THE RACE TO THE BOTTOM

TAKE ADVANTAGE OF A COMMODITIZED INDUSTRY!

We’ve been talking a lot lately about the concept of commoditization of a product, a service, and even a whole industry, and primarily because it’s been happening in the real estate, mortgage, and appraisal industries for several decades now. If you aren’t familiar with the term, commoditization simply refers to a product or service that is differentiated in the market primarily based almost solely on price. The commoditization process can happen slowly, like it has in the appraisal industry, or it can happen fairly rapidly, like it did for the airline and travel industries with the advent of apps and websites that give transparency, as well as power, to the consumer to choose what they want, instead of being told what they need. 

I want to go deeper on this topic because it’s here, now, and it’s quite obvious to me that the vast majority of players in those three industries, especially the appraisal industry, don’t seem to understand the process of commoditization. How do I know they don’t understand? By their actions and their words, that’s how! It only takes about 30 seconds of hearing somebody speak about their business or seeing what they rant about in online forums to know that they don’t understand what is happening to their business and their industry. As a coach, it pains me to hear and see some of the stuff I see because there are things that can be done to take advantage of the commoditization process, but only if you know that it’s happening, what it looks and feels like, and what causes it. So, let’s talk about that stuff first. 

Commoditization of a product, a service, or an industry occurs when the market believes that a product or service is easily substitutable with another. If you’re an appraiser, an agent, or a lender, sorry to break the news to you, but you’re all substitutable to the market by one of dozens of other substitutes. Unless you specialize in some way, your product and service can be substituted with what appears to the consumer and client base as the same thing, although maybe for a better price and with better service. In essence, the market sorts and chooses commodities based primarily on price. If you’re an appraiser, you’ll know that the vast majority of appraisers doing lender work get that work via a process of bidding based on fee and turn time. 

I know not all appraisers have to do that, but we know from studying the numbers that a large portion of appraisers have gotten the bulk of their workload from AMC’s, and many of those AMCs work off a reverse auction model whereby they send a mass email to a bunch of appraisers for their best fee and turn time. Any time a business can do that it’s because they are very confident that the services they’re seeking are easily substitutable by dozens or hundreds of other similar services. The fact that appraisers have been doing this bidding process for over a decade should’ve been the first sign that they’re industry has been commoditized. And, in fact, there are several signs that indicate when an industry is being commoditized, so let’s talk about those first, and then we can talk about what to do about it. 

When it comes to commoditization of a product or service, there are essentially two things that cause it, and three or so warning signs that it’s happening. The first cause of commoditization is the increase or, or emergence of a standard design or technology in the marketplace. Think razors for shaving, cell phones, or computers. There was a time when razors came with one blade and that’s what you got. Then Gillette comes out with two blades and changes the game. A competitor rises up and adds a third blade, so Gillette adds a fourth, and a fifth, and a sixth, and then a gel pad, and they eventually become the standard. It doesn’t mean that Gillette doesn’t have any competitors, it just means that the market has decided that there is a minimum standard, below which most don’t want to partake. If they are going to pay less, they expect and are ok with a substandard product. 

The second cause of commoditization is the increase of transparency around product features and price. When there is transparency around features and price, the market can more easily compare, and they can easily switch if they find what they consider to be a better value for their money. When you couple transparency with technology, what you get is real time decision making and decisions can be made quickly. Think auto and health insurance and purchasing airline tickets. Those are two industries that have, more or less, been commoditized. You can whip out your commoditized cell phone or laptop, type in any number of services, and get quotes for insurance and airline tickets in a matter of seconds. With airline tickets, you can actually see the pricing changes in real time as competitors weigh in, as well as the seats filling up. When there is transparency around features and pricing, the market starts to sort based on price relative to features more easily. 

In the appraisal business, the price relative to features war almost always comes down to fee relative to turn time, with some revision ratings thrown in to keep you on your toes. If you have no way of distinguishing yourself in that crowded marketplace, you’re forced into a race to the bottom of the fee and turn time battle. That, by the way, is one hint at how to take advantage of a commoditized industry, and that is to specialize in some way, but we’ll talk about that in a bit. So, the two primary causes of commoditization are the rise of a standard design, format, or technology, and increased product and pricing transparency. There are, of course, some other ancillary causes, but those are the two big ones to be on the lookout for. 

From there, you can see warning signs if you know what to look for. By the way, the reason we’re talking about this is twofold: we’re talking about it so that you can see just where your business or industry stands in within your industry, and also to wake you up a bit to what you need to be doing to take advantage of an industry that has been or is in the process of being commoditized like the appraisal industry has. 

