The problem of service commoditization

With technology commoditization comes service commoditization. What will be the next competitive advantage then?

Photo by Aga Szóstek

Creating services was for the last decades the way to maximize business performance and reach a bigger market. But the era of Service Economy is coming to an end as a consequence of technology commoditization brought through the digital transformation that is sweeping through thousands of businesses today. Let’s unpack what’s going on.

The market of commodities

According to Pine and Gilmore commodities are materials extracted from the natural world: animals, minerals, plants, etc. Companies process or refine these materials to yield certain characteristics and then put them up onto the market. Since commodities are undifferentiated they are sold in big bulks for a price determined by market demand. If you find a niche where commodity demand exceeds its supply, you are up for big bucks. If not, you have a red ocean, where price dumping is the only direction to go.

The authors of “The experience economy” see commodities only as items coming from the physical world. How about a digital domain? Commodities there include tangible elements such as code, design elements an even copy writing (of privacy policies, for example) and more intangible ones: ideas. How hard it is today to copy any idea if it only requires the use of technology? Not much, right? We can say that the technological development of today leads to comoditization not only of technology but also of ideas.

Service design as business strategy

Services are a combination intangible activities with tangible products that serve as their tokens. In other words, it is a combination of a product, for example, a medicine with an interaction such as a medical treatment. Services facilitate actions of customers rather than just providing a means to do it. Look at UBER — it offers a means to travel from A to B providing a service alternative to using your own car.

The main characteristics of services that help to differentiate it from products and commodities include:

— there is no transfer of possession or ownership at the moment of sale,

— they cannot be stored or transported,

— they are instantly perishable,

— they come into existence at the time they are bought and consumed.

And what is the crucial business aspect — customers are generally willing to pay for services more than for commodities and products. The ultimate proof of this point is a simple calculation of a cup of coffee made at home compared to drinking the very same cup of coffee at a cafe.

For a number of years turning products into services was a sound business strategy to gain profit and raise a company position on the market by offering long-term customized offering to the customers. Adobe is probably still one of the iconic examples of service transformation. For decades the company was selling software in a form of out-of-the-shelf products with a perpetual-license software model. Creative professionals would buy a boxed version of Adobe products and kept on using it forever, skipping the updates as what they had was working just fine. By 2008, Adobe was hit by recession along with the appearance of new free solutions of similar nature such as GIMP. By 2011 they decided to take advantage of new by then cloud technology and turned theirs product into subscription-based services (despite the heavy objection from both investors and customers) with a pretty spectacular success. Such a transition was a proof that services were offering a higher economical value to people and therefore it was worthwhile to take one’s product (a car) and build a service around it (maintenance service combined with lease and insurance).

Service commoditization

Today we observe something that could be called: technology commoditization — technology being both a mediator for offering services and a service domain in itself (with thousands of examples of solutions called System as a Service of every possible kind and nature). Technology commoditization will keep on progressing ever faster as a consequence of digital transformation processes so many companies around the world are presently undergoing. The end goal of any such transformation is to harness technology to streamline the current services. It is about optimization and cost reduction nicely packed in the story of entering into a new era of technological advancement.

As a consequence (often not particularly noticeable or widely comprehended) services are on their way to turn into digital commodities with all the drop-backs associated with the commoditization process such as constant price pressure and purchasing solely based on price and availability. It will become a battle field for those who can lower the costs and therefore the prices the most. It will lead to creating services that are much like any other service out there. Which is inevitably leading to the decadence of Service Economy as a winning business proposal.

Building for irreplaceable

There has never been a situation where the end of one era didn’t mean a beginning of a new one. With omnipresent technology taking care of many mundane problems companies had to deal thus far in other ways with, there is an opportunity to focus on designing the strategic vision that will set your business on the path to build solutions that will differentiate it from the competition. The great news is that in today’s world the possibilities to do something different, to stick out are limitless, especially if you decide to leverage human potential to deliver unique experiences. This path starts with three questions for any business out there:

1. How easily are you replaceable for your customers?
2. How can you become irreplaceable for them?
3. How will you know you have succeeded?

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Aga Szóstek, PhD is an experience designer with over 19 years of practice in both academic and business world. She is an author of “The Umami Strategy: stand out by mixing business with experience design”, a creator of tools supporting designers in the ideation process: Seed Cards and the co-host in the Catching The Next Wave podcast.