According to McKinsey, only 8 percent of companies said their business model would remain viable if their industry continues to digitize at the current speed and trajectory. Additional research shows that the spoils from digitization are not evenly spread, resulting in a few big winners and a large swath of big losers. In fact, the negative economic affects are twice as large for the bottom 75% of companies as for those at the top.
What is causing this business model disruption?
Location, location, location
For retailers, store location has always been one of the most important competitive advantages. For brands, it has been the product’s location on store shelves—the ideal placement being at eye level on a shelf or endcap. Brands pay significant sums to obtain the best possible placement, not only to glean customers’ attention and increase sales, but also to communicate brand strength.
As consumers turn more and more to the web for their product research prior to purchase, spending hundreds of billions of dollars by brands for better shelf space might not prove to be as effective as in previous eras. Indeed, product ‘placement’ (i.e., ranking) within search results is, in many cases, much more important.
However, search engines need to acknowledge that the product information is relevant, in order to rank the product highly. For the brand, SEO now becomes the crucial component—not whether the product is at the consumer’s eye level. This criterion is important not only for Google, but also for ranking highly on Amazon and on other retailers’ and marketplaces’ websites.
The Diminishing Value of Brand
When the consumer has instant access to almost unlimited choices, and ubiquitous product information, the resulting transparency diminishes brand value. Similar to the way the financial markets are supposed to run, everyone in the market is on an equal footing with near perfect information at their fingertips. As a result, product imagery, descriptions, specifications—and the underlying confidence in the product information itself—become more important to the consumer than the actual brand.
Amazon recognized this phenomenon early on and launched its transparency program last March for the Amazon line of products. This program has since been extended to any vendor selling products through the Amazon Marketplace. Every item that has a Transparency label has a unique code that can be scanned with the Amazon app to reveal the product information.
Where Does This Lead?
The playing field has officially been leveled. Therefore, without perfect product information and a great product story, the only thing that remains on which to compete is price. And with lower prices, you get decreased profits. To make matters worse, algorithmic pricing—or dynamic pricing, such as what you see on travel booking sites for hotels and flights—can cause prices to automatically fluctuate based on criteria like supply, demand, competition, or season. Thus, competing on price increases volatility and complexity—and produces a “winner-take-all” environment.
This is what we refer to as the “race to the bottom.”
As retailers watch and respond to one another—and Amazon—in their efforts to become the low-priced alternative, they become less differentiated and exacerbate the race to the bottom. Although many factors affect how competitive a product is, competing on price is a no-win situation. Instead, brands need to invest in their product information. Providing a differentiated product with a stellar product story behind it is the way to avoid the price war and a race to the bottom that no one will win.
Johan Boström, evangelist and co-founder