Selling Commodity Services: Controlling Cost vs Adding Value

Nov 1st

One theory of web marketing starts off with controlling cost. Where you try to find what works right now, and do exactly what is needed to get to the level of success you want to reach. The theory sounds valid, but...

  • By the time something is common knowledge, its value and effectiveness has decreased and is heading lower.
  • The markets are shifting. Tomorrow's marketplace is uglier and more competitive than today's marketplace. And it has lower margins for average players too!
  • Those who invest in building real assets are going to eventually beat you. And their success is self reinforcing.

Investing & Adding Value is Better Than Being Cheap

Rather than thinking of how to control costs while growing a web business, it is better to spend that same time, energy, and focus learning how to create value and how to get people talking about how valuable your widget is. When I was new to the web I kept my reported income far lower than it should have been because I kept reinvesting in learning and marketing, even when I was heavily in debt. Some of the spend was a waste, but I know enough to compete in many markets with minimal investment.

How to be Cheap

Two months ago my mom told me she wanted to create a new blog about Diverticulitis, a topic effecting my grandma. With no warning, that afternoon I...

  • learned how to spell the word Diverticulitis (2 minutes)
  • used WordTracker's free keyword research tool (2 minutes)
  • bought my mom a $6 domain at GoDaddy (2 minutes)
  • spent 5 minutes aligning the DNS, hosting her site at Dreamhost, which allows unlimited sites to a $7 a month account. I recently created a 5 year account for a friend and only spent $300 for 5 years of hosting!
  • set my mom up with a default Blogger template (5 minutes)
  • created a cheesy logo (that took me 5 minutes to make using low end $50 logo design software I bought years ago)
  • modified the CSS file to match the logo (5 minutes)

My mom wrote 10 blog posts that took her ~ 5 to 10 minutes each, and a week later I spent 5 minutes and ~ $80 submitting it to a couple directories.

A few months ago I bought a domain name for $2,500. Last month I was offered $17,500 for the domain, and not too long ago the same guy paid over twice that for a similar but worse name. If he offered me that much I might have sold, but unsolicited offers are typically on the low side.

Today I was sent an unsolicited $500 offer for my mom's new site. Why? Because the site already ranks in Yahoo and Microsoft. If I spend a few hundred more the site will likely compete in Google too. My marketing knowledge was expensive to acquire, but everything else was good enough to compete for cheap or free (at least in that market at this moment in time).

The reason this story is remarkable is because people were willing to buy such a small site when it was so new. In two months the site was conceived, created, competing, ranked, and someone already made an offer on it. Two months ago that same domain name was $6.

Everything is Becoming a Commodity

It started with the average travel broker, then it hit classified ads and regional monopolies like newspapers, and it is working its way toward your industry. Just look at all the above web industries listed that are free or nearly free. Due to more efficient markets, automation, outsourcing, and the need to compete on an open marketplace, the margins for almost everything needed to compete on the web are heading toward zero.

My mom's new site competes on about $100 of investment, but in a year or two that domain name might have cost $500, and a couple more competitors entering the field might have pushed the marketing costs to $1,000. A year or two later the domain name might have been $2,000 and the marketing costs might be $10,000.

Don't Become a Commodity

The three solutions to the commodity issue are

  • use new technologies to create and publish the DIY tools and information that will commoditize other businesses competing in your space
  • build your knowledge in related fields that interest you, such that you can add value to multiple points on the value chain. Google is search + ads + documents + hosting + syndication + etc etc etc. I know a bit about SEO + SEM + marketing + branding + conversion + domaining + etc etc etc.
  • Invest to build your awareness and brand (build mindshare and distribution) to where you are not considered a commodity. Create enough of an abundance of demand that you chose who you work with.

Unless somebody is talking about you or consuming your stuff right now you are becoming a commodity, although you may not realize it yet.

Published: November 1, 2007

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Comments

November 1, 2007 - 7:58am

The only thing I would say is that information has become a commodity - so travel brokers, real estate ads are all easily duplicated and done by everyone.

I think if you're actually selling something it makes a little harder to become a commodity. That being said I think it's imperative for anybody who does anything to understand more then one way of making their business model work.

November 1, 2007 - 8:39am

Hi Ari
Some large US corporations have their call centers overseas, and their accounting departments (even some of the largest banks).

