Andrew Godfrey – Leader of Mercer’s Financial Services Business in the Pacific Market
In the 1980s, Harvard Business School professor, and perhaps the world’s best-known business academic, Michael Porter, first described the two ways a company gains a competitive advantage: by lowering costs or adding customer value to stand out from the competition. Fast forward 30 years, and for the first time in its relative infancy, the superannuation industry is now wrestling with this market force as funds seek to thrive in the digital age.
Super funds and administrators have become bigger in recent years on the back of consolidation and the need for scale. The overheads of running a super fund and the investment in technology that's required are significant, so scale is critical, but the competitive landscape for super administration has reached a peak of consolidation. To transform, the industry needs to invest in new technology and operations where people are at the heart of the process.
The super industry is facing a crossroads and funds and administrators have to choose to continue with an ‘old school’ approach, or choose a ‘new school’ strategy. Either the industry responds to the digital revolution and empowers funds and members, or it continues to drive out costs and engage competitors in a price war.
Live and die by the price tag
According to Porter, profitable companies either have a large or small market share, while those in the middle are usually the least profitable. This is due to large companies effectively deploying cost leadership strategies, while the small companies focus – or specialise – on a market niche, which proves profitable.
In the super industry, cost leadership is a viable strategy for larger companies because they can use their size and big reserves of cash to take advantage of economies of scale, delivering a cheaper product or service to more people.
However, a cost leadership strategy can force the competition to match the price or fees the leader has set, creating a price war – similar to a ‘Coles versus Woolworths’ scenario. Companies in this situation must innovate cost-saving solutions and try to attract a larger portion of price-sensitive customers. This often leads to ever-eroding margins and an increased importance on volume sales. Further, cost leadership can lower customer loyalty because they're attached to the price, not the brand, and can reduce the company's reputation as a provider of high-quality services or products.
The differentiation solution
The alternative competitive strategy to simply reducing price is enhancing the customer experience while continuing to deliver value.
Superannuation administrators cannot escape the reality of needing to continue to reduce our cost to serve, but more importantly we need to continue to innovate. There will most likely always be pressure to reduce fees. However, the industry, government, and members have to let the Stronger Super reforms do their job and fees will come down. Funds absolutely have to keep one eye on the current and future policy landscape, but they also need to keep one eye firmly fixed on the member.
For example, the industry has historically underinvested in administration. To be profitable service providers in this space they have to make new investments; they have to invest in new technology such as marketing automation or lead management platforms, to create relevant, practical and personalised conversations with their customers. These intimate conversations build trust and engender loyalty in customers. The organisation delivering a personalised service separates itself from the company providing a cheaper service, and builds its reputation as a high-quality provider.
Super companies can protect their margin by differentiating themselves with innovation such as digital capabilities that provide their members with more control and access to information and tools they need to engage with their super when, where and how they want to. By providing a more comprehensive service to their customers they can avoid a protracted and painful price war with competitors.
'New school' super administrators will recognise the value of the customer; provide customer-focused technology solutions; simplify super while ensuring people are at the centre of process; provide an innovation pipeline to power future growth.
Of course while regulatory reform, account consolidation and remuneration models are not insignificant issues to contend with, the one thing that has become abundantly clear in recent years is how adept at multitasking administrators have become.
Price wars are good for buyers in the short term, however in the long term it cuts into profit margins and threatens the survival of the business. A more sustainable future is developing the customer experience and investing in new technology to drive ongoing conversations.