Commodity ThinkingReading Time: 3 minutes
In a post a few weeks ago, I talked about the growing body of data suggesting product segments most susceptible to a form of disruption theory known as low-end disruption. Through a series of recent conversations I’ve had with some investors, business school teachers, and “thought-leaders” it became clear to me many supposed smart minds still fall into a dangerous trap. I’m calling this trap commodity thinking, and I’m doing so for a few reasons.
Commodity thinkers tend to believe everything is destined to become commoditized. This common way of thinking of many who look at and analyze consumer electronics industries leads them to the assumption that if a product falls into the consumer electronics category, then it will become commoditized. Often examples like the Sony Walkman, or TVs, or hand held game pads, are used as examples of the inevitability that things like smartphones and other types of computers will always be a battle of prices.
I’m not saying the price is not important, what I am arguing is the price is not the most important factor to consumers. We looked to quantify this, to a degree, in several studies we did last year in both our pre-holiday buying study and our post holiday purchase study. We explored products like wearables/smart watches, smartphones, TVs, PCs, and tablets. In each category, we never found more than 20% of interested buyers or of those who did purchase a product in the category who were influenced by the price of the product as their major purchase driver. What was more interesting, was how devices that were more general purpose like PCs/, or tablets like iPad, or Apple Watch, and smartphones, seemed to be even less price driven than devices like TVs or Fitness bands which were more specific purpose type products.
We have enough data on this subject for me to hypothesize further that specific purpose products tend to be the ones that are more susceptible to commoditization. The commonality of things that tend to not be as price sensitive tends to be things we consider computers, all of which are more general purpose in nature and can do more than one thing, many things in reality, for their owner. Perhaps the perceived value goes up because a product has many dimensions instead of just one. Whatever the case, we now have more than enough consumer data from companies themselves, retail/channel experts, and quantitative data to understand beyond a shadow of a doubt that certain products and product categories are under no threat of commoditization.
The other reason I’m calling this commodity thinking is that the act of falling into the trap of believing all consumer electronics products become commoditized is itself commoditized. Meaning, it seems this is the prevalent thinking my the majority. The reason for this, to put it simply, is it’s easy. This way of thinking is easier to wrap a spreadsheet around, or a template for building your model. It is, however, deeply flawed and void of understanding of the deeply nuanced consumer mindset. A favorite story of mine was when a hedge fund manager at a large investment firm said to me “why would anyone buy an $700 iPhone when a $300 smartphone will do just fine?” He happened to be wearing an Armani suit, a $10,000 Rolex and Prada shoes. Hopefully, you see the irony in this scenario. He can’t see why someone would buy a more expensive product when a cheaper one is just as good, yet he spent absurd amounts of money on clothes and accessories when much less expensive alternatives would do just fine.
Commodity thinking is pervasive, and it is dangerous from a business perspective. Understanding the customers for a product or service, what the pain points are, and where their value propositions lie, are key parts of establishing a price elasticity strategy. In a world where more and more technology is getting smarter, more useful, and more valuable, there is a good chance commodity thinking is on its way out entirely in the tech industry.