Fighting Commoditisation with Innovation

The global nature of commerce is such that all products and services are liable to commoditisation – the process of products becoming simpler, more ubiquitous and lower cost.

If you are in the business of disrupting a marketplace, commoditisation is great, otherwise, it’s very much the enemy. Generally speaking the more commoditised a product, the lower the margin and the harder it is to differentiate your offer from other lower-cost offerings.

There are countless examples of commoditisation in every marketplace, but let’s take just one – data storage. It was a specialised product – in fact I have NAS drive on my desk that cost me £250 back in the day. Of course now, thanks to disruptors like Dropbox the cost of storage in the cloud has tumbled and according to industry experts this trend is only set to continue.

Whether it’s due to technology innovations or purely competition, commoditisation is an inevitable fact of life.

How do you maintain margin in highly competitive markets?

Firstly, it’s up to you what you sell your products for and there’s a simple model proposed by Ian Gotts and Dominic Rowsell in their book “Why Killer Products Don’t Sell” to help you think about how to market your products and services. It identifies three buying cultures that we / customers have:

  • The first is called Value Offered. VO products fulfil a recognised need, buyers buy after taking the briefest look at the alternatives, all of which are a similar price, and make a choice. Buying a domain name is a perfect example of a VO buying culture. There’s little or no way of differentiating one product from other so we decide based on cost, convenience and good old marketing
  • The second is called Value Add. VA products fulfil a recognised need, but the price point or differences between the products in the marketplace are generally complex enough that the buyer does some comparison or talks to suppliers to understand the differences between their offerings. Selling Value Add gives you an opportunity to build a relationship with the customer which in turn gives you an opportunity to ‘sell’. Selling a domain name in a package that also includes hosting, support, tutorials etc. would be a great example of where you have matched a recognised customer need, but created an offering that added value
  • The last one is called Value Create. VC is where you are literally creating new value for the customer – value that they didn’t know they needed yet. It takes longer and costs more to sell VC, but not only are the margins higher, the competition is lower. Selling a fully managed service that includes everything, expertly built and maintained would be an example of VC.

Commoditisation can happen rapidly

Most new products start as Value Create offerings and the successful ones inevitably become commoditised and become VA then some become VO. Twitter was VC – no-one needed to be able to blog in only 160 characters – Twitter had to ‘create’ an understanding of the value of it to get their first users. Once they achieved this, it quickly became Value Add then Value Offered – no-one takes any time thinking about what microblogging platform to use any more.

The alternative strategy to avoid the race to the bottom

If you find your products and services are under increased price pressure, you can either join the race to the bottom, or take some action;

  • Re-think the proposition to either ‘add’ value to differentiate your product or service or ‘create’ new value, or
  • Find new marketplaces for whom you can add or create value, so if we return to the example product, when you sell domains and hosting to IT people, they don’t need help so it’s hard to add or create value – their priority is likely to be to show their boss that they’ve got the lowest price and saved the company money. But if you built a proposition selling broadly the same thing but to schools where they don’t have an IT person and want and value help – in other words they want a value add buying culture, you make it easier to maintain margin, become the customer’s best friend and lock-out low-cost competitors

Innovation is THE tool in your armoury to defend against commoditization

A great example of creating new value in a highly commoditized marketplace was Dell. PC manufacturers generally had a $1,000 offering, a $1,500 offering, a $2,000 offering etc. so the consumer decided how much they wanted to pay and chose based on the spec, recommendations or the deal from the retailer or reseller – a classic Value Add buying culture. Dell made a killing by ‘creating’ new value – you could buy it directly from them, choose exactly the spec and the price you wanted and they would build it just for you.

Another great example of beating the commoditization trend is Starbucks. It’s no secret that your $3 Grande Espresso Macchiato is actually 5 cents worth of coffee with added air, but that doesn’t stop us going to Starbucks – we go there for the experience; the environment, the customer service – the whole package.

The bottom line

Commoditization is a fact of life. Where there’s a successful product and customer demand, smart people somewhere are thinking about how to disrupt it, make it simpler, easier to buy and cheaper.

The best form of defence is attack; get out of highly commoditised marketplaces before it’s too late by adding or creating new value for your customer, find new customers or customer segments that want and value support and are less price sensitive, exploit innovation and create new customer experiences.