The telecom industry is embarking upon a price war as noted in a recent Barron’s article, Verizon Offers Best Value to Investors Amid Telecom Price Wars.
Typically price wars begin because the companies in an industry are experiencing slowing revenue growth. The question is ‘Why are those growth rates slowing?’
The presumption is that the market is saturated, but is that really the case? Or is it that these companies have ‘hit the wall’ in innovation? More importantly, does it alter the approach you’d use in solving the problem?
What does it mean when we say that a market is saturated? It could mean:
- Supply outstrips demand.
- A disruptive technology supplanted ours.
- Customers have gotten bored.
Let’s look at each of these ‘definitions’ more closely to see how they’d impact future strategies.
Supply outstrips demand
It’s not unusual for an industry experiencing rapid growth to overbuild capacity. Stephen LeBlanc and Katherine Register in their book, Constant Battles: Why We Fight, demonstrate that our inability to spot downward trends early is one of the root causes of war. It’s fairly easy to see how that ‘disability’ could result in overbuilt capacity.
If that’s the case, is lowering prices the right solution? Of course you know my answer, it’s ‘No!’ How in the world can the leaders of these companies expect to reverse a slowing revenue growth rate by reducing prices? The math simply doesn’t work. If the telecom companies lower prices by 10%, they need 10% more customers to break even. That means they’d need more than a 10% growth in customers to reverse the trend. Where do they expect to find these customers? The market is saturated.
The naiveté of their ‘strategy’ is compounded by their presumptions that:
- Competitors won’t lower their prices.
- Customers are going to change solely for lower prices.
The first presumption is quickly dispelled by the fact that all of the telecom companies are offering ‘new deals’. If the second presumption were true, how do you explain the fact that premium price providers, Verizon and AT&T, own the lion’s share of the market?
What should these companies be doing? They should be:
- Looking for new ways to employ their excess capacity.
- Identifying uses for their offerings that their customers haven’t yet envisioned.
- Innovative in finding applications for their offerings.
That way they can increase sales and maintain their premium prices.
Will this approach work with disruptive technologies? Let’s take a look.
For those of you who may not be familiar with the phrase ‘disruptive technologies,’ here’s a brief definition – any innovation that disrupts the marketplace. The horseless carriage replaced the horse; the iPod changed the way music lovers buy music. These are examples of disruptive technologies.
One of the common mistakes made when considering disruptive technologies is that the old technology is going away. Indeed, you may have noticed that I was sloppy in my language above when I said “The horseless carriage replaced the horse; the iPod changed the way music lovers buy music.
The horse is still around, although it has taken on more of a recreational role than a working role. People enjoy breeding, showing, racing and jumping with horses. And people still go to rodeos for the calf roping and barrel racing.
Billboard magazine reports that album and CD sales represent about half of all album sales, the other half being downloads. That despite the fact that iPod has been around since 2001.
There are two erroneous presumptions made with regard to disruptive technologies.
- The old technology is going away.
- Price will stem the tide.
The horse and iPod examples cited above indicate that technologies are rarely completely replaced. Those markets that value the old technology will pay a premium to get them. Why? Because they’re in short supply.
The presumption that price can slow the transition from old technology to disruptive technology is as naive a strategy as trying to reverse a slowing sales trend by reducing prices. People who love innovation, who can’t wait to get their hands on the latest and greatest, who pay multiples of what the mass market does, won’t be dissuaded by lower prices on the old technology. Nor will those who see the advantages of the new technology once it has been proven.
The key to dealing with a disruptive technology is finding ways to adapt to the changing markets while continuing to serve the customers who value the ‘old’ technology. This strategy requires a creative mindset and fear is the greatest obstacle to that creativity.
If sales growth is waning and it isn’t the result of excess supply or a disruptive technology, it’s because we’ve lost that creative spark. We’ve stopped innovating and our customers have begun to take our quality, service and reliability for granted. They’ve gotten bored. Shame on us.
Rekindling those creative fires may be more challenging than you think. Often the reason why innovation has slowed is that we’re too close to our customers to see new opportunities. Don’t be afraid to bring in outsiders to spur the creative thought processes.
In his book, Chaos: Making a New Science, James Gleick said that the math the came out of chaos theory should have come from the disciplines of math and physics. Instead they came from the fields of meteorology and the behavioral sciences. Recall the origin of any disruptive technology and you’ll find that it almost inevitably came from outside the industry.
So don’t be afraid to bring in outsiders to help you reenergize your innovation strategies, just make sure they’re known for their creative thinking.
I trust that I’ve demonstrated that the answer to a ‘market saturation’ problem isn’t lowering prices, it’s rekindling innovation. If your sales growth is slowing, it’s time to rekindle the innovation fires.