The first warning sign is increased price sensitivity in the market. Again, take cell phones or laptops. We’ve all got dozens and dozens of choices when it comes to cell phones and laptops. There are some definite differentiators within those choices, but even within those differentiated categories, there is very strong price sensitivity due to the transparency of features relative to price. You can buy a Dell laptop with a certain size hard drive, a certain amount of RAM, and certain speed for $X, say $500. You know the specs, you know what you’re getting, so now you can move to the left a bit and compare it to the Lenovo with the same exact specs and compare price. The only real differentiators in this instance are name brand, reputation, user reviews, and maybe service. Product for product, most people will sort based on price relative to features. It only changes when you’re comparing an Apple product to a PC product because Apple has done a masterful job of ‘cultifying’ their brand and products with good marketing. 

Price sensitivity in the market is the first warning sign that your product, your service, and/or your industry is being commoditized. Do we see price sensitivity in the appraisal industry? Absolutely we do! Do we see it in the Realtor and Lender industries? Absolutely we do! 

The second warning sign after price sensitivity is price competition. With increased transparency, service levels, price, and features are exposed, which means competitors, clients, and customers can all see every other company’s offerings and at what price. With all that transparency comes very strong price competition. What happens when there is very strong price competition, but also very little effort to differentiate at any level? You get a downward spiral of pricing which causes decreases in profitability and typically a further erosion of service levels. This is why it’s referred to as a race to the bottom? You start to cut your fees or prices due to competition and, because you’re making less money, you start to cut out any additional service you may have been providing. Increasing sensitivity to price is seen all over the appraisal world where appraisers complain about bidding on an order and not getting it. Why? Because the customers and clients know they can get the same thing for less somewhere else with very little differentiation. 

If you are not awake and aware of this phenomenon, I’m hoping this episode brings some awareness to you. It does no good to complain about other appraisers who will do it for less than you, it changes nothing and shows a complete lack of understanding about how free markets work. You can’t just complain that people or companies who are willing to provide the same (or maybe better) product and service for less are ruining an industry and expect things to get better. You have options available to you, but you’re likely not doing anything about it. 

The third warning sign that a product, a service, or an industry is being commoditized is what is referred to as consolidation. That’s where larger companies buy up smaller companies to gain some kind of efficiency, some greater scale or reach, and some capability that maybe they can’t develop on their own. Look at the appraisal industry in 2021 and 2022 and you see that happening as we speak. 

I worked in the mechanical contracting industry back in the 90’s and the same thing happened in that industry. For a 5-year period from around 1996 to 2001, many smaller HVAC companies were purchased by larger companies to gain market share and reach. And, by the way, these consolidations were, in many ways, great for the market of consumers and customers. Where a small HVAC company might be able to cover a certain geographic region and provide a moderate level of service, a larger and more organized company had more installation crews, more service trucks, 24-hour service, and could take care of a wider market better than many of the smaller companies could or were willing to provide. I’m not saying consolidation is good in every instance, but in many cases, it can be good for the end user in a variety of ways. Where economies of scale can be achieved, efficiencies and offerings can be passed on to the end user. When consolidation occurs, the way value is distributed to the market changes and value shifts to companies that can offer the best value to the market, which typically comes from lower cost production, better service over a larger geographic area, the ability to increase efficiency, better client and customer service, and the ability to navigate the shifting values in the marketplace. 

So, you have a better idea of the causes and warning signs of a rapidly commoditizing product or industry, now let’s talk about how to win in a commoditized industry or market. I’ll make it easy for everyone and say that there are essentially two important ways for you to win when there is price, efficiency, and service pressure from all sides. Those two ways to win are to be the premium player and/or the efficient producer. You can be both, by the way, and if you are both, you’re likely dominating in your market. The premium player and/or the efficient producer creates some subcategories, but for ease and time, let’s talk about those two.

What is the premium player? Well, like it sounds, it is the company that provides some kind of meaningful differentiation between all of the other players in the market. I know, I know, this is almost all appraisers and Realtors in their own minds. Every single one of you thinks you’re the premium player in your market because you think you’re the best at what you do, even when almost nobody else knows or cares. Most likely you’ve done nothing to differentiate yourself in your customer’s mind, they don’t perceive you as different in any significant way, and any differentiation is only in your own mind. That, my friends, is not being the premium player. That is arrogance and conceit that ends up costing you in the end because nobody cares how important you think you are in your own mind. If you’re not providing something that the customer thinks is meaningful, then anything you are doing that you think is extra is really just wasted effort and probably adds to your frustrations, increases the time it takes you to produce results, and does nothing for helping you maintain your fees. 

