Differentiate or Die, But How?

I’ve been thinking lately about differentiation. I work in the PC industry, which is a well-developed market. Some would say it is “commoditized”. PC’s are an example of an industry where, with rare exceptions, companies struggle to differentiate their product offerings. To some customers and influencers, most of the offerings are so similar that price becomes the one controlling factor of consideration and purchase.

And yet, companies must differentiate. There is overwhelming evidence from across many industries to suggest that differentiation and profitability are positively correlated. I’d go so far as to suggest that if you show me a company that makes above-median profits in their category, I’ll show you a company that is well-differentiated from competition on one or more dimensions.

There are more options available to companies than purely product-feature differentiation. I’d assert that product-based differentiation is most effective as a strategy during the formative years in any new category. I wrote in an earlier posting about Apple’s iTunes, and my belief that it was iTunes, and not the iPod, that was so well differentiated as to create a sustainable position for Apple in the emerging digital music arena a few years ago. But as markets mature, in order to disrupt the position of a well-entrenched or product-differentiated leader, companies must look to non-product-based differentiation.

As product categories grow, I believe they hit “false maturation” points. This is when it looks to all of the established players as if the rules are clear, and then someone or something changes all of the rules. Business model differentiation is usually what brings about this change. Dell Computer changed all of the rules on how PC’s get manufactured and delivered to the customer, resulting in a set of advantages to them on product cost and mass customization for the customer, that sustained them for years, and earned them the lion’s share of profits in their category. Superior business models, ranging from how a company produces products and services, to how it conducts business with its suppliers and partners, to changes in the distribution model, usually result in lower costs for the innovator, and often result in sustainable differentiation on either lower-costs, better customer experience, or superior availability of products, or all three.

By “availability”, I’m referring to how easy the product is to buy. Is the product or service offered where the customer prefers to shop? Does it intercept the customer and create opportunities for unplanned purchases? Is there a sustainable advantage in the availability strategy of the company? As I write this post, I’m at an airport. It strikes me that Thomas Cook has an availability strategy. It seems like every time I get off the plane, they are right there in the most convenient spot offering me currency exchange services. It’s an otherwise commoditized market, but I’ll bet they get above-median profits based only on being in the right places.

As a society, we’re moving beyond the “stuff” economy. As a result, sometimes even price, availability, and business-model superiority isn’t enough. As services and “experiences” increasingly become the sources of growth in our economy, differentiation in these areas becomes more and more important. I recently met and spoke with Joseph Pine, co-author of “The Experience Economy” and a number of other books. Mr. Pine asserts that there has been a progression in our economy from away from products and toward not just “services”, but toward “experiences”. I agree. Arguably, companies like Starbucks, W Hotels, Disney, Lexus, and many others have built massive growth engines based in part on staging experiences for customers.

So how does all of this affect the differentiation options available to a company in a maturing market? I think of differentiation on four dimensions (see illustration).

To me, differentiation happens on the four dimensions of Product Offering, Customer Connection, Business Model, and Availability. The best companies sustainably out-pace their competition in more than one dimension, or else, really dominate in the one dimension that is most important in their category. In the illustration above, the oval denotes the position of a company that is very undifferentiated in product or customer connection, but very differentiated in business model, leading to sustainably low costs, and in availability. In this case, which might represent a computer company such as Acer, the company reinvests cost advantages to create distribution (availability) advantages.

In contrast to that example, some companies focus on product differentiation. Clearly, product differentiation remains an important dimension. But in my view, it is changing in nature. Today, product differentiation is less and less about rational features and more and more about intangibles. Products that are well differentiated make us FEEL something. Their features may be differentiated at a rational level, but the real magic comes when those features, taken together, add up to an emotional benefit for the customer. The best products resonate with our idea of ourselves, and how we want others to perceive us. This is one of the most powerful drivers of product-differentiation-based profits.

BMW comes to mind. I don’t own one, but I have driven one. Arguably, this is a differentiated product experience, driven by a number of rationally differentiated features. But more importantly, the differentiation flows from how the company translates those features into an emotional benefit. The product, and its selling proposition of “The Ultimate Driving Machine” are well-synchronized, and as such, the brand feels authentic in its promise. The result? BMW’s have the ability to make the customer FEEL something.

Customer Connection is a challenging one. It is easy to set-out to deliver it, and hard to actually accomplish it. The companies that do this best have been successful, against strong odds, at ingraining a customer-connection culture into every aspect of their companies. Done well, a sustainable profit advantage can emerge. Amazon comes to mind. There were several different aspects to Amazon’s strategy that resulted in their success, but the most obvious one to me, as a user, is their (unlikely) ability to create an intimate relationship with me, even as an e-commerce company. Because they keep such a good profile on me, and provide me with useful recommendations, and make it easy to shop (and even easier to buy), I come back time and again. In fact, I usually ONLY go to Amazon, and choose online alternatives only if they don’t have what I am looking for. Somewhere, something about the experience made me loyal – I call this Customer Connection.

