Is Innovation Killing the Soap Business? is the title of a great article in the Wall Street Journal’s Paul Ziobro and Serena Ng. The article talks about the overall market impact of P&G’s new product innovation – Tide Pods. The product that provides precise ‘unit doses’ changes the dynamics of the laundry industry. Compared with pre-pod levels, detergent sales are down 5.1% raising the questions about innovation and growth. Normally the two go together, new products drive the product category, but in this case the opposite is happening.
Get used to it as that is happening as organizations increase the digital nature of products, services and offerings. When I read the story it became an allegory for what digitalization can do in other markets and with other product categories. First, please read a short soaping story and then continue to an analysis of why everyone needs to pay attention to this soapy story.
The Short Soap Story
In short, Tide Pods is different from prior product innovations. Innovations like concentrated detergent supported market growth as consumers bought more and often used more detergent that necessary. Tide Pod changed that by providing an exact amount of detergent that works particularly well with new high capacity washing machines.
People are buying less detergent because they are using exact amounts rather than guessing. According to the article the market is shifting towards Tide Pods which are earning a larger margin even though consumers pay about 25% more per dose than regular Tide and pay 287% more than discount detergents. The product is more profitable for P&G as it caries a higher wholesale price, but less profitable to retailers as there is little room for mark-up.
Hence the more Tide Pods sells the smaller the category and its profitability to retailers grows, but the more margin P&G makes. Raising the question “How can a new product be good when it is hurting the total category?”
This soap story is an allegory for digital disruption.
The story of soap is one of the stories of digital technology and how can disrupt markets, companies and industries. Tide Pods provide a precise measure that takes advantage of high tech washers and eliminate overconsumption. The combination of product precision on the attracts consumers willing to pay a premium for knowing that they are not wasting detergent or wasting the capability of their high tech washers.
Exact dosing, giving people exactly the right amount, at the right time and in a convenient way is the essence of every digital product or service. It is the definition of digital context as people recognize the value of personalization, efficiency and associate themselves with using new technology. The result is that the most profitable part of the market moves first and fast taking growth and margin with them.
You know you have disruptive innovation when everyone else cries foul as a new product drains profit pools can market share. Digital disruption comes when the combination of digital and physical resources create new products, services, offerings or operations that change the nature of access, economics or performance. In this case exact dosing changes economics and performance disrupting market incumbents.
Precision will be increasingly important in the first digital decade as everyone wants exactly what they need, they do not have to waste their time, resources or money (its ok for you to) and they feel its personalized to them. Precision represents one of the techniques for creating digital disruption.
Innovation creates change, choices and comprehensive value.
Innovation is not killing the soap business. Innovation may be killing your business.
Innovation does not have to grow the market. All innovation does is leave the market better off, not necessarily bigger, but definitely better off.
Markets that rely on a measure of customer ‘waste’ are particularly susceptible to precision-based products. Digital technology will create precision products and market disruptions. This is what makes this story allegorical. P&G did it by changing the physical characteristics of their product and eliminated their reliance on overuse to generate growth and profits. What is possible in your company, industry, and market? Who will get their first with new digital precision based resources that make the competition cry foul.