In many industries, commoditisation is something to be feared. It turns propositions that were once unique and valued into generic, low-margin products and services. Yet in sectors that seem commoditised, some companies (think Dyson, or Southwest Airlines) can either charge huge premiums or thrive happily. How? It’s because when customers say: “Just give me more, for less”, they could in fact want something else.
Commoditisation has featured throughout the history of commerce. It's the process that happens when your product becomes (or is perceived to become) undifferentiated from everyone else’s, leaving price the only thing left to compete on. Today, dramatic technology changes are driving this trend faster than ever. No industry is immune: commoditisation affects everything from laptops to travel agencies to energy supply.
As a result, it’s one of the most common issues that clients call us with: “We think we sell a very specialised and valuable service, yet all our customers want is lower prices. How can we make them value what we do?”
Customers may not mean what they say
The answer, in our experience, is to listen differently. In many cases the plea for “cheaper, faster, better” may be masking a very different need. It’s because businesses don’t always take into account the emotional and psychological aspects of their customer relationship.
Take the example of a well-known dynamic in human relationships, where in the context of a quarrel, one partner (a woman in this instance), says: “You don't bring me flowers!” What she actually means is something more significant: "I want more attention!" What she gets, mostly, is the occasional wilted bunch of carnations from the service station. The result? Neither side gets what they want. One hasn't asked for it in the right way and the other hasn’t listened properly.
Same service, different perceptions
One of our clients provides a very specialised service to their industry that has become a recognised global “gold standard”. They couldn’t understand why despite their reputation and first-class service, their customers were constantly driving for price cuts. When we looked at their service offering and talked to their customers in depth, it became apparent that there was a huge mismatch between our client’s self-image as a provider of a unique and indispensable service, and their customer’s perception, which was of a “body shop” hiring out specialist consultants who could probably also be found elsewhere.
Our client needed to articulate the value of their service, which could, for example, help their customers address big themes like resilience and reputation: things that are worth paying good money to protect. Like the carnation-wielding partner in the relationship, once our client understands what the customer is really asking for, they can put together a much more attractive value proposition.
We found a similar issue at an engineering services company. It fielded project engineers who carried out highly specialized and skilled tasks, like machine maintenance in an industrial facility or carrying out asset management for specialist equipment. But their customers pushed back on price, in this case asking the company to carry out the same tasks with fewer people. Again, this was a communication issue. Pitching themselves simply as a provider of technically skilled people, our client hadn’t articulated, for example, how it could help its customers optimise their operations or achieve a more cost-effective procurement strategy.
How to combat commoditisation
Dyson triumphed in a commoditised industry by using innovation to position itself differently; Southwest Airlines has become a leader in low-cost airlines by understanding that a no-frills offering needs to be accompanied by exceptional efficiency and friendly, personal service. In both cases, customers wanted much more than a cheaper appliance or a low-cost flight.
So the first step to combat commoditisation is to understand what customers are really asking for. This involves understanding what they mean and not necessarily what they say. Then you’re in a position to start mapping out what you are selling, who you are selling to and what it is that different groups of customers value. This is a hugely powerful exercise in low-cost innovation.
At Futurecurve, we use the Value PyramidTM model to help our clients do this in a structured way. You can learn more about this in our book but in the meantime, if you’re being affected by commoditisation, think of it as an opportunity to learn and innovate rather than a threat to your business.
And don’t send your customers flowers. (Unless of course that’s your core business). Start by asking yourself whether you’re really making clear the value of what you offer – or whether you are unwittingly commoditising yourself.
It could be the beginning of a beautiful relationship.
Is commoditisation affecting your business?
Think about the following questions and answer them honestly:
- Are your close competitors achieving higher margins?
- Do your customers ask for price cuts or demand that you do “more with less”?
- Would your customers talk about the value you deliver in the same way that you talk about it?
- Are you telling the full story about the value your business can create?
Please do leave a comment below on any of these issues raised.