Snappy title isn’t it. The sort of headline that suggests you might be in for a few dull minutes. Not only that, but it also notifies you that should you decide to invest the time to read it you will have a part two lurking somewhere in your future. This is not how headlines should be.
The convention seems to be to grab attention with a compelling headline. “Three simple ways to increase sales and crush your competition” for example. And then fail to meet the high expectations you have set for yourself by delivering some deficient content. Or maybe I am just bitter because I didn’t “lose 20lbs and get beach-body ready in just three weeks” as promised.
Anyway, headlines are a good example of how things become similar over time. Every article you read about writing great headlines is pretty much a variation on a theme. Start your headline with ‘how’ or ‘why’, use numbers, create lists, add emotional words… that sort of thing. Consequently, many headlines you read, particularly online, sound sort of familiar.
Competing products also tend towards similarity over time. Despite just about every marketing textbook urging us towards differentiation, the reality is that most competitors offer similar products at similar prices. This article explores the reasons for this. Not purely as an academic exercise but as a platform for creating differentiation that works. So, for the 10% of you who didn’t abandon ship at the headline, let’s get into it.
Pareto’s other law.
Vilfredo Pareto, an Italian engineer, gifted the world with his famous dictum “80% of consequences come from 20% of the causes”. His 80/20 rule is so well established and ubiquitous that it has the effect of overshadowing his other work. This is a shame because Vilfredo was far from a one-trick pony.
Of particular interest is his principle of trade-offs know as Pareto efficiency or Pareto optimality. This explains, to some extent, why you and your competitor’s products tend to be more similar than different.
The chart below shows two preference criteria relevant to creating a product. The degree of value or utility you offer your customer on the Y-axis and the costs incurred by you to deliver this value on the X-axis. Note that the cost line is reversed, the further to the right you go the lower the costs you incur. This is because it is a preference criterion and you would prefer lower costs to higher.
Given current capabilities and technologies, there exists a theoretical maximum amount of value or utility that can be created for your customer at every point along the costs incurred line. Plotting these points creates a curve knows as a frontier curve or a Pareto frontier.
Any products sitting on this frontier cannot create more value for their customers without incurring higher costs. And they can’t reduce their costs without also reducing the value offered to customers. They are in a state of Pareto efficiency. In the real world, most products are not Pareto efficient, but they aspire to get there. This is one of the factors driving homogeneity.
Take the position of product A in the chart below. Given current technology and capabilities they could theoretically improve the value they offer while holding costs steady or they could reduce the costs incurred while holding the value offered constant. Or any combination of the two.
When you draw a vertical and horizontal line from the point where your product sits you highlight a potential range along the frontier curve where you could achieve Pareto optimality. The closer you get to the frontier, the narrower this potential range becomes. This is also true for your competitors.
Whether you know it or not, you and your competitors are striving towards a narrower range of potential Pareto optimality over time. The closer you all get, the more similar your offers become. Particularly when your focus is a combination of increasing the efficiency of your operations while improving the performance of your product.
Before we get to the so what bit, here is a summary of the concept. Pareto efficiency is a situation where no preference criterion can be better off without making another preference criterion worse off. If the situation is not Pareto efficient then the possibility exists for a Pareto improvement – a new situation where gains can be made in one preference criterion without subsequent losses to another.
Depending on where you currently sit in relation to the frontier curve you have a range of Pareto optimalities to shoot for. The closer you are to the frontier the narrower this range becomes. When you and your competitors are striving for Pareto improvement the consequence will always trend towards similar products being offered at similar prices.
The so what bit.
Pareto efficiency explains, in part, why products trend towards similarity. Despite the aspirations for differentiation, the reality is that competitors will typically end up offering similar products at similar prices over time, especially in technical and scientific B2B markets. It is as close to a law of nature that exists in the business world.
But that doesn’t mean you just have to accept it. There are three actions you could take to gain an advantage.
Widen your options – The driver of homogeneity is the desire to maintain or reduce your costs while maintaining or improving the value of your offer to your potential customers. You could go off-piste and aim for a spot on the frontier curve that sits outside of your Pareto optimality. You could sacrifice one preference criteria to claim a spot on a different part of the frontier curve. The chart below shows a potential expanded range.
You could aim to offer more value while accepting an increase in your costs, which could be a premium offer. Or offer less value while benefitting from a reduction in your costs, which could be a budget offer. You could do this with a new brand or go bold and reposition your main offer. You can use the concept of a frontier curve to explore potentially less contested space.
Move beyond the product and invest in the brand – The theory recognises that the customer value-line represents the value and utility the customer perceives they are receiving rather than what you think you are giving them. Many businesses, particularly in the B2B technical and scientific world, think of the value offered as something more tangible and objective. They think the softer stuff is for consumer products.
Investing in intangible elements such as branding and positioning can create value that is harder for a competitor to emulate or exceed.
Choose another frontier curve – The frontier curve is typically expressed for an entire market. In reality, many different segments will make up the whole market. You may well have a better position with some segments than others.
Take an example of a product that is sold to vets. Within this large market of veterinarians, there may exist a subset who are very driven by environmental and ecological concerns. If your product has good credentials for this segment, you will enjoy a better position in relation to this frontier curve than your competition. These circumstances create an opportunity for traditional segment-target-position strategies.
Teaser for part two
Here I have looked at the concept of Pareto efficiency and how it can drive conformity in products markets such that competitors end up selling similar products at similar prices. In part two I will look at the principle of minimal differentiation. This is an idea that explains why it is rational and logical for companies to make their products as similar as possible.
This will be explained by selling ice creams on an imaginary beach. Hopefully, my beach-ready body will have arrived by then.