CIO — One of the hot news items recently was the decision by several dotcom companies to reduce one of their initial competitive advantages over brick-and-mortar competitors—cheaper prices. The reason is obvious, though it’s somewhat amusing to see it discussed in such lofty terms: In the wake of the slump in high-tech stock prices, investors are demanding profitability (gasp!), rather than just the ".com" suffix on a corporate name.
To any reasonably intelligent observer of the Internet phenomenon, this should not come as a great surprise. The question that remains is, what will e-businesses use as their competitive advantage if they can’t offer substantially lower prices than the brick-and-mortar world? One of the business-IT megatrends that we articulated nearly a year ago was that the products and services offered by many of the e-businesses would become commodities, and companies would have to find other ways of gaining customer loyalty.
This idea is not rocket science. Amazon.com may have achieved its initial success partly by offering books at a substantial discount, and perhaps CEO Jeff Bezos actually thought he could make a profit with discount pricing in the early days. After all, a virtual bookstore doesn’t have the overhead of rent and upkeep that a physical bookstore has. But during the course of a few years, Amazon.com discovered that it was facing almost identical discount prices from brick-and-mortar competitors like Barnes & Noble and its e-business spinoff, Barnesandnoble.com. The average consumer probably doesn’t lie awake every night obsessing about this the way Bezos and his counterpart at Barnes & Noble presumably do. As one of those consumers, all I know is that I’ll find virtually identical prices for a mainstream book today, unless I’m silly enough to buy it at the airport bookstore just before I jump on a flight. But you certainly can’t blame Amazon.com or any of the comparable dotcom companies for using discounted prices as an attractive marketing campaign in their early days. After all, the Japanese automobile industry used the same strategy in the 1960s, and the Indian software-outsourcing industry used the same strategy in the 1990s. Cheap prices can be an attractive way of getting attention in an established marketplace.
As suggested above, the interesting question is, what happens when discounted prices are no longer sufficient? In the case of the Japanese automobile industry, one of the obvious answers was better quality. Honda and Toyota could say to the U.S. marketplace, "Not only are our cars competitively priced [though perhaps no longer quite as cheap, compared with Ford and General Motors], they run better and last longer."
