Decommoditization: The Winnable Game…

“Our research shows that commoditization is as much a psychological state as a physical one. A commoditized market is one in which buyers display rampant skepticism, routinized behaviors, minimal expectations, and a strong preference for swift and effortless transactions regardless of product differentiation” ~ Marco Bertini and Luc Wathieu.

The C word (as in commoditize) is business greatest fear and failure. Customers consider your products or services to be a commodity when there is no measurable difference between your features and benefits and those of competitors. Although convinced they provided the most value, you realize that the lowest price will win. Let the bidding wars begin.

Why didn’t the most value win? In the minds of the customers, it did. They think lowest price equals the highest value. When the business does not give customers the means to measure value in terms other than price, then the business turn their products and services into commodities. The business and not the customers are responsible, but that can be good news: What one takes away, one can give back. Armed with the proper tools and knowledge, you can decommoditize sales.

When customers’ technical knowledge of your products is equal to, or better than yours, they view your products as commodities. They feel they can accurately compare products without your input. They no longer depend on you to explain the technical differences between competitive offerings. You now lost a key opportunity to justify a higher price than that of your competitors. Fortunately, you can recapture this opportunity and lost value (and then some) when you make customers rely on you as an expert in their industry.

CBC’s blog writes: Why does the consumer seem to have all the power? The reason is very simple: High availability of alternatives…there’s a large supply and a fixed amount of consumer demand…which means you don’t have as much control. But you probably already knew that. In fact, this situation suggests a pretty obvious strategy… create something for which there is no alternative…

If you create something that’s one-of-a-kind, and there are no alternatives, then the power dynamic shifts. Suddenly you have all the power, because if the consumer wants what you’re selling, you’re their only option. We know what you are likely thinking right now: “we are creating something for which there is no alternative: unmatched customer service, superior products and services, and an unsurpassed commitment to our communities…” Let’s get real…

Currently, you’re not trying to create a truly different alternative you’re just trying to create a better alternative. Focuses on service, products, and commitment to the community–while admirable–will never turn you into something for which there is no alternative. Remember, our goal is to be different, not better. You’re not practicing “differentiation,” you’re unwisely attempting “betterentiation” instead.

That is, Different Not Better: A Mango in a Sea of Apples. Your goal is to be a mango, standing out in a sea of apples. Focusing on better customer service, products, and community involvement will only make you a better apple…never a mango. When you focus on “better”, all you’re saying is “we’re still an apple, but we’re just a better apple.” Not a very compelling argument especially considering that’s what everyone else is saying too.

The blog continues with an example: It’s no secret, banks and credit unions are all essentially selling the same products and services. It’s been that way for quite a while, and few bankers deny it any longer. To amplify this challenge, today there are even more non-traditional players selling those same (or substantially similar) products and services: companies like E-Trade Bank, Edward Jones, Lending Club, etc. Umpqua Bank’s respected CEO, Ray Davis, is known for being among the first to point out that with so much similarity in banking products and services, the only real way to differentiate a financial institution is in the way the company delivers those products and services.

In our experience, most financial services leaders agree with this perspective, yet it’s amazing how few have successfully applied it at their banks and credit unions. If the commoditized parts of banking are the battlefields upon which you are fighting, you cannot win. It’s impossible. That’s because a competitor will always be able to outdo you on these fronts, if they want it badly enough. If they are willing to reduce their margins enough, they can always “buy the market” by offering a lower loan rate, or a higher deposit rate, than you. They can always build an extra branch, or place additional ATMs, or stay open later…

Still, most credit unions and banks spend a large amount of their energy trying to differentiate themselves based on products and services: the best rate on the rewards checking account, the easiest auto loan, the most flexible CD. Again, this is a strategy based on being “better,” not “different.” If you’re battling the competition on these terms, you’re playing an un-winnable game. So, you’ve got two options:

  • Keep trying to beat them at an un-winnable game
  • Change the game to something you can win

Decommoditization is about changing the game to something you can win: “Giving people a reason beyond products, services, and rates to bank with (buy from) you”: This is changing the game. When people are shopping for a product or service, they look for attributes that allow them to comprehend and sort through the landscape of options at their disposal.

