This post is an extract of my forthcoming book on business model innovation. The innovation book looks at why business model innovation is needed and how it works. You can read more about it here. These posts are early drafts of planned content and I’m putting them out to get feedback. Please do comment below, or subscribe to these pages to get each new section as it is published. In today’s post, we will be looking at the impact of competition on the world
Why are You in Pain – Part 2
That problem is competition.
Marty is pretty cool. He’s a lawyer with a heart. When I first met him during COVID – we lived 12 time zones apart so flying to his Illinois, US office seemed foolhardy – he was super chipper.
He’d been practising law for 20 something years (maybe 30 – he still looks young). He was big on wills and trusts -financial instruments that keep as much of your land and money from the taxman and give as much to your children or a deserving cause.
That’s a pretty nasty business to be in – making people worry about the future and selling them a densely worded document that they barely understand.
What he cared about was the well being of his clients. That they weren’t ripped off my the medical companies, by the tax man, by his competitors and above all by their own stupidity or laziness.
As part of the work we did for him we looked at the competition he faced. This is what they said about themselves – paraphrased – to attract customers
We all Compete the Same Way
- We are lawyers
- We are legal lawyers
- We are commercial lawyers
- We are lawyers in Illinois
- We are lawyers with a nice office
- We are lawyers with nice suits and a big smile
Ok. I am being generous. There really wasn’t that much differentiation. There were hundreds and hundreds of lawyers though and it was clear why Marty thought that staying as a simple lawyer was suicide.
Depending on the business you are in there will be hundreds, if not thousands of people that you are competing against. Many of who you don’t know, most of whom any individual customer doesn’t know.
Most of the time you see the impact when you bid for a job and lose. The customer has found something better elsewhere. You guess so anyway because often the client cares so little about your offering that you never hear from them again.
Slim Margins Suck
In a business my wife ran some years ago my wife was happy to get the win rate up to 2%. That is for every 100 quotations she gave – she won 2. That was slightly better than the industry average. Competition on price, availability and speed meant that it was incredibly difficult to find a sweet spot that was defensible.
What we saw with that business was ever-increasing commoditisation. As more people figured out what did, and then how to improve on what we did competition grew so fierce that margins dropped. When we started we were able to make 25% gross profit on each sale. At its worst, we were making 0.02%. That’s pretty extreme and as you can imagine it was exceptionally painful for her.
As margins drop you need to sell more to make up their contribution. But it’s ever harder to make sales and decreasing prices – which is what many others are doing – contributes to the margin decline.
Eventually there comes a point where something small, something trivial starts a chain reaction that brings it to an end.
In the past we’ve had a few good answers to the impact of competition.
Ways to Win
We’ll dive into these in a lot more depth in part 2 but fundamentally there are three approaches that you can take
- Make better products
- Get better at selling them.
- Make your products cheaper.
The second two don’t work that well. That’s an exaggeration. They do work well, but only for a time. That’s because most of the possible gains come early in the process.
Making a $100 product 10% cheaper gives you a lot more value than making the same product $10 cheaper 3 years down the line when you have iterated 4 times already.
Similarly you can get better at selling – but as everyone else piles into the ‘get better at selling x’ market the increase in sales that you can achieve gets ever smaller.
That leaves make better products.
Looked at with a wide-angle lens there is unlimited upside potential for increasing most products value. The form, structure and substance may change radically but there is alway is more that can be done to make it, or a variant, or something that solves the same problem better.
Have you been onto any of the e-commerce sites and looked for something simple – lets say a screwdriver…
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