August 12, 2015

Five Things to Know as Scanning Services Lose Value

LiDAR Data

The task of scanning or digitizing an environment is on an inexorable path from a specialist endeavor to a commodity. Scanners keep getting smaller, less expensive, and easier to use. The processing software is more automated than ever – especially for registration, and more end users are working directly with point clouds. While these all represent growth potential for the 3D imaging industry at large, they will undoubtedly be bad news for many in the service provider sector.

Many of us have no desire to participate in a commodity economy. The specialist aspect is what drew many of us to laser scanners in the first place! But the last point on this impending transformation is an important one: It’s not going to happen all at once. So what do we need to be considering as our market redefines itself?

First let’s define our terms. When I say commodity, I mean a fungible asset that is identical to every other unit. Think a bushel of wheat or a barrel of oil. It’s a known thing in a known quantity with a set market value. Whether you buy it from Vendor A or Vendor Z makes no difference in the value of the item. Your “specialist service” would be best defined as a differentiated product. Most of us probably started this way as we saw ourselves as different from our competitors in whichever industry we viewed as our origin. Personally, I was differentiated from other land surveyors. Your experience may have differentiated yourself from other engineers, SFX studios, or whatever.

Another way that we have viewed ourselves as differentiated products is by our deliverable(s). You and I may both have the exact same equipment and use the same methodologies, but if you only produce BIM for architectural clients and I only produce water tight meshes for 3D projection systems, there is a good chance that we market (and price) ourselves very differently. And that’s what it really comes down to. For commodities, the price is set be the Price Taker, that’s the customer – not you. With differentiated products the Price Maker (that’s the producer of the product) sets the rate.

With those concepts in place, what are the issues that we need to keep in mind moving forward?

  1. Generalist versus Specialist. There are two schools of thought here. One is that the generalist is more diversified and therefore less susceptible to market fluctuations. Studies have also shown that people with generalist knowledge are more accurate when producing forecasts than those with specialist knowledge about the subject at hand. However, when you look at the profitability of professionals like doctors or lawyers in other industries, those that specialize in one area tend to be more profitable. Once you’ve learned how to do something well, repeating the procedure is more efficient than learning a new thing – and more of those hours are billable. The take away here may be to stay general until you spot a niche; then go corner that market.
  2. The Value-Added Differentiation Fallacy. This is the false perception that providing for a niche market means that you have a differentiated product as opposed to a commodity. The reality is that it simply puts you into a smaller commodity market. Differentiation is only real if it applies only to your product. It is an opportunity to create a differentiated product but you’ll still have to do so through branding or some other bundling that others cannot offer if you want to take back over as the Price Maker.
  3. The Primacy Effect. When you become a commodity, your clients become customers. They tend to be less informed and less invested in any particular company. Consider when you call a plumber or HVAC repair service. We tend to look in the yellow pages or Google them for a list. The primacy effect says that when this happens, people are more likely to remember the first few names on the list over others. It’s why there are so many companies with names like AAA plumbing, AAAA Bonding, etc. Of course, with Google the list is not alphabetical and the rankings are a whole other game but it does show the importance of being found quickly. As an interesting aside, I just heard a piece on NPR where they determined that companies (plumbers in Chicago, Il) that had names starting with the letter A or numbers are “generally likely to charge more money and get lower ratings than companies that start with other names”. The study went on to state that the same effect was seen when using Google search rankings as opposed to the company names.
  4. Absolute Advantage. Can you make the same thing using fewer resources than the competition? That’s an Absolute Advantage. In the commodity game it’s the only way to get ahead on a per transaction basis. Perhaps it’s efficiencies of scale or specialization, perhaps it’s a technical advantage with custom software or hardware, perhaps it’s your client list. The firms that come out on top will definitely have one.
  5. Capex versus Opex. One way to remove yourself from the commodity market is to remove your client from the commodity market. Capex (Capital Expenditure) projects almost always go out for bid but Opex (Operating Expenditure) costs are ongoing so they only go out to bid at regular intervals. Finding ways to tie your services and bill your client through Opex allows the client to fully deduct all costs in the accounting period in which they occurred. Billing through Opex also provides a steadier income stream for your firm and the smaller upfront tends to be more palatable for customers. It’s probably why you signed a two-year contract for your cell phone instead of saving money by buying it upfront and then shopping for a service provider.

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