. They are 'burning their furniture to heat their home'." That may be so, but what is bothersome is that a large company has an awful lot of furniture to burn - far more than I do.

A large company may have the ability to “bleed the market” or defer charging for digital services longer, but they will ultimately suffer the same profit erosion that a smaller company will. The market will move towards a cost plus model and you must cover your costs or loose money. The point I was trying to make in the previous post is anyone can take a leadership position in charging for digital services. It doesn’t have to be the largest company. The objective is to start conditioning your customers to accept the charges by adding a line item and starting small. What if you charged $10 for posting projects? What if it was $1? At some point the customer is going to see that as a negligible expense, but they will start to become “conditioned” to expect some charge. You may be surprised to see the large competitor follows suite. They were waiting for someone brave enough to take the initiative and they will follow suite. Maybe they will charge $15 to your $10? This gives you an opportunity to raise your prices also.

Case Study: Ultimate Escape from Commoditization

A good friend of mine, Mike MacNair, CEO of MacNair Travel, lives in a rapidly commoditizing market.  If you think your market is being commoditized, try working in the travel industry.  Agents are rapidly being replaced by web pages.  Mike has been aggressively moving his business from a transactional model to a consultative business model.  When others in the industry are facing demise his business is doing quite well.  He doesn't try to compete with Expedia, etc.  Instead he embraces them as a tool and focuses on corporate travel and honeymoons.  The type of markets that are ripe for consultative selling.  Mike took consultative selling to the next level and wrote a book.  Mike is proving that as a market consolidates and moves towards commoditization opportunities appear for a few courageous players.

Links to reviews:  DowJones MarketWatch, Yahoo Finance
Book on Amazon

How to Survive in a Plummeting Elevator

I subscribe to a couple blogs that point to new and interesting web services and technologies.  A new "how to" site was recommended.  I checked it out.  I found some of the "how tos" quite humorous.  Some people have too much time on their hands.  Check this one out.   Note the complex math involved under "Warnings".

Trademarks

There was recently quite a stir on the IRgA Forum about using Xerox's trademark.  It is a touchy subject.  As someone who lives in the world of intellectual property, I have some strong opinions on that.

Seth Godin has a couple an interesting blog articles on this subject.  "Godin on Trademarks", "Warez"