THE STORY
I have a skateboard park near my home where lots of young boys like to hang out. The primary attraction at the skateboard park is a giant U-shaped surface. The idea is to start at the top of one end of the “U” and skate down & back up the other side of the “U”.
It sounds easy enough, but these boys have a tendency to
fall off their skateboards. As it turns out, the location the skateboards
prefer is not on top of the “U” but at the bottom. That’s where all the
skateboards congregate after the boys fall off of them.
They are victims of the law of gravity. The boys try to fight
it, but the skateboards willingly give in to the gravitational pull to the
bottom of the “U”. But then again, if skateboarding were easy, there wouldn’t
be any challenge to the sport.
Lately, it seems like retailers have become more like skateboards. They all want to fall down to the bottom of the “U”. In this case, it is the gravity of pricing which is pulling them down. All the retailers seem to want to be on or near the bottom of the range of prices.
In the past, retail pricing was more like when a boy is
guiding the skateboard, trying to defy gravity and get as high in the air as
possible. Similarly, retail management in the past would guide the stores on
paths towards pricing as high as they could get away with. But now it is more
like when the boy falls off the skateboard. The retail pricing falls to the
bottom like an unmanned skateboard.
And there the stores lay, all
clustered at the bottom of the pricing range. And although that may be good for
the consumer, that’s not a good thing for the retailers.
If you want people to prefer your offering, then you have to give them a reason to prefer you. There needs to be something in your offering that makes it special enough to cause people to see a justifiable reason to prefer it over the alternatives. That won’t happen if every option looks the same. Similarity makes all the options undistinguishable from each other. There is no reason to prefer one over the other when you cannot distinguish one from the other. Therefore, a key aspect of strategy is to find one’s point of preferred differentiation.
The problem is that business gravity tends to pull everyone
down into an indistinguishable sameness. As soon as one firm finds a positive
differentiation, everyone copies it. They chase each other on prices until
everyone is at the bottom. They all get stuck in a heap at the bottom of the “U”
looking about the same.
To fight the business gravity, firms need to apply the
principles of differentiation. We will look at three of these principles.
#1: A Difference Needs to be Meaningful
Marginal differences do not motivate behavior. Consumers are
creatures of habit. If you want to change their habits, you have to make your
differentiation large enough to grab their attention and overcome the
resistance to change.
When I was in the grocery business, the general rule was
that if you wanted to get people to shift based on price, then your average
prices would need to be at least 7% lower than the competition. Otherwise, the
price differential is not enough to succeed. You don’t look different enough to
create preference on price.
The problem is that in commodity retailing, pretty much all
retailers are now within about 7% of each other on price. Wal-Mart’s original
popularity was based on the fact that their prices were significantly lower
than the prevailing “normal” prices. That caused people to shift to them in
droves.
Now, Wal-Mart prices are considered to be the “normal”
price. Their prices are no longer seen as abnormally lower than the marketplace.
They are
the marketplace price…no big deal. They set the market norm which others come
pretty close to matching. No wonder Wal-Mart has stagnated. Their level of
difference in their prices is no longer meaningful. When your level of
differentiation is no longer meaningful, it is no longer a point of strategic differentiation.
#2: Successful Differences tend to be on the Fringe, Not the Core
Such a phenomenon is typical for the core attributes in
almost any industry. Because the core attributes are so critical to success,
competition won’t let you get a meaningful differentiating advantage there. They
will copy the market leader on core attributes to nullify any advantage.
In retailing, the core attributes tend to be product and
price. Unless you are a niche retailer, the products and prices between
retailers today are not all that different. As a result, it is difficult to
create meaningful differentiation at the core. Therefore, if you want to create
differentiation, you have to look to the fringe.
And that’s what commodity retailers are doing. Wal-Mart has
been investing in improving its service levels and store décor. Even Aldi, a
leader in no-frills, low cost retailing, has started a program to upgrade its
store décor. After all, if your prices are not that much lower than anyone
else, why should customers put up with your low service and bad décor? The
trade-off isn’t worth it when the price differential shrinks. So now you can no
longer just be the best low price store; you have to be the low price store
with the best fringe offering.
So the irony is this: although the core is the reason for
consuming an offering, it is the fringe where differentiation tends to be most
effective, since it is easier to create differentiation at the fringe than at
the core.
#3: Successful Differences tend to be Difficult to Copy
But just as the core can be copied, eventually so can the
fringe. So the trick is to try to find the types of differentiations which are
the most difficult to copy. This is done by making bold trade-offs.
The trick is to get extremely good in one fringe area (i.e.,
create a huge differential) by foregoing much investment in other fringe areas.
It’s like putting your eggs in one basket.
For example, the core in the airline business is getting a
passenger safely to their destination on time. Most airlines are pretty similar
with respect to these core features. So to create differentiation, you have to
go to the fringe. Southwest Airlines focused on the fringe aspects most popular
with pleasure travel and pretty much ignored the fringe directed at business
travel. As a result, they are not the most popular business travel airlines,
but they have meaningful differentiation that attracts the pleasure traveler.
Had Southwest tried to be equally strong in all
fringe areas, they would not have stood out on any fringe area. The
beauty of only focusing in one area of fringe is that it allows you to make
bold changes to your business model. You can cut out the aspects of the
business model where you do not focus so that you can alter your business to be
even better at providing the fringe being focused on. This is the idea of
making trade-offs.
For example, Southwest Airlines eliminated the hub &
spoke approach to scheduling. Although that may not have made business
travelers happy, it freed up resources to make it easier for Southwest to win
with the pleasure traveler. The beauty is that it is difficult for airlines who
did not give up hub and spoke to match Southwest on the fringe which matters to
Southwest, because the others did not make the trade-offs necessary to create
ability to outdo Southwest in the areas where Southwest chose to differentiate.
So the secret to differentiation is this: pick an area of
differentiation which is inherent to the unique way you operate your business
model, so much so that those using a more conventional business model cannot
match you. Create trade-offs in both the way you operate and the fringe you
offer, which make imitation difficult. By working the two in tandem (internal operation
and external fringe offering), you can distance yourself from the norm and
create meaningful differentiation.
There is a natural tendency in business for companies to chase the same approaches to the core. Like gravity, they are pulled to the same place. By all looking and acting the same, there is little opportunity to create differentiation. And without meaningful differentiation, there is no reason for a customer to prefer your offering over the alternatives. To get around this, firms need to:
- Consider how to create differentiation in an aspect of the fringe;
- Create trade-offs in the business model which allow one to get so good at offering the chosen fringe that others with a more conventional business model cannot effectively copy you.
This is not just a problem for retailers and airlines. All businesses can fall victim to their industry’s gravity and become indistinguishable from the competition. Differentiation at the fringe is important for all businesses to consider.
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