[PMC] Pernicious constraints

(Readin’ time: 7m 46s)

Yesterday I casually mentioned 4 drawbacks to differentiating on cost:

  1. Forces you to develop killer operational efficiency in order to drive down your actual cost of delivering.
  2. Filters for cost-conscious buyers.
  3. Forces you to innovate around reducing delivery cost instead of other dimensions.
  4. Encourages marketing to your peers rather than your buyers.

It’s worth elaborating on these 4 drawbacks.

The first one is the most obvious, but first let’s touch on the idea of differentiation.

If someone challenged me to reduce marketing down to 3 key ideas, I think the idea of differentiation would be one of the 3. It’s that fundamental and important.

In the context of you finding clients for your services, differentiation accomplishes 4 things.

Cognitive defaults

Differentiation helps you work with rather than against human cognitive defaults.

We could summarize these defaults by saying that we ignore what’s familiar and focus on what’s different. It’s more accurate to say we focus on what’s different for long enough to decide whether to keep focusing on it or not, but the main point still holds: we ignore a lot of stuff because are brains are by default cognitively stingy.

As a sideline, I have to wonder how much innovation comes from people or groups of people who–consciously or not–overrode this cognitive default so that they stop ignoring what’s seemingly familiar and thereby notice some important nuance they’d previously ignored? I think it might be a lot.

Anyway! Differentiation moves you and your services out of the familiar category and into the different category. This reduces the chances you’ll be ignored.

“Product placement”

When I think about all the classes I took in college, one stands out as the most influential on my thinking: a political science class that spent a lot of time focused on schema theory. I’ll gladly accept Wikipedia’s help in defining this for you:

In psychology and cognitive science, a schema (plural schemata or schemas) describes a pattern of thought or behavior that organizes categories of information and the relationships among them. It can also be described as a mental structure of preconceived ideas, a framework representing some aspect of the world, or a system of organizing and perceiving new information. Schemata influence attention and the absorption of new knowledge: people are more likely to notice things that fit into their schema, while re-interpreting contradictions to the schema as exceptions or distorting them to fit. Schemata have a tendency to remain unchanged, even in the face of contradictory information. Schemata can help in understanding the world and the rapidly changing environment. People can organize new perceptions into schemata quickly as most situations do not require complex thought when using schema, since automatic thought is all that is required.

Starts to sound a lot like those cognitive defaults I mentioned previously, doesn’t it?

If you want to dive down a fascinating rabbit hole, search the Internet for who invented the end cap. I couldn’t figure out who was responsible for this product merchandising innovation, but it certainly isn’t a product of human evolution. Rather, it’s clearly the result of experimentation or an innovation process.

These two things are related. Over time, where products are placed in retail environments start to converge, and this convergence creates schemata–cognitive shortcuts. I haven’t measured it, but I’d predict a ton of consistency in the answers to this question: “in most retail environments, where do you look for the least expensive products?” And likewise, “where do you look for sale items?” I’d bet 80% or more answer “the bottom shelf” and “end caps”.

This is the power of product placement, and in a way, differentiation is a way for you to place the “product” of your services, or your company brand, where you want it in the “mental shelving system” inside your client’s minds.

Control the narrative

Once you start thinking in terms of human cognitive defaults and schemata and product placement, you’re thinking in terms that will allow you to control the narrative around your services much more effectively than you otherwise could.

In commoditized product or service categories, the buyers control the narrative. That narrative generally looks like this: “All these $OPTIONS are the same, so I’m going to choose base on $SINGLE-FACTOR”, where $SINGLE-FACTOR might be:

  • Lowest price
  • Purchasing convenience
  • Packaging convenience
  • Or, some other personal preference factor (ex: use of natural ingredients or an eco-friendly manufacturing process)

When you control the narrative rather than the buyer, things change. You’re more in control of how prospective clients perceive your services, and you have more control over the buying process.

White space

On the subject of white space, you gotta read this: scienceplusstory.com/white-space-for-opinion-pieces-a-simple-definition/

Alan Weiss also talks about this subject too, under the heading of being a contrarian.

Differentiation allows you to colonize white space, which is critical to earning attention.

OK, that was a lengthy aside, but an important one.

Differentiating on cost has at least 4 big drawbacks.