Zappos (the online shoe retailer) may be an even purer example of Customer Connection. They really have nothing going for them except their ability to delight customers with a great experience. Shoes are hard to shop for without touching them and trying them. And yet, Zappos thrives, based on an end-to-end passion for customer connection. Their buying experience simply isn’t matched by anyone else in their space.

So, companies can differentiate and drive profitability based on sustainably out-pacing competitors on one or more of the four dimensions – 1) a differentiated product offering that motivates customers, ideally on both a rational and emotional level, 2) a disruptive business model that results in sustainably lower costs, translating to pricing advantages, 3) a better strategy than competition on availability and distribution, outpacing competitors on putting the product right where the customer is likely to buy, and 4) a level of customer connection that competitors can’t match, usually based on offering customers experiences that they value, and will come back for again and again.

But how does a company choose? In my opinion, three factors play into the decision: 1) What are the customer needs and benefits in the category that really motivate purchase? In other words, at the moment of truth, what do customers really value enough to sway their decision? This is easy to ask, but answering it accurately is an art form. Traditional “customer unmet needs” research doesn’t do the trick. I’ll comment more on this in another posting sometime. 2) What is the competition doing? Do they have well-staked claims? Are established, well-run players already famous for certain differentiated positions? Are their competitive vulnerabilities? And 3) What is special about our company, and our capabilities? What can we sustainably deliver that out-performs the competition? The answer lies at the intersection of these factors (see figure).

“Sustainably” was the key word in #3, above. The trick to identifying a defendable position lies in figuring out whether it can be held over time. Will the competition be able to switch gears and neutralize us? If it is product or customer experience-based differentiation, the answer depends partly on the company’s ability to execute. How long will it take to become “famous” for the proposed positioning? I’d argue that right now, it would be difficult for a new online shoe retailer to position around customer experience and depose Zappos. They can sustainably defend their position, because they grabbed it early in the category’s life and executed like hell. The question for a company like Zappos is not whether they can defend their position, but rather whether their position is really important at the moment of truth. Do customers really value it, more than they value walking into a traditional store? The answer seems to be yes, for enough customers to give them a viable business.

The best low-cost multi-room entertainment scenario?

I’ve been asked lately what kind of multi-room entertainment scenario I have set up in my own home, so I’ll describe it here. The approach I use is actually pretty simple and low-cost, which got me wondering, is my set-up actually the lowest cost multi-room entertainment approach? Read my requirements and set-up, and tell me if you have a different / better approach that meets my requirements, for less money.

First, let’s define “multi-room entertainment”. My requirements were:

• Audio only (I’ll discuss multi-room video separately – this is an emerging topic and the solutions here are changing rapidly)
• Play music and other audio content which is stored on a computer in my house, and also stream online audio content. Extra credit if it can play back my protected iTunes content (further discussed below).
• Access and play back song playlists that I make on my computer (because I think it is easiest to actually make the playlists on a computer, vs. on a playback device).
• Remote control: be able to walk around the house, select and control the content, and which zones are playing it, as well as control the volume. Extra credit if the remote is actually good (meaning small, attractively designed, intuitive controls, actually works as you walk around the house).
• Not overly complicated or unique, meaning I’m not the only one in the world who can easily use the system as configured.
• Play back two different pieces of content in two different zones.
  

Although, I’ll admit, I have subsequently nixed this last requirement. Our home’s public space (living, kitchen, family, and outdoor areas) really isn’t big enough for two separate audio streams from the central entertainment system. To me, different content in different zones turns out to be called “NOISE”. And just to be clear, the kids bedrooms aren’t part of the central system. They have their own local-only media going on in their rooms, and everyone likes it that way. More commentary on kids’ media, parental controls, etc. some other time.

So, with all of these requirements in mind, I looked at a number of approaches. One that came to mind right away was Sonos. First, let me just say that there is something special about Sonos, because everyone I know who uses it has an intense loyalty to it. I know the investors behind Sonos at Frazier Capital, who are very smart, and I’m also very impressed with Sonos CEO John McFarlane, who I have spoken to on a couple of occasions. Sonos meets all of the requirements. Three issues swayed me away in my final decision.

