The Price Was Wrong

ONE OF THE HOT NEWS ITEMS recently was the decision by several dotcom companies to reduce one of their initial competitive advantages over brick-and-mortar competitors -- cheaper prices. The reason is obvious, though it's somewhat amusing to see it discussed in such lofty terms: In the wake of the slump in high-tech stock prices, investors are demanding profitability (gasp!), rather than just the ".com" suffix on a corporate name.

To any reasonably intelligent observer of the Internet phenomenon, this should not come as a great surprise. The question that remains is, what will e-businesses use as their competitive advantage if they can't offer substantially lower prices than the brick-and-mortar world? One of the business-IT megatrends that we articulated nearly a year ago was that the products and services offered by many of the e-businesses would become commodities, and companies would have to find other ways of gaining customer loyalty.

This idea is not rocket science. Amazon.com may have achieved its initial success partly by offering books at a substantial discount, and perhaps CEO Jeff Bezos actually thought he could make a profit with discount pricing in the early days. After all, a virtual bookstore doesn't have the overhead of rent and upkeep that a physical bookstore has. But during the course of a few years, Amazon.com discovered that it was facing almost identical discount prices from brick-and-mortar competitors like Barnes & Noble and its e-business spinoff, Barnesandnoble.com. The average consumer probably doesn't lie awake every night obsessing about this the way Bezos and his counterpart at Barnes & Noble presumably do. As one of those consumers, all I know is that I'll find virtually identical prices for a mainstream book today, unless I'm silly enough to buy it at the airport bookstore just before I jump on a flight. But you certainly can't blame Amazon.com or any of the comparable dotcom companies for using discounted prices as an attractive marketing campaign in their early days. After all, the Japanese automobile industry used the same strategy in the 1960s, and the Indian software-outsourcing industry used the same strategy in the 1990s. Cheap prices can be an attractive way of getting attention in an established marketplace.

As suggested above, the interesting question is, what happens when discounted prices are no longer sufficient? In the case of the Japanese automobile industry, one of the obvious answers was better quality. Honda and Toyota could say to the U.S. marketplace, "Not only are our cars competitively priced [though perhaps no longer quite as cheap, compared with Ford and General Motors], they run better and last longer."

In the case of the dotcom companies, factors like quality and convenience can be used as competitive weapons. I like to buy books from Amazon.com, for example, because (a) I have the convenience of being able to order from home at any time of day or night, and (b) I know that I can search for a book by author or title, whereas the clerk at the neighborhood brick-and-mortar store probably won't be able to give me accurate information about the book I'm trying to find. But competitive advantages in this area are likely to be hygiene factors: I don't pay much attention to them when they're present and notice them only when they're absent. And if the neighborhood brick-and-mortar store had any sense, it would retaliate by hiring better clerks and staying open 24 hours a day to service the people who want to wander in to buy a book at 3 a.m.

Ultimately, the success of a dotcom company is going to lie in other areas -- such as the ability to make better use of its data and the ability to create a sense of community on its website. Amazon.com continues to amaze me with the sophistication of its personalized data-mining capabilities. Whenever I visit the site, it effectively says, "Hi, Ed, good to see you back again. Here are three books we think you'd like, based on your recent purchasing patterns." In theory, the neighborhood brick-and-mortar store could do the same thing, and perhaps there are some legitimate examples of that level of service in a few small towns, but this doesn't work so well in a big city like New York. Some brick-and-mortar bookstores do create a sense of community by opening a coffee shop in the midst of its book racks or by inviting poets and musicians to drop in to read their work and play their songs. But I think there are far greater opportunities to create virtual communities consisting of affinity groups based on products or other consumer preferences.

The interesting thing is that a company like Amazon.com is arguably doing a good, innovative job at several of these tasks -- and yet it's still being subjected to intense pressure by the financial community.

If it's tough for Amazon.com, how much tougher must it be for all of the other dotcom companies that don't have the experience and sophistication that Amazon.com demonstrates over and over again? Well, Charles Darwin told us a long time ago what happens when there is a great deal of competition in an environment with limited resources: It's called survival of the fittest. And what we've begun seeing in the dotcom marketplace is that fittest no longer means offering the biggest discounts. It will be interesting to see what it really does mean as the dotcom industry evolves toward maturity.

This story, "The Price Was Wrong" was originally published by CIO.

Insider: How the basic tech behind the Internet works
Don't miss
Join the discussion
Be the first to comment on this article. Our Commenting Policies