Think of anything in your life that you pay for. Maybe it’s your athletic shoes or a flat screen tv. You are the consumer and you want what you want. You’ll pay for certain things, other things don’t really matter to you. I own, like many people, 5-7 flat screen tvs spread throughout my home and offices. I bought them primarily on price and size. I don’t really care about 4K, although I have one 4K tv that I never watch 4K content on. I didn’t buy it because it was 4K, I bought it because it was big, it was on sale, and it had Netflix and Hulu built in. I didn’t care about 75% of the stuff they wrote on the box that this particular tv has. My athletic shoes are the same way, although I’m a tad more selective about those because we want them to perform in the ways we use them. However, the sales lady who sold me my last pair of Asics running shoes was telling me about all the things that Asics has built into their shoes that make it a great running shoe. Here’s the thing, I’m not a runner! I hate running! I do sprints in my backyard, but I could just as well use soccer cleats for that type of exercise. I don’t need all the gel technology, the angle of the foot pad, the breathable mesh on top, or 10 of the 12 other things they tout about the shoe. I liked the way they looked, and I loved the way they felt on my foot. I need them for weightlifting, hitting the heavy bag, and sprints in my backyard. Are they best shoe for those activities, somebody could easily educate me that they are not. I bought them anyway and I love them. 

My point? Just because you think the hours you spend on each report, the years you’ve spent on getting educated, and the care you put into your research should matter, if they don’t matter to your clients and customers, you have some choices to make. Either you find clients who do value that stuff, or you conform to what that client is willing to pay for and then shut up about it. The premium player in the market is somebody who has put in the years of work developing relationships and educating their market on why some of that stuff matters. With that effort, they have attracted some clients who care about that stuff and are willing to pay for it. Everyone can’t be the premium player, by the way. Premium player status is relegated to the top relationship and reputation builders in any market. Notice also I didn’t necessarily say the premium player has the most premium product. What they have is the perception that they are the premium player because of their marketing, their outspoken nature, their work building relationships, and their work educating their market. If you think you’ll automatically rise to premium player status because you put in more work on your appraisals than somebody else, you’ll be disappointed. 

The other thing one can do to take advantage of a commoditized industry is to become the most efficient provider of a product or service. When you’re the most efficient provider of the product or service, you tend to gain market share due to your speed and your service relative to the cost of the product or service. Being the most efficient provider entails building systems and processes into your business that allow you to leverage technology advances, data gathering systems, and other people performing mission critical tasks which shorten the time from order acceptance to being entitled to some cash for your deliverable. The problem with 99% of appraisal businesses is that they tend to falsely believe there is some marketable correlation between time spent on an appraisal and quality. This is what leads many of them to think, quite falsely, that they’re the premium provider. 

We hear appraisers all the time say that it takes them 6-8 hours per standard residential appraisal report. What they always leave out is how much time has elapsed in between touches on that report. The reality is that the average time from appraisal order to signing and sending is somewhere between 7-8 days. If we just use the 7-day number, that represents 168 hours that appraisal file exists. If it takes you 8 hours to complete an appraisal, 8 hours from the total of 168 hours represents a mere 5% of the life of that appraisal order where some value is being added to it. That, my friends, is absolutely disgraceful. That means that 95% of the life an appraisal file is spent just waiting for somebody to add value to it and get it to the finish line. That is not efficiency by any stretch of the imagination. If you want to be the most efficient provider of a product or service, you have to figure out how to cut that number in half, then cut it in half again, and then halve it again. You have to have a desire to get that 7 or 8 day number down to 3-4 days. You have to desire to get that 8 hours down to 4 hours with no loss in quality. You have to figure out how to increase your capacity while also increasing your quality, which means lowering revision rates and delays, and increase your ability to communicate with your clients during the lifecycle of the file. When you can do that, you’re getting closer to becoming the most efficient provider of products and services and playing into a commoditized market or industry. The irony of all this is that the most efficient provider typically ends up making more money even with lower prices because they’ve nailed the efficiency part. They can produce more in less time and at a lower cost, which means they can also undercut the premium provider in many cases. If you’re the most efficient provider and the premium provider, well then you likely are in the process of owning the market. 

This might all be hard to take, and I get it. There is a large contingent of people in all industries who are stuck in old ways of thinking, and also incentivized to keep things the same. They don’t want to change, and they are unwilling to wake up to the realities all around them. However, winners in every industry figure out how to differentiate themselves from their competitors, but they also figure out how to evolve and successfully navigate the shifting values and choices in the market. What will you do to make sure you’re not substitutable with somebody else in your market? What will you do to become more efficient and add more value in less time? I hate to be the bearer of bad news, but I love bringing you reality, and the reality is that you don’t have many other choices for survival in a rapidly changing world and industry.

Until next week, I’m out…