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Little Bang for the RFID Buck

Radio frequency identification tags flounder as innovators figure out how to best use them.
November 1, 2003

RFID tag; you’re not it. The aspiring “bar code of the future,” midwifed at MIT’s Auto-ID Center, faces a serious identity crisis. Proponents insist the tiny tracking tags (RFID stands for radio frequency identification) will profitably transform the global economics of supply chains and customer relationships. Outraged privacy activists attack the diminutive digital devices as Orwellian bugs for tomorrow’s surveillance society. Though these rival claims are less about honesty than hyperbole, radio frequency ID is emerging as a symbol of innovation that benefits innovators at the direct expense of consumers. That’s bad news for a technology bidding to be a ubiquitous global standard.

Even worse news was Wal-Mart’s surprise summertime declaration that it would indefinitely delay a high-profile “smart shelves” RFID test with Gillette. When the world’s largest-and most technologically invested-retailer postpones experimentation with a next-generation innovation, that’s a market signal radio-tag innovators can’t afford to ignore. If any company is superbly positioned to turn a technical protocol into a ubiquitous presence, it’s Wal-Mart.

Mere weeks later, another Gillette smart-shelves experiment with Tesco, Great Britain’s tech-savviest retailer, ended amid controversy. What’s going on here? Are the anti-radio-tag activists winning the privacy propaganda wars? Does RFID technology promise more than it can reasonably deliver? Or do the darn tags simply cost too much?

The answer reveals a great deal about the dueling economics-and dueling ethics-of innovators with conflicting business models. Technology innovators must always remember that there’s a huge difference between customers who invest in innovation to save money and those who invest to make money. The fervent belief that saving money and making money are somehow equivalent is the great innovation delusion.

Wal-Mart has no such delusions. At the same time that the retailing behemoth canceled its in-store test, it reiterated its intent to push suppliers to attach radio tags to all the cases and pallets they ship to the company’s warehouses. Why? Because even a casual back-of-the-envelope analysis shows Wal-Mart getting by far the biggest bang for its RFID buck from using the tags to boost efficiencies within its gargantuan logistics infrastructure.

In other words, Wal-Mart best maximizes its ROR-Return on RFID-not by using smart tags to better track millions of customers spending billions of dollars but by optimizing the processes that place hundreds of thousands of products on its shelves. Wal-Mart’s ability to deliver on its “everyday low prices” promise depends more on rigorously tracking products than rigorously-intrusively? invasively?-monitoring customer purchases. Wal-Mart knows this. So do its suppliers. And so the Auto-ID Center is learning.

But what about making money through radio-tag tracking? Don’t retailers like Tesco-with business models and investor expectations geared to higher margins than Wal-Mart’s-also have a big incentive to go beyond internal supply chain efficiencies? Yes, but the barrier is obvious: the economics of the tags are inherently different when they’re employed to increase customer value rather than cut internal costs. Whether the tags cost a penny, a nickel, or a dollar is irrelevant to the essential business question: how are they used to add value-genuine or perceived-for customers?

Apparently, neither retailers nor manufacturers have yet figured out an economically intelligent answer. Even worse, RFID champions appear unable to design real-world business experiments that potential customers find more exciting than offensive. In effect, radio tags have everything to do with cost reduction and nothing to do with value creation. The issue isn’t RFID technology; it’s determining how to persuade customers that an innovation’s benefits unambiguously outweigh its costs.

Indeed, the loudly debated privacy issue is a red herring. The RFID community could take its cue from the credit card companies who monitor customer purchases in real time. Visa, MasterCard, and American Express have convinced millions of their customers that real-time monitoring cuts back on fraud and the risk of identity theft. In other words, the costs of privacy invasion are outweighed by the benefits of increased security.

The problem with radio frequency ID is that it’s clear how retailers and manufacturers might benefit from attaching smart tags to their products, but it’s utterly unclear how this helps consumers.

The moral of this ongoing tagging tale is simple: everyone understands “everyday low prices.” But if customers can’t see how they’ll get value from your proposed innovation, the problem is not their ignorance but your own.

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