Saturday, October 26, 2013

Product differentiation when there is no difference

(No, I don't mean this kind of product differentiation.)

I was just reading this article in the about how sales of bottled water will soon surpass that of soda. Of course, this is utterly ridiculous. It's &*#$-ing water! You know, the stuff that flows from your tap almost for free? Whatever, I guess that's an old argument, and is seems that side of rationality has lost that one. But one of the interesting things in the article was about how all these water companies are trying to differentiate themselves to get an edge because the plain old bottled water market is so competitive that there's very little profit left:

The TalkingRain Beverage Company, a bottled water business that started in the Pacific Northwest, is getting out of the plain water business altogether because the economics are so bad. “The water business has become very commoditized,” said Kevin Klock, its chief executive.
(Umm, "very commoditized"?!?! Sorry, gotta say it again: It's &*#$-ing water!)

Which got me thinking about what really is a commodity. Even tap water does taste different in different places, and I suppose some bottles might be easier to open than others. Grains, chemicals, minerals–they can all come in different purities and grades. In fact, even in lab, we buy all sorts of different types of water for different purposes, including, umm, bottled RNase free water (oops!). So whatever the perfect commodity is, it would have to be something digital and thus inherently pure, like some form of information. But it can't just be all information. For instance, if you're selling some kind of information, you're probably selling information that's hard to come by or process or present in some way. So then I'm not sure if that qualifies as a commodity.

Which leaves money. Money is just a number, and it's equally valuable wherever you go or from whoever you get it; there is no different kind of money (there are financial schemes and categories of investments, but they are not money in and of itself). Of course, you might be wondering who would be selling such a "product". Like, who's out there saying "here's an authentic $10 bill, I'll sell it to you for $10.50!" Well, that's exactly what credit cards do, for instance. So how do different cards differentiate themselves? How do you differentiate yourselves when you're just giving people money? Seems like there are two ways they do it. One is psychological manipulation. These include making merchants pay more or less, which is essentially a hidden cost to the consumer, and those insidious schemes that play upon people's "just pay later" mentality. The other differentiator is the various bonus rewards schemes, which rely on other companies' real world products to provide differentiation.

But what surprises me is that they don't really seem to compete on cost. As in, they ALL have astronomical interest rates. Now, for something that is to my mind as commoditized as a commodity could be, that seems quite strange. Apparently, you can get bottled water for as little as 8 cents per bottle in bulk because competition has driven enormous efficiencies in the production of the "product" (i.e., bottle manufacturing). Why is there so little price competition in credit cards? Sure, on interest rates, they have to cover the folks who don't pay their bills, and on charging businesses, they have to cover the infrastructure costs.  Still, shouldn't one company be able to ultimately offer much lower rates than another? I think the clearest answer is cartel behavior. And indeed, they have been hit with many such fines for that sort of behavior in the past. I think it's because the only way to make money (and tons of it) in a purely commodity business is to cheat. In that way, you could view the price competition for water as a shining example of the highs and lows of capitalism: competition drives incredible optimization and efficiencies in a product whose very existence is essentially ridiculous.

Definitely don't want to step into any arguments about the pros and cons of capitalism and regulation. But I will offer up this funny anecdote that might provide fodder for both sides of the argument. I was in DC some time ago for a grant panel, and in the room, they had... bottled water, of course. But apparently, they weren't allowed to call it bottled water, most likely because of some well-intentioned rule against bottled water. So instead, they had these bottles specially labeled by the caterer as "refreshing drink" or something like that, which (ironically) probably cost more than just getting regular old bottled water. Sigh. I was in Canada for a conference recently, and they had a bunch of cups and a pitcher. Now that was refreshing.

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