End of Geography and Ignorance as Competitive Advantages

Two of the biggest barriers to price competition for traditional retailers have been geography and ignorance: it was a hassle for customers to physically travel to another retailer to comparison shop and as a result they were relatively ignorance of prices even for identical or very similar products. This creates a bit of monopoly pricing power for retailers, boosting profits. From the beginning , online competition has been very different (although far from frictionless).

The Rise of the the Shopperphone

Mobile apps are now eroding these two traditional barriers to competition in the physical world as well. For instance, the NY Times describes emerging tools like ScanLife that let you snap pictures of items in stores and order them online. RedLaser photographs the bar codes so you can find cheaper vendors online.

I confess that I even used plain old Google on my iphone last time I bought a pair of pants. In that case, I found that the online retailers were not significantly cheaper, so I felt comfortable buying them in the store.

These tools mean that even traditional retailers must now match worldwide competition for the products they want to sell, or else deliver unique benefits that can't be matched.

Sitting out the emerging Battle of the Retail Channels is not possible. Both online and traditional retailers have some unique advantages over their competitors (e.g. immediate gratification vs. broader product selection, to name one for each channel) They'll need to identify and cultivate them aggressively in the coming years or find another line of business.

Internet and Old Media: Substitutes or Complements?

Time spent on the Internet was assumed to crowd out time spent on old media like newspapers and T.V. and to a large extent that's true.

But it can also be a complement, increasing the value of existing media. For instance, the NY Times as an article describing how Twitter and Facebook have helped drive record TV ratings for the Vancouver Olympics.

"The Internet is our friend, not our enemy,” said Leslie Moonves, chief executive of theCBS Corporation, .... “People want to be attached to each other.”

In research that Jeffrey Hu, Duncan Simester and I did, we also found that their could be significant complementarities across different channels, e.g. Internet & catalog sales. In a controlled field experiment, most customers responded to increased catalog mailings by also increasing their purchases via the company's Internet channel. Interestingly, the effect was reversed for the very "best" customers. They were already saturated with information from the company and additional communications actually had a negative effect on profits.

NY Times execs debate $30/mo vs. $10/mo for iPad edition

According to Business Insider, the print circulation execs want the iPad edition of the NY Times to be priced at $20 to $30/month, while the digital operation is pushing for $10/month.

Which is right?

Arguably, both numbers are much too high. The direct marginal costs are almost zero for delivering the NY Times electronically. On the margin, the main costs are the print subscribers that will get cannibalized, but many of them are being, and will continue to be lost anyway to other electronic publications that charge zero. The Times is a differentiated product, but not that differentiated for most customers.

On the other hand, advertising revenues will increase with each additional reader. With the large form factor of the iPad, the NYT could devote up to 1/3 of the screen to customer-specific, location-specific, context-specific ads. Coupons, which were a mainstay of local newspapers could be reinvented in this medium with a dramatic increase in effectiveness (and value). Advertisers would pay a lot to get in front of the NY Times customer base every morning, and again throughout the day. Done properly, online ads and coupons could easily be worth more than the foregone revenue from subscriptions.

Furthermore, by pricing aggressively from the start, the NY Times can head off competition and foreclose some entry. Last, but not least, the publishers may care about their influence, and that also grows with greater circulation, even beyond the profit-maximizing levels.

So the optimal price for the iPad edition may well be zero, or less.

Four ways that IT is changing innovation

Sloan Management Review interviews me (video).

Productivity is up 5.1%, unit labor costs down 2.8% in 2009

Today, the Bureau of Labor Statistics reported that productivity in the U.S. was up 5.1% for 2009, the largest increase since 2002. Meanwhile unit labor costs are falling rapidly, since wage gains have been muted.

I just met recently with a business leader who used the downturn to layoff 10% of his workforce. He said he did not lose 10% of his productive capacity when he did this, since he kept the best workers. Efficiencies, driven by process reorganization and new technologies, make it possible to run leaner than before.

Throughout the economy, many firms are finding that they can increase output without hiring more workers. This portends more strong productivity growth in 2010, but also a relatively jobless recovery.