People crave meaningful differences between products because it allows them to navigate their sea of options and determine which products are going to best fit their needs. There’s nothing more frustrating than looking at two products and not grasping how they differ from each other. This leads us to a critical principle:

When there is no meaningful difference upon which to base a selection, it makes decision making difficult…and leaves the buyer to consider only commodity attributes like price.

Most businesses think differentiation is something they do for themselves—to make their companies more successful… But it’s not the real reason for differentiation:

Differentiation is something you do for your customers and potential customers—to give them meaningful criteria upon which to base their best decision.

Differentiation is your way of helping people evaluate you and determine if you’re a good fit for them. You’re giving them a meaningful way to sort through their options, so they don’t have to resort to commodity attributes like price to make a decision. The point of differentiation is not to build a compelling argument that you are the best product or service, and it’s not a tool of persuasion: It’s a tool for clarification and understanding.

Right now, you may likely be thinking “What are you talking about!? We’re building a sales culture here—we want to help as many people as possible reach their dreams, and that means selling, selling, selling as many products and services to as many consumers as possible. We’ll serve anybody and everybody we can!” If that’s what you’re thinking, then you are wrong: You are not right for everyone—and the longer you pretend you are, the longer will be a commodity.

A question to ask yourself: What customers are you totally the wrong fit for? Keep in mind, we’re asking who is and is not a good fit for your business, not who is or is not eligible to do business with you. A great answer to this question is often phrased, “we’re a terrible fit for people who value ___…because that’s the opposite of what we value.”

Until you can answer this question, you will never be able to effectively decommoditize your product or service. That’s because it’s impossible to be an amazing fit for one group of people, without being a terrible fit for the opposite group. You have to polarize your audience, or else your brand will never resonate strongly with anyone. If you’re not a great fit for some people, and a terrible fit for others, all you will ever be is “just OK” for everyone.

In the article “Make Commodities Stand Out – De-commoditization is the Key” by Daniel Burrus writes: No matter what industry you’re in, chances are you have a few products or services in your line that are commodities. From food and beverage items to household products to daily services, commodities are everywhere and make bottom line profits harder and harder to attain. So what’s a business to do?

The answer is to de-commoditize…but not just once…continuously! For example, suppose you sell flashlights. To customers, a flashlight is a flashlight and you can only charge so much for one. But what if you made your flashlight last twice as long? And, later you can add more unique aspects to your flashlight, such as making it half the size or twice as bright…

Here’s another example: Water is water…until you put it in a bottle…then you can make it unique… make it special … add some vitamins to it and give it a fancy name…. Now you’ve taken a commodity and you’ve de-commoditized it: Innovate, that’s the key.

The fact is that every product and service can be decommoditized repeatedly. Unfortunately, most businesses don’t do this. Instead, they come up with a new product or service and they milk it (the cash cow). They make their money on it and let the product or service become a commodity.  Realize that the minute you come up with something new, a competitor will copy it.

As they do so, your de-commoditized and innovative product or service slowly becomes a commodity… You find yourself competing more on price and eventually remove the product or service from your line. Instead think creatively (innovate) about your product or service so you can repackage it, redefine it, revamp it, or somehow make it unique in the marketplace again…

Decommoditization has been identified as a strategy for sustainable consumption that acts one level up on the institutional context of consumption as compared to strategies such as eco-efficiency and eco-sufficiency. Thus, while the eco-sufficiency strategy targets the product and the eco-sufficiency strategy targets the person (the consumer as decision-maker), the decommoditization strategy targets the institutional context in which consumption takes place. It aims to decrease the influence of commodities and to limit the effect of commercialization.

“Companies tend to ask themselves “how can we make our products/services better than the competition”, where as, entrepreneurs; ask “how can we make our products/services so different such that there is no competition?” That’s a decommoditized company”.