The market changes on a daily basis and, for some industries, this means that the market is eroding competitive advantage. This leads to commoditisation. More often than not, this results in a price war, which usually ends in one way: it becomes a race to the bottom.
But it doesn’t have to end that way. In fact, it only ends that way if you believe that the market sets your price. You’ve given up on trying to make higher profits using pricing techniques – how will your business partners and investors cope with that news?
If you’ve decided that your product is a commodity, it’s likely that a segment of the market believes that there’s no difference between your product and your competitors’. If you decide to target these customers, you’re going to need to be price competitive to win.
1. Market segmentation
The trick that many businesses miss here is that there are other customer segments that have similar needs, but a different view of the competitive landscape. In short, they don’t think your product is a commodity.
Let’s take HDMI cables as an example. Looking at Amazon, 1.5 metre HDMI cables range from £1.10 to over £550.00. HDMI is a digital interface passing 1s and 0s – the bits either make it, or they don’t. The 1s and 0s aren’t delivered faster or in higher quality over more expensive cables.
The brand of cable doesn’t matter, but there’s a segment of the market – the same people who are used to buying extremely expensive analogue cables – that believes you get what you pay for. It’s a case of market segmentation. Whether that’s right or wrong in the HDMI cable market is another matter, but the point stands. Buyers will pay more for something if they perceive value.
How do you differentiate in a crowded, commoditised market? You look at ways to make your product different from what else is on the market. This isn’t about bells and whistles – it’s about fundamental differences that benefit your clients. It’s about how well you execute the jobs your clients are trying to get done when they use your product.
This means building extremely close relationships with your customers to find important, under-served pain points and outcomes. These could help you derive ways to improve the way they work, be more effective or reduce barriers to entry. Specific segments of the market have different ways of doing the same task – look for white space here, as it’s an opportunity to build competitive advantage.
Take Apple’s MacBook Pro as an example. Fundamentally, it does exactly the same set of jobs as a Windows laptop – you can browse the web, send email, edit documents and photos, and watch videos. But MacOS is a very different platform to Windows – it has a unique set of features that a particular type of customer find more intuitive than the Windows alternative. To some, the way MacOS does things makes sense, whereas for others it is completely alien.
3. Unbundle add-on services
Most products can be split out into core products and add-ons. This is a matter of segmenting essential features and non-essential or variable cost features. You can do this using outcome-driven segmentation to help determine which features your customers value the most. This has two benefits – it reduces the barrier of entry into your product, and it ensures there’s a captive audience for higher margin upgrades.
In turn, this reduces commoditisation because you’ve focused on delivering a product that maps perfectly to customer jobs to be done. If they need to do additional jobs, they buy the add-on. If they don’t, the core product is aligned perfectly with the core functional job to be done.
The budget airline industry has done a good job of this, with Ryanair begrudgingly being the best at unbundling its products. Their core product is a seat on the customer’s selected flight, but their add-ons include online check-in, checked luggage, extra legroom, priority boarding, in-flight meals and more. The prices it charges for these add-ons are often extortionate, but that’s how Ryanair makes its money.
CEO Michael O’Leary is proposing making flight tickets completely free, presenting an interesting lexicon. It means the flight ticket is the ultimate commodity. It’ll look to make money in other ways – through increased footfall in airports, Ryanair could strike up agreements with the airport restaurants and bars.
This kind of challenging thinking is how you can drive the next stage of growth in your business. If you find your business going through the early signs of commoditisation, you need to challenge yourself and find a way to provide enough value to be deemed a differentiating factor.
You can start by deconstructing your product into its components. How could you tweak one or more of these components to provide something your buyers would value? This isn’t a case of reinventing the wheel. It could be a small thing, but something so crucial that buyers that value this feature will gladly pay more for it.
Don’t believe in commodities; there’s always a way to differentiate and add value.
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