When your product becomes a commodity

Here is another great link provided by Luis, a member of the Fresh Produce Industry Discussion Group. the next member of the FPIDG will be the 100th, so join and put us in triple figures.

The link is a Harvard Business School article by John Quelch, titled, "When your product becomes a commodity." From the article:

How often have you heard a manager blame "commoditization" for failing to 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.

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."

Later, some advice ......

But how do you survive if you find yourself in a commoditizing industry characterized by me-too products, overcapacity, and frequent price cuts? How can you make money?

1. Decide which customers you do NOT want to serve, try renegotiating prices with them and, failing that, fire them. You will lose market share but improve profitability.

2. Compensate your salesforce on profit margin, not sales revenues. A volume-based salesforce will sign up any customer, regardless of profitability. That's OK early in the product life cycle but not in maturity.

3. Trim costs and acquire competitors (with profitable customers) to extract maximum scale economies in procurement, manufacturing, and distribution.

4. If you aren't the low cost producer, complicate your pricing structures so customers can't easily make side-by-side comparisons, and provide discounts as needed of artificially inflated published prices.

TK: Interesting point about complicating pricing structure to confuse customers. Gee, I wonder if that is why we see so many varying sizes and weights at retail? Spare me the confusion of the 14.5 oz. package, the 19 oz. package, the 15 oz. package. And how about "firing" customers? Author does make good points about knowing the profit margins associated with individual customers and providing profit based incentives to sales force.

The overriding advice Quelch gives is to innovate and avoid become one of the crowd:

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 as good as your dumbest competitor."