arrangements get simplified. Brand is often used as a proxy for quality. Most of the companies that created the sector, including the early movers, get forced out. We all want our services to be successful, which means we should all be planning for the time we are commoditized. And this is likely to happen faster and faster over the next decade. Why?
Artificial IntelligenceYes, AI is going to drive commoditization over wide swaths of software by eliminating and automating processes. AI itself is being commoditized far faster than anyone (or at least anyone I know) expected. Two years ago we thought it would drive all sorts of differentiated new solutions. Now AI is so easy to apply, and the tools are so powerful, that it is about as differentiating as using a SQL database. AI has been incredibly successful and is moving to commoditization and dragging many other applications along with it.
Cloud ComputingThis was expected. Cloud computing makes it easy to scale. Commoditization depends on scaling. Cloud computing accelerates commodification.
Open APIsWell-architected software has clean, easy to understand and easy to adapt APIs. Open APIs breakdown silos and let data and functionality flow across systems. Systems become composed rather than architected. AI, cloud computing and open APIs are all feeding on each other. This opens up many opportunities for innovation, but it also accelerates the commoditization cycle. How can you tell if your offer is, or will be commoditized? One way is to look at the value map for your sector. The traditional value map, as introduced by McKinsey graphs Price to Value. Offers naturally distribute along this line (or within a zone of indifference). Discount offers are at the bottom left, premium offers at the top right. You should have a pretty good idea of what this map looks like for your sector and where your company is positioned. What we have come to realize is that in the real world this value equivalency line can be curved. In commoditizing markets the value equivalency line becomes concave. This means that additional value is not rewarded by increased price until you get to the top end of the market. Buyers are increasingly unwilling to pay for additional functionality. It is more and more difficult to assert meaningful differentiation. The market is commoditizing. Where can we see this happening today? There is evidence of this in the following sectors:
- HRIS and Payroll (Human Resources Information Systems)
- CRM (Customer Relationship Management)
- LMS (Learning Management Systems)
- CMS (Content Management Systems)
- SCM (Supply Chain Management)
- The industry consolidates around a few large platforms
- Lower priced alternatives flood into the low end of the market (standard functionality is well established)
- Open source alternatives begin to gain traction
- There is downward pressure on prices
- New business models, leveraging commodified solutions and the data they make available, emerge