The Antidote for Commoditization

“There is no such thing as a commodity,” or so said the late Theodore Levitt in his book, The Marketing Imagination.  However, Levitt passed away before the full impact of Walmartization hit America.  I still agree with him, but the past two decades shifted the leverage in consumer products to the mega-retailers, and away from suppliers. That pushed many products into “commoditization,” giving the buyers strong negotiating positions.

Industrial products had a bit different problem, since many of the suppliers and the customers were somewhat more interdependent.  Still, some very large companies with big global purchasing power are known for their tough, competitive purchasing style.  As industrial customers consolidated and grew into “mega-customers” they also grew a “get the lowest cost” mentality.  What is a supplier to do when faced with the huge customer who is a “tough buyer?”

Differentiation via Innovation—the Antidote to Commoditization

The same solution works for both of these situations:  “differentiated innovation.”  How to apply this solution is quite different dependent on the product or service.  Why?  Because one market might be sold through retailers to consumers, while another is sold direct, and yet another is sold through distributors.  Consumers make much more emotional decisions than industrial purchasing managers who buy to a specification, not an emotion. Distributors as intermediaries add another kind of decision criteria—a service oriented one.

Thus the approach to differentiated innovation must be customized quite differently.  To generalize, one approach uses technology, and the other uses psychology.  But, as Mark Twain once said, “All generalizations are false, including this one.”  He was right.  But I used the oversimplification to get your thinking headed in the right direction.  They are two very different situations.

How often is the color of a specialty fastener, a submersible pump or an industrial valve a major purchase decision factor?  Not very often, right?  On the other hand, in a home appliance, a car or a blouse, color is very important.  Sometimes speed of service is critical; at others, the service capability is the key issue. Thus we get the clues on how to proceed with differentiated innovation.

What to Differentiate Matters

Function is important in all products.  Performance is important in all services.  Knowing what the critical decision criteria can be the key factor in deciding how to differentiate innovative new offerings.  Price is always important, but many times, it is not the sole or even the primary decision factor.  Function and/or Performance, on the other hand, are nearly always essential—in both consumer and industrial products—and services. 

Unique or proprietary function can be a differentiator in an industrial product.  It can also be used to avoid the commodity trap in a consumer product, but creating the unique proposition may be more difficult.  On the other hand, cosmetic features, style, appearance, names, brands, etc. can easily be the basis for separation from commodities in consumer products; much less so in industrial products.

As examples, I’ll take a few products with which differ significantly: a flow-control irrigation valve, a bicycle and an aerosol cleaner. 

The Valve: Function and Reliability

The valve may have a body of metal or rugged plastic, whichever is strong enough to perform the function. But it almost always gets “buried” usually in a “valve box” underground.  How important are aesthetics/styling in this valve?  How important is the color of the valve?  Not very important.  What are important are features like the size of the piping it fits, the flow, speed of operation, and durability—number of cycles before something fails.  Ruggedness in appearance can matter, provided it is backed up with performance.  Metal may be perceived as stronger than plastic, but plastic may be considered preferable since it is not susceptible to corrosion.  How “pretty” a valve is, probably matters little, however if it looks rugged and well designed, that might matter.

The Bicycle: Features and Styling

Now take the bicycle.  Of course it must work and be safe—there are many regulations about bike safety. How many speeds it has, what kind of brakes matter, etc., but these are often shared by many similar models.  Cosmetic features are much more important. The color, the styling, the graphics and even the name can influence purchase decisions. (e.g., Outdoorsy or high tech names add perceived value: “Titanium” is an expensive sounding name, even if there is no titanium in the bike. “Stone Mountain” sounds like a rough and tough mountain bike.) 

Tactile features like texture and softness of the grips and seat, and physical features like the size, shape and tread of the tires, and the geometry of the frame, which determines how a bike fits the prospective rider, are major decision influencers. The inclusion of special accessories and/or features like bags, baskets, carriers, shock absorbers, pedals with locking devices to mate with special shoes, may also be important differentiators.

The Aerosol Cleaner: Efficacy and Cost

Imagine the ubiquitous aerosol cans of “brake and parts cleaner” found in virtually every auto repair shop.  The cans pretty much look the same, are the same size, and spray out of a very similar looking nozzle. So what’s the difference?  Price may vary, but it is the nature of the spray: its shape, velocity out of the nozzle, pattern, and most of all, chemical makeup, (solvent content and volatility) which determines how well the cleaner actually works.  

The odor may not matter unless it is offensive.  There is likely a desirable odor based on the solvent contents. The chemical makeup matters because different states have different regulations on what can be “sprayed into the atmosphere,” and even how empty cans must be disposed of. Ultimately what matters most is whether it does what was intended—clean the parts.

Understand these key differentiators and exploit them.  Valves that have low flow losses, long life and rapid actuation may yield a competitive advantage.  Bikes that have unique functional features like easier gear shifting, more comfortable seats and more durable tires might create advantages, but flashy color schemes and impressive names have been proven to count for a lot.  Aerosol cleaners that meet users “expectations for efficacy” at “competitive prices” are winners, but these are very imprecise measures for buyers. Sell innovation-based expectations to gain an advantage.

Understand the Buyer’s Decision Factors

The key point of this entire article is the huge importance of understanding the critical decision factors your buyers will be using to measure what is the “best value” combination for them.  Is it cost, reliability, styling, efficacy, function, or more likely, some combination of several?  Making a beautiful valve that works poorly is a bad idea.  Making a wonderfully functional bike that it ugly is also a bad idea.  Making an aerosol cleaner that sprays but doesn’t clean is yet another way to fail.  So, how do you succeed?  Create what will sell!

Innovate What Buyers/End-users Will Buy

Differentiated innovation focuses on what buyers will pay for, and what end-users will buy.  The key is to understand those decision criteria well, and then only after that understanding is in place, innovate with “better solutions” that offer the best value combination based on those decision criteria.  When you’ve done that, you have found the antidote for commoditization—differentiated innovation.

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