- The Commoditization Trap IV

The Commoditization Trap IV

Written by Wilfred Ling

Saturday, 28 November 2009

Wet Market. I read in Saturday’s Straits Times paper that wet markets are having a tough time competing with supermarkets. Many stall holders complain about declining revenue and were quite pessimistic about their business. To me, that’s typical of being trapped by becoming commoditized. Supermarkets could buy in bulk thus driving down cost of purchase due to economy of scale. There is no way which individual wet market owners can compete because they can never have economy of scale.

Property Agents. As I look at the classified ads on property (not that I was looking to buy one!), the classified runs into many pages of photographs of property agents. If you are a potential buyer or seller, which property agent would you choose? I tell you, most people would just choose based on looks. If you have a decent and honest look, maybe you’ll receive many calls. If you have that “evil” and dishonest look, you’ll get less or no call from classified ads readers. To me, these many pages of photographs are a representation that property agents have been commoditized.

Insurance Agents. Again, it is not uncommon to see entire page of advertisement taken up by insurance companies displaying countless names and photographs of successful insurance agents who achieved the Multi-Million Dollar Run Table (MDRT) etc. What they have all in common? They have successfully achieved the stipulated commission and premium requirement for that year. So, if you are a potential client wanting to buy insurance, which agent would you choose? In terms of products, they all sell the same products (because they are from the same insurer). In terms of skills, they are all good at sales since they have got the MDRT. There is no differentiation except for looks. So you’ll end up selecting based on looks.

Unit Trusts. Ever since DBS lower their sales charge to 1%, a price war has broke out. As I typed, I saw one Google Ads advertisement from an FA firm stating that if their existing clients would to recommend a friend, both friend and existing client get to enjoy 0% sales charge on their unit trusts purchase up to any dollar value. In other words, unit trusts don’t have sales charge! How good can this be? It is a sign of desperation you see. Thus, unit trusts itself have become commoditized and FA advisers selling unit trusts for a living have been reduced to be worst than a wet market stall holders.

General Practitioners (GPs). In my neighborhood, there are 5 clinics. In addition, there are also traditional Chinese practitioners who are gaining popularity. As I look at the number of patient each clinics have, I really wonder how on earth are these GPs going to pay for rental, staff’s salary and other overheads. These days, being a doctor does not automatically mean having a high pay. When I spoke to my neighbours which GPs they prefer, we often cite reasons such as friendliness, comfort and convenience. It seems that knowledge, competency and skills are just taken for granted. So, these GPs are being commoditized by us. Certain GPs hoping to get a constant stream of patients enter into contracts with insurers and companies to become their panel doctors. What they don’t realize is that they got themselves deeper into the commoditization trap because one of the elements of commoditization is to be controlled by bureaucrats who are only concerned with lowest cost and nothing else.

There are also other professionals which have become a commodity too. With a large influx of professional foreigners and a lax foreign immigration policy, employers these days could just look for the cheapest professional to hire. This is potentially a politically hot topic and so I shall not elaborate further since I still need to earn a living in Singapore.

Independent Financial Advisers (IFAs). Many people join the IFA industry rather than banassurance or tied agency because IFAs can sell many products compared with a person who is tied. But later on when many tied-agents left their agencies and join the IFAs, suddenly every client seems to have met and bought products from an IFA. This means that IFAs are no longer unique. If you think further, the development of the IFAs industry is responsible for commoditizing insurance and investment products to a level that is unheard of in the past. When a client can choose 10 products at one go, these products are now viewed as mere tools to meet a need. A product that is considered merely as a tool is a hallmark of a commodity. Personally I think that right now – if any individuals wish to join the IFA industry, he or she will be joining the Commoditization Trap. Some IFAs have become so desperate that they started paying premiums for their prospects in order to acquire leads. This is similar to giving away the product FREE. Since the IFAs can only earn through commissions and fees paid by clients, giving away the insurance product FREE for the first year is like giving away the bulk of the commission because majority of the commissions are front loaded. This is unlike a product manufacturer that can earn a profit for manufacturing the product.

The features of a service, product or profession being commoditized are:

1. Fierce price competition even to zero cost.

2. No differentiation from each other as everything or everybody looks alike.

3. Being tightly controlled by bureaucrats and other people remotely connected to end customers.

4. Effortless comparison in which the output of the comparison exercise is purely the price factor.

I have listed a few professions and occupations that are victims of being commoditized. If your occupations have some or all of the 4 features of being commoditized, you are in deep trouble because it is reasonable to assume that you will be force out of job eventually.

To get out of the Trap, it will be important to ensure your occupation:

1. Does not compete on price. For those doing product sales like IFAs and insurance agents, the only way not to compete on price is NOT overly relying on product sales to earn a living. The same goes for any industry that relies on product sales.

2. Significant differentiation with competitors to the extend that comparisons become impossible.

3. Not easily controlled by bureaucrats and other people. It is impossible NOT to be controlled because in society there will always be a hierarchy of authority in order to ensure law and order. But some companies imposed unreasonable burden. For example, if a firm require the IFA to fill up 30 pages of forms just for one shield plan, that’s classic sign of being unreasonably controlled by bureaucrats. I also heard of some IFA firms that strictly impose a fixed asset allocation for clients according to their risk appetite. There is no flexibility at all. To me, that’s also a classic sign of bureaucrats being too controlling.

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Jane - Hi..

|220.255.7.108 |2009-11-29 15:58:55

Dear Wilfred,

I was an insurance agent turned FAR after the insurance co was
sold. I thought with a wider product range, I could differentiate myself. But
that was not the case. I do not see any growth after becoming a FAR. In fact, I
am earning less compared to mid-90s when I first joined the industry. How to get
out of this trap? Thank you

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Wilfred

|SAdministrator |2009-11-29 17:28:54

Jane,

I've almost got out of the Trap. I am about 3/4 out of the trap already.
Within just a couple of years, I believe I will be totally out of the trap soon.

What traps you is the necessity to rely on product sales to earn a living. You
need to get outside that limitation and start charging fees for value that you
create for your clients. Think about your best 5 clients. Why do they like you
and why you like them? Is it because of your products? No likely. It is because
you did something (not product) which they experienced it & like. That
"something" is the value which you created for them.

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