First, Sonos turned out to be pretty expensive. Although they market themselves as a low-cost alternative to the more sophisticated and complex custom systems, they didn’t anticipate the level of “cheap” that I apparently represent. A two-zone Sonos system, complete with a remote, an amplified zone, and a non-amplified zone (hook the second one to an existing stereo or amplified speakers) -- will run you about $950. Not bad, but I thought I could do better.

Second, they wouldn’t play my protected iTunes, or my iTunes playlists. The DRM issue turns out, after the fact, to be a decreasing problem, and I predict the end of DRM music will be a good thing for Sonos.

Sonos does allow you to make playlists, but I’d have to start over. I already have a bunch of perfectly good playlists that I made in iTunes, and it actually took me some time and thought to compile them.

Third, while I really like the Sonos remote, it is SO five-years-ago. By that, I mean it has a scroll-wheel circa iPod 2004, and a big-brick-like design that would prevent me from carrying it around my own cocktail party. It’s just too big. To be fair, Sonos recently released an iPod/iPhone remote control, which significantly enhances the appeal of the system in my view. The remote app is getting good reviews.

So, while it was close, Sonos didn’t win my business, yet.

Next I looked at the various remote-playback products that from Roku, Logitech, and other players. Each approach was less elegant than Sonos, but had the same drawbacks as Sonos. So they were discarded. It turned out this would be a two-horse race.

Finally, I looked at Apple’s Airport Express, which turned out to be the right solution us.

I purchased two Apple Airport Express WiFi access points (for $99 each), which also double as music servers using a feature Apple calls “Airtunes”, and added them to my home network. Each of the Airport Express units is attached to a second-hand stereo, which in turn powers the music in a couple of rooms or outdoors. Our stereos are pretty simple affairs. Any receiver that pumps out good quality analog sound and with sufficient power to drive the speakers in your rooms, will be adequate. Our speakers are varied in size and shape, depending on the room. Some bookshelf speakers, some in-wall and in-ceiling speakers, and some outdoor speakers. All are wired back to two stereos hooked to two Airport Express units, which in turn are joined to our home computing network. These stereos each have only one input that is being used (set to the Airport Express), and only one volume setting that is ever used (fairly loud, because this sets the max volume that your remote can access, discussed below) -- so the only thing you ever have to do with the stereos is power them on and off.

Our primary home computer houses our iTunes library, and we leave the iTunes application running on that computer. That computer’s library becomes the music and audio content source for the whole house, because it can be accessed remotely from the Airtunes-enabled Airport Express’s. This computer can be placed anywhere on the WiFi or Ethernet network. It does not have to be near one of the music zones.

For remote control, we use an iPod touch, and an iPhone. We happen to already own these items, which was a bonus when comparing costs of different approaches. Apple offers an application for iPhone and iPod touch called “Remote” ($4.99) which allows you to very easily remote-control your iTunes content, and play everything back on stereos connected to Airport Express’s. The application is beautifully designed, almost identical to the familiar built-in iPod interface, and allows me to select content all the usual ways: by song, album, artist, genre, and yes, playlist. All of my iTunes playlists show up automatically. I can control which zone gets the content, and even control the volume, all from my iPhone. This is actually a decent demo at parties.

OK, let’s tally up the costs. Two Airport Express’s at $99 each. Two second-hand stereos with at least one input and decent quality sound (the ones we are using actually have exceptional sound). No remote controls needed, no other fancy features. Just the kind that wind up on eBay and other second-hand sources for $50 each or less. And one iPod touch, for $229. Total of $527 to meet all of my requirements above, assuming you don’t already have iPod touch and a couple of second-hand stereos (I did). With Sonos, you are in for about $1000, for the Sonos two-zone system plus one second-hand stereo.

I’m assuming you already have a computer and home WiFi network. And for all of the approaches, I’m assuming you already have speakers placed and speaker-wire run. If you don’t, the cost of doing this will be roughly the same, regardless of the approach you choose (Sonos or iTunes with Airport Express).

Sonos does give you some things that Airport Express doesn’t easily do. One is Internet radio. I’m a big fan of Pandora, for example, and it doesn’t play easily through Airport, and can’t be run from Apple’s remote app on the iPod. If you aren’t wedded to iTunes, you might like the subscription music services like Rhapsody that Sonos offers. And, Sonos is a pretty elegant solution that gets good marks from its customers.

So here’s what it boils down to in my opinion. If you value the idea of one music database, one set of playlists for your home entertainment and iPods, and one relationship with iTunes, then Apple’s Airport Express and iPod remote is the way to go. You’ll give up the ability to run subscription music and easy, built-in Internet radio, but you’ll get superior iTunes integration. And you’ll save about half of what you would have invested in Sonos.