How products become commoditized
One of the theories in Clayton Christensen’s The Innovator’s Solution explains how a high profit-margin business turns into a commoditized one.
- Products in a market start to have performance that exceeds the needs of most users
- New entrants make a product “good enough” for the low-end
- Low-end users choose on the basis of cost and convenience, and not performance, since all products meet their needs
- The new entrants expand their market by becoming “good enough” for more use-cases
During the phase when performance is below consumer demands, the market favors competitors that offer the entire solution as an integrated package, because product designers don’t need to make as many compromises. In this phase, profit flows to the integrated solution provider.
Once performance can be easily satisfied, the market favors a modular approach, because each individual part can be optimized for cost and the performance loss that comes with the design compromises don’t matter. In this phase, profit flows to the maker of the modular part that needs to be improved so that the entire package can serve more of the market.
What to do when the market favors commoditized products
Christensen’s proposed strategy is to shift from integrated solution provider to crucial part maker (and possibly back) as the product/market fit switches back and forth between under-performing and good-enough. This strategy requires companies that can be nimble enough to change from solution to part provider (and back again) fairly often.
To do this, use your market advantage in the proprietary/integrated phase to establish the modular interfaces – then off-load all of the easy-to-overserve parts and build an ecosystem of competing providers.
Prices will be driven down through competition, but you keep the high-margin parts for yourself. It’s tricky to figure out where the high-margin parts will be, as IBM found out when it tried to do this with the PC, but kept the wrong piece (building the PC and selling it to consumers), and created Wintel, who were the crucial part-makers.
Can you slow down commoditization instead?
Christensen offers a lot of evidence that this cycle is inevitable. However, some companies have shown that they can keep profit-share with integrated solutions in over-served markets with these strategies:
- Keep building demand for new features in your users. Kathy Sierra calls this “Upgrading your users”
”I bought a Nikon Coolpix 5700 because I wanted to get a little more serious about my photos--to do something a step beyond point-and-shoot. I wanted to learn more about photography. It's certainly in Nikon's best interest to help me get hooked on photography, because next thing you know... I'll be buying the extra lenses, and then pretty soon I'll have to get a better camera, and on it goes. IF they can get me to become passionate not about the camera, but about photography.”
- Establish lock-in. This is essentially how the iPod and Kindle are keeping me from finding alternatives. It’s not just DRM, but that’s a part of it.
For phones/computers, apps lock you in because they won’t work at all on another platform. Even if I find replacements, I need to somehow migrate their data. Microsoft Office establishes lock-in with each document created and has been “good-enough” for years without any serious competition. Facebook has no feature that I can’t find at Google+, except my family doesn’t use Google+.
Effective lock-in doesn’t get me to just keep using the product I bought – you have to get me to use your new versions too.
- Integrate with your other products that aren’t yet commoditized. This is the biggest reason I can’t move from iPod. I need iTunes/iCloud for my iPhone, iPad, and Apple TV, which are not commoditized at all. To unseat an iPod, you need to integrate with this mostly proprietary system. Similarly, Kindles are integrated with Amazon Prime streaming and Amazon’s vast collection.
- Protect your IP. The threat of commoditization is probably the biggest reason Steve Jobs said he would go to thermonuclear war with Android.
- Change the market’s perception of performance. In suggestion #1, I am suggesting that you help your users get the benefit of your performance advantage. This is a little different – here, you change the measurement completely.
It is incredibly hard to do this. For years Apple tried to get people to not think in clock-speed, but just gave up and went to Intel. With iPhone, they don’t even talk about these kinds of specs and just want you to think in pixel-density and touch responsiveness.
About the Author
Lou is the former Vice President of Product Development at Atalasoft.Follow on Twitter More Content by Lou Franco