Don’t Fall Into the “Commodity” Trap

A few years ago one of my students asked me to help him market his company’s products.

The product line was a broad group of fabricated copper wires.  The problem the company faced was its perception that it was marketing a commodity product that could not compete with larger competitors who had a price advantage.  The client believed that the almighty price was the only factor that influenced the customer.

When I went through my marketing analysis, I examined the company and the nature of its business and its customers.  It turned out that many of those customers liked the way my client was able to customize its products through various wraps and color codes.  Also, my client was able to provide smaller quantities than its big competitors.  Finally, my client could turn orders around faster than anyone else – often an order could be turned around in day while competitors were turning orders around in weeks. .

Thus, even though prices were somewhat higher, my client offered increased VALUE and VALUE ADDED.  In developing a marketing plan, it was those non-price aspects that received the greatest emphasis.   In marketing commodity products, the value equation is extremely important.  Value = Benefit minus cost.

The naïve market fears “commoditization,” but it’s really a cop-out.  Harvard Prof. John Quelch points out in a December 14, 2007, article in Working Knowledge (Harvard’s FREE weekly newsletter and data base – http://hbswk.hbs.edu) “How often have you heard a manager blame “commoditization” for failing t deliver sales or profits?  If you’ve heard it , you’ve probably wondered if it was just a convenient excuse or if the manager had a valid point.”

Quelch simply looks at the situation as a “glass half full” rather than a “glass half empty ” scenario.  He writes: “The truth is, even when a raw material has no value added and quality standards are set by law or the industry, there is still plenty of opportunity for differentiation around availability, delivery, shipment quantities, payment terms, and all the other services that accompany the core product.  Marketers must use their imagination.  As the saying goes: ‘There are no mature products, only mature managers.'”

Philip Kotler once wrote as part of “Marketing Strategies for ‘Commodities’ ”  that a seller has two lines of defense: (1) to claim all the items in the commodity class are not the same and there is enough variation in quality and performance to justify slight price differences or (2) to differentiate the “offer” surrounding the product.

Look at the huge successes that commodity products have enjoyed based on the marketer’s ability to differentiate.  One needs to look no further than Starbuck’s Coffee, Perdue’s chicken, Intel’s microchips.

Quelch suggests three practices to delay the “inevitable forces of commoditization.:  They are:

• Innovate by upgrading – even slightly – to gain a competitive edge.
• Bundle. Adding a companion product or service to the initial product offering.
• Segment.  Aim for target markets or niches where less-price sensitive customers cluster..

Quelch concludes: “However, you approach commoditization, try to innovate at all costs to beat it back,  Because as Peter Drucker said: ‘In a commodity market you can only be a good as your dumbest competitor.’ “