Many businesses and entire industries are undergoing massive price and margin compression. Is yours one of them? It's tempting to "buy work" by lowering prices and cutting costs, but service quality and reputations often suffer for it. Leaner processes and new technologies can boost margins but a strong brand may be the only way to sustain margin in the longer term. It's the only thing about you that can't be easy copied .
When I started my coaching business in the mid-nineties, I didn't have an office and often met people for the first time at Starbucks–a couple of $5 lattes and an environment perfectly suited to connecting with someone new.
A five dollar latte at Starbucks is a very high margin product that was quite a bit more expensive than the competing products at the time. Twenty years ago, the idea that a cup of coffee was an artisanal luxury good served and consumed in a well-designed environment did not really exist. What was the innovation? It really had nothing to do with the product but something else.
A commodity is an undifferentiated product or service sold only on price.
Every class of product and service has a market rate. It is a kind of mean or median price representing a tendency for purchases to anchor around that value. The less special or personal or rare something is the more its price converges around this shrinking transactional value.
Anything new that solves a problem better than competitors is an opportunity to create a premium over market rates. But competitors move in fast to copy the invention and a sort of economic entropy kicks in to grind down the margin and put a downward pressure on price. One way to regain margin is process and technological innovation but these are also subject to competitive theft and duplication.
Alpha is the premium a company earns over the index value of a commodity.
Back in the day (a phrase middle-aged men frequently use), I used to use props in my public speeches. I'd pass out two bags of coffee beans–one from Starbucks and one a no-name brand in a yellow bag– and ask each audience member to grab one from each bag, study the beans and then pick their favourite one. Over time, a consistent 75% of the audience picked the Starbucks beans. I asked people to explain their choices. What came out of their mouths as justifications were not the observable traits of the physical beans (discernible through the senses like smell and taste), they were branding statements.
There's what a thing is and what the thing really is.
It's not about the bean and not about the transaction. The real innovation of Starbucks had nothing to do with the product itself. It was a branded environment set up to invite connection. It's about an on-going relationship. The $5 spent on a latte is just the rent paid to sit and have a good conversation. Love or hate Starbucks, people happily pay this rent countless times per month.