Why Commoditization Is HereAnd What To Do About It

2. Patents. As National Underwriter readers already know, the number of filings being made for patents for insurance and financial business processes and methods keeps growing. Many of these are made under Class 705 at the U.S. Patent Office. This class also includes the likes of electronic shopping, advertising management systems and postage metering systems, but financial is right up there at the top, according to the Patent Office Web site. And, though Class 705 apps are but a fraction of other types, their numbers are definitely up.

Where commoditization is concerned, the impact of this trend will be felt via the licensing of the patented processes/methods. If those patents help produce an insurance sales leader, for example, other firms will want to buy licenses for those processes. Once multiple firms buy those licenses, the related products will then be on par with others, thereby creating uniformity, laying the groundwork for subsequent commoditization.

3. Regulations. The regulatory push toward full disclosure and transparency in cost structure is inexorable. Many firms already have responded by showing fees, trimming fees and dropping fees altogether, and product contracts increasingly read like roadmaps. These trends make features and costs more widely known and easier to spreadsheet, priming the pump for commoditization.

4. Changed thinking. Historically, financial people fought like Mother Hens to keep their products away from the commoditizers reach. Yes, some competitors just copied one anothers innovation straight out, changing only the name on the contract, creating post-rollout uniformity anyhow. But that did not change the groupthink against standardization, especially since most firms, in the pre-tech era, still found plenty of ways to differentiate (beyond price).

Now, however, many financial firms willingly put their products and pricing up against one another online, in brokerages, on menu boards and in product tracking services. And many distributors willingly spreadsheet an entire competitive set, if necessary, in order to turn a producers head.

5. Market demand. All of the above wouldnt hold much sway if consumers didnt want both good products and good pricing. But they do and, as exemplified by the fellow above, they will do what they feel they need to do to get it. That man wasnt looking for "excellent product and rock-bottom pricing." But he did want good basic coverage at a competitive premium.

The combined effect is this: No matter how many bells and whistles a product offers, no matter how unique the third-party service it includes, no matter how strong the brand and the financials, insurance and other financial products are being sold in a marketplace that is pushing for more and more commoditization.

Does that put customization in peril? Hardly. The solution is already here: Promote the unique skills of professional and expert advice. Many consumers can put products on a grid, but few can apply the outcome to their own financial needs and plans without help from a specialist. Even that solo shopper mentioned above realizes hes going to need some help, going forward. Its up to the entire financial industry to get the message across that it has trained experts who can light the way.

Reproduced from National Underwriter Edition, October 1, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.