Or will you figure out how to differentiate yourself in a commodity market? HBS professor John Quelch believes the old saying, “There are no mature products, only mature managers.”
Even if the product itself has no distinguishing characteristics, firms can still compete on customer service, availability, delivery, and financing, among other differentiators. At a Professional Pricing Society conference, I met the pricing experts from what others called “the dirt company.” They sold gravel and fill to contractors—can a product be more of a commodity than fill? But they successfully charged a premium because they had developed a sophisticated scheduling system which allowed them to give contractors an exact time for pick-up. The premium they charged was less than the cost of the expensive truck and driver waiting at competitors for their turn to obtain fill.
Quelch advises companies to adopt four tactics:
- “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.
- Compensate your sales force on profit margin, not sales revenues. A volume-based sales force will sign up any customer, regardless of profitability. That's OK early in the product life cycle but not in maturity.
- Trim costs and acquire competitors (with profitable customers) to extract maximum scale economies in procurement, manufacturing, and distribution
- 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.” (source at end of post)
I do not agree with his suggestion to complicate your pricing structure. Most B2B buyers want several bidders and companies which cannot be compared to their peers will be eliminated from consideration. Even consumers will be likely to look elsewhere. I have seen success with simultaneously raising prices and discounts. It’s particularly effective internationally in cultures that believe a large discount means that they have received a good deal.
Whatever you select to be the differentiators, remember that there can only be one lowest cost producer in an industry. If that organization is not yours, you’ll be out of business soon. Careful analysis of your strengths and weaknesses vs. rivals and the needs of different market segments should yield a match. If not, it is time to revise your whole strategy.
(HBS Working Knowledge, “When Your Product Become a Commodity,” interview with John Quelch, the Lincoln Filene Professor of Business Administration at Harvard Business School, 12/14/07)