Service based businesses, and just about every non-commodity business, have some root in being classified as information or applying information.

Software programs are just information, as are product design specs. Add in open source software, outsourcing, and Google's quality based pricing (if you are small and unkown you pay much more for the same ad) and it is easy for sustainable profit margins in many industries to shrink from underneath.

November 1, 2007 - 5:18pm

Just because companies do things doesn't make it better. I hate indian call centers and I think you get what you pay for.

Word is just information, yet I haven't seen OpenOffice really take market share.

The profit margins only shrink if you base yourself on specific forms of marketing. Think outside the box a little bit and you become much more competitive, as you've demonstrated here over and over again.

November 1, 2007 - 8:12pm

I haven't seen OpenOffice really take market share.

Too true on that Ari, but given a few years Google might take serious marketshare, unless a big privacy fiasco or other reasons for distrusting Google become widely available to the business community.

Oliver Taco
November 1, 2007 - 10:59am

Hmmm, thoughtful post.

Of course, brand is the most powerful anti-commodity force known to marketing. Think corn flakes (sorry, Corn Flakes) versus, er, corn flakes and the price difference.

-OT

November 1, 2007 - 2:14pm

Great use of developing a site, thanks for posting the info. I hope your mom didn't mind giving up her, obviously great, package :)

November 1, 2007 - 9:13pm

okay I will give you $600 for mom's site - or are you selling text links already?

November 1, 2007 - 9:26pm

That site is noncommercial thusfar. But I don't think my mom wants to sell it.

Fulcrum04
November 1, 2007 - 9:15pm

Information may be a commodity. Time taken to use it is a scarce resource.

Websites that focus on a particular type of user and offer them a solution e.g. summarisation of information - saving them time - add value. Market segmentation offers niche definition to achieve this.

November 1, 2007 - 9:31pm

Information may be a commodity. Time taken to use it is a scarce resource.

And when people look for how to cut costs and save money right off the start, invariably they are pushing themselves down the value chain and setting a lower value on their time.

November 1, 2007 - 11:25pm

Thanks Aaron I really enjoyed this post and it has sparked quite a few new ideas for me.

Do you believe it is possible to achieve the same sort of results/success with absolutely no money at all? When I first started out, I was dead broke. I mean, I couldn't even afford to eat, little alone pay for directory submissions...

Would love to hear your thoughts.

Cheers

Aidan

November 1, 2007 - 11:28pm

Hi Aidan
When I started I was in debt and unemployed. I backdated a credit card application to make it look as though I had a job. I lived off that for a few months and eventually I got another job for ~ 8 months while I was learning, but I quit it when I was making $100 a month from the web.

Quite naive, arrogant, and ignorant of me to be so foolish like that, but it worked out ok.

November 2, 2007 - 1:30am

I remember reading about a diabetes blog someone started that was making about $40k/year in advertising for the owner. Any site (or blog) that concentrates on a narrow niche is going to have less competition for traffic than something more mainstream. Also, such blogs can be easily monetised as the people visiting are interested in related products (eg for diabetes ads for glucose meters, for diverticulitis high fibre products etc).

Unlike some areas (eg video games) which are product related but attract low CPC clicks, medical related sites (especially blogs that can automatically promote themselves via RSS feeds) can make a lot in advertising even on low traffic volumes.

November 2, 2007 - 9:36pm

"spent 5 minutes aligning the DNS, hosting her site at Dreamhost, which allows unlimited sites to a $7 a month account. I recently created a 5 year account for a friend and only spent $300 for 5 years of hosting!"

Sorry for yet another off-topic question, but Im about to create and SEO the first website of my own. Im trying to find a reliable hosting provider, b/c everybody tells me how bad many of those budget hosts out there are.

You recommended dreamhost in your e-book, but I was thinking "maybe that information is a bit outdated by now..". But now I'm reading that you're using them to host your mom's site and created a 5 year account for a friend with them.

That sounds like you're (still) extremely confident in them for (affordable) shared hosting? (Or are they simply being very helpful knowing who you are?:-))

November 2, 2007 - 10:50pm

You answered your own question there Patrick. Yes I like Dreamhost and I also recommend Pair.com.

November 2, 2007 - 11:49pm

hehe, yeah I guess I did. thx for confirming it though.

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