By Alec Hogg
I received a lesson in practical disruption yesterday. A glimpse into a future where much of what we’ve taken for granted in business is to be re-assessed.
My teacher was a serial entrepreneur who wanted to bounce off a world-altering concept beyond my comprehension. But before we talked through his profound idea, he exposed me to the inner workings of his hugely profitable (70% GP margins) and rapidly expanding business.
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Much of what he shared was confidential. But his deceptively simple business model has wide applications. On reflection, the only real surprise is that it is taking other entrepreneurs so long to cotton on to the concept.
The cornerstone is generic alternatives to heavily-marketed luxury products.
A consumer’s experience of the products is identical and the business model completely legal. The only difference between generic and the exponentially more expensive “original” is packaging. And, of course, price – with the generic selling at a fraction of the mainstream alternative.
The approach being applied is a nightmare for the business establishment. In essence, these products enjoy a free ride from decades of a corporation’s investment in creating a premium brand though selling a story. After years of heavy marketing, its price point now bears little resemblance to the production cost.
Pharmaceutical companies have long been exposed to generics. But in their case, decades-long licence protection has been provided on the argument that without it there would be no incentive to invest in expensive research required to test and develop their drugs.
But for other sectors of the economy, particularly expensively marketed luxury brands that sell at a multiple of their production cost, the first line of defence is marketing’s smoke and mirrors. Identical products with taglines like “inspired by…” are perfectly legal and in these changed circumstances, deeply threatening.
Support for such generics has grown in proportion to a swing in consumer trust from traditional elites to “people who are like me”. Why buy Hush Puppies when a Facebook friend swears by a generic lookalike at half the price? Or pay extra for Coke when someone you follow on Twitter says cheaper unbranded Cola is just as refreshing?
The business world is being disrupted in unimaginable ways, a trend accelerated by a breakdown of trust in an establishment whose hard-sell tactics are being brutally exposed. Long-established brands used to be the investor’s ultimate moat against competition. Not so much anymore.