Profitability

If you’re going to differentiate on cost, 99% chance you’ll do so by saying you’re cheaper than the alternatives to hiring you.

There’s one sneaky caveat here: you can be super expensive and claim–with lots of legitimacy, at least in certain situations–that your super expensive cost is cheaper than doing nothing. :smirk: This would be one way to be expensive and differentiate on cost, but this is not what I’m really talking about here.

I’m talking about having no other compelling differentiator, so you’re left with differentiating on low or lower or lowest cost.

If you do this, your ability to run a profitable business is constrained to one dimension: relatively high volume. This means you need to build a business that’s optimized around volume in order to achieve profitability. A bit more on the consequences of this constraint below.

Filtering

Price is a real, physical thing, and it is also a psychological signal. Just like a product being placed on the bottom shelf in a retail environment signals something about that product’s price and status, the price of your services also send an informationally-dense signal about quality, effectiveness, desirability, and status.

The signal that low price sends is a filtering mechanism. It filters the pool of prospective clients into roughly two groups: one that actively avoids low-priced options, and one that doesn’t.

We can’t over-generalize about these two groups, but we can generalize a bit and say that those that do not actively avoid low-priced options are less desirable clients. They tend to share these characteristics:

  • They’re cost-conscious, which means they prioritize low cost over the quality or effectiveness of project outcomes.
  • They scrutinize the levers they think effect cost, which are often the wrong levers to care about if you want an impactful result.
  • Related to they above, they accept (perhaps even seek) shortcuts that have negative impact on project outcomes, which has a negative effect on your reputation and ability to get good case studies down the road, etc.
  • They operate with a fair bit of anxiety around money, which is simply not fun for you since it might squeeze you by depriving you of the budget you need to do great work, discover better solutions, etc.

Low price sends out a “bat signal” that summons these kinds of clients. This is pretty obvious to most of us.

Constrained innovation

A more insidious by-product of low price, however, is how it constrains your ability to innovate.

I recently said the below, and I think it’s going to become an increasingly big part of what I talk about on this here email list:

A low cost pricing model constrains how you innovate within your business, and it focuses your innovation on optimizing your delivery model for efficiency and low cost.

There’s nothing inherently wrong with focusing innovation on increasing efficiency and lowering cost. In fact, as a consultant, that’s often what you’ll be hired to do! However, therein lies a problematic contradiction.

If your “innovation budget” is absorbed with reducing your delivery cost, then there’s little or nothing left to innovate on behalf of your clients. This has a delayed effect on your business wherein you happily spend your innovation budget on lowering delivery cost for years, and then suddenly find the world has changed in a way that makes your services much less relevant.

If your innovation budget had been focused externally rather than internally, you would have seen this sea change coming (at the minimum) or even benefitted from it (in an ideal situation).

A perfectly valid way to look at this is this: premium pricing makes it possible for you to have a generous, external-facing innovation budget without worrying about having a somewhat sloppy, un-optimized internal operation. Yes, the un-optimized nature of your internal operation is not ideal, but it’s far better to have this tradeoff (lots of external-facing innovation, little internal-facing innovation) than the inverse.

What’s interesting to me is that books like The E-Myth and Built to Sell really focus on internal-facing innovation, and there does seem to be some value to this kind of innovation if you want to build a sale-able services business. I don’t want to discount this kind of innovation entirely, and I don’t want to paint it as an either-or choice, but I do want to point out that if you have a limited innovation budget, you need to make choices about how to invest that budget, and that choice should be aligned with your goals.

Bad marketing incentives

Let’s say you are chasing the low-cost dragon, and so you’ve focused your innovation internally on operations and efficiency and low-cost delivery.

Who do you think is most interested in learning about how you innovated your delivery model?

I’d say it’s your peers every time. This internal-facing innovation means you’ll have lots to say to your peers, and relatively less to say to your buyers.

This might be the most insidious by-product of a low-cost price model. It starves you of impactful, interesting stuff to say to prospective clients.

Using a product analogy again, your clients are interested in what comes out the factory door, not every detail of how the thing was made inside the factory.

The bottom line: Should you avoid differentiating on cost? Yeah, you probably should. It filters for clients who aren’t fun to work with, and it constrains your ability to innovate and connect with ideal clients in pernicious ways.

-P

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