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Gold is surging like nobody business. But for this article, I will write about another kind of commodity that is heading towards a downward spiral which affects everyone. The Commoditization Trap II.
10 years ago, my air-con cost me $3000. Today, a similar but more powerful unit with an energy saving Inverter cost $2000+. There is no inflation here. Only deflation. 20 years ago, a graduate can expect to have a high salary and a stable job in a multi-national company (MNC). Today, a fresh graduate cannot be assured even with a job. Stability? Sorry, that is not part of the dictionary anymore. 20 years ago, a retiree can enjoy the fruits of their labor as they look forward for getting their CPF money. They also have children whom they could rely on for their retirement. Just yesterday, I saw a very well dressed elderly person sweeping the pavement at Tampines Central. Probably he got retrenched and now need to continue to work. Children these days cannot be relied on. Not that they are not caring but their debts are larger than their parents’! Coupled the very strict 2-child policy implemented in the 70s, retirees in this generation cannot rely on their children for help. 20 years ago, an insurance agent can expect to earn a huge commission selling insurance. Today, an insurance agent earns nothing because his competitor gives the insurance FREE out of desperation. When the price of goods and service is ZERO, what can the insurance agent do other than leave the industry altogether? A few years ago, banks can sell unit trusts charging customers 5% in commission. Customers were willing to pay this amount because of trust. Today, banks are selling unit trusts at 1% which is even lower than online portals .This is a reduction by 80% in commission. Somebody will be affected by such reduction in revenue. It will be either shareholders or employees. Likely both parties are affected. But jobs are related to revenue. So jobs are at stake. All the above are victims of commoditization trap. In such a trap, goods and services and human capital have the following characteristics: - All goods, services and human capital have become merely price. The only thing that is different is the PRICE. So consumers of these goods and services ONLY look for the PRICE and nothing else.
- All goods, services and human capital looks identical to each other. What’s the difference between a graduate from XYZ compared with another graduate from ABC? Nothing other than how much salary they are asking. It appears that everybody is a graduate these days. Some of them even possess degrees from paper milling degree company.
- Because everything is reduced to PRICE, those with better experience cannot differential themselves since consumers (firms) of these human capital ONLY look for price. So the more senior staff of the company suffers a pay cut or is asked to go.
- If PRICE is the only consideration, than suppliers of goods, services and human capital can only compete based on the lowest PRICE. That’s explain why PRICE has been dropping. Those who cannot compete will have to exit the industry. For job seekers, they cannot find a job if they are not willing to work at a low cost.
- Some decides to continue to stay with their jobs working for FREE. These are those who are in the line of sales. Insurance agents, financial advisers and property agents have to work for free in hope of closing a sale at the end of the day. What happens if someone offers FREE insurance? I saw an advertisement about a property agent claiming not to charge any commission! This model of working for FREE dies automatically when some joker offers the product for FREE.
- If consumers only look for PRICE and nothing else, they get nothing other than the identical looking product/service. They cannot ask for anything extra. Anything extra they ask will almost always push them to get the identical product.
- However, there are some successful suppliers of human capital, goods and services that have survived. There are two groups although both have one thing in common – these suppliers hold key information that consumers do not have. In the first group, these suppliers will utilize manipulative selling techniques which consumers are not aware of. There are many advanced and highly sophisticated selling techniques which are used by these suppliers in order to close that deal. Obviously these are not ethical but neither are these illegal. When my clients told me that they never understood why they bought this product or that product despite it was so lousy – normally they are a victim of advanced selling techniques used.
- The second group add value to consumers’ experience by helping them make better decision as commoditization has made decisions making impossible to make (after all, everything looks the same). The value-add service helps consumers make better choices. But not all of these second group of suppliers can survive. I know one professional financial planner in the industry has decided to leave the industry because clients are generally not willing to pay for such service. In this case, consumers’ desire to get a FREE advice remove this second group from the industry only leaving behind the MANIPULATIVE ADVANCED SELLING TECNIQUE group to devour the consumers.
Both suppliers and consumers of goods and services must escape from the commoditization trap otherwise they will become victim of the trap. In fact, most people I met are victims of this trap.
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