Retailers keep closing shops. This has been the trend of 2017. Often it is being blamed on Amazon and called the Amazon effect, but that’s really an incorrect attribution of the cause. There is a very different and very fundamental reason for this breakdown in retail. That issue is that most retailers have not understood how to make money in a digital economy.
Retailers have always been masters of making money on physical products. That is what they do and they often do it well. Those principles which drive them are rooted in what Adam Smith first wrote hundreds of years ago about how trade and economies work. And those principles have worked quite well for a long time. However, as digital products grow, we are seeing that many companies are struggle to make money in a digital economy.
Digital products are very different from physical ones. Yes, they are often very similar but the barriers to entry and means of production change the game quite a bit. A digital product has very different marginal costs. Physical products were all about getting the means of production down lower than the competition. The per unit cost was very critical, but with digital products, the per unit production costs is almost nothing every time. When a physical book is created, in order for an author to share that book with customers, a new book is often needed, which means it must be produced and that cost is then passed on to the customer along with a profit margin. Now an author can create an ebook and once made, the per unit is nothing. That book can be shared with 1 million customers or just 1,000 customers, the cost per book never changes. This new shift in cost per unit is one of the things that is impacting retailer’s abilities to compete, they haven’t grasp how to deal with this change.
Add to that, the change in social behavior. Up until about 10 years ago, the rite of passage for many teens America was to get a driver’s license. It was one of the most important events in a teens life. But now teens are waiting until they are young adults in their twenties to get a license. Why? There are three main reasons we drive in America and in many modern countries:
1: To get to work.
2: To get products we want to consumer.
3: To meet people we want to communicate with.
Many teens don’t work so they don’t need a car. Add to it, the means of consumption were now available online. When I was growing up you could get a pizza delivered at home. Now, you can get pretty much anything delivered. And last, most teens prefer to communicate online, not in person. This kind of shift is important because if people no longer want to go to a physical location to socialize and consumer, then you don’t need a physical store. Many retailers are trying to fight this trend instead of embracing it.
If retailers want to still be around, they need to focus more on these kinds of trends instead of fight the old pricing wars they are used to. The digital economy has its own rules, rules that are very different at times from the economic rules we have played by for decades. Understanding and embracing the news rules are the keys to survival.