CHANGING THE RULES OF THE GAME: DIFFERENTIATING A COMMODITY PRODUCT

ALAN W. HALE PRESIDENT CONSIGHT™ MARKETING GROUP

“Sell harder” is the rallying cry from sales managers of companies selling commodity products in mature markets. When that fails, then marketing wants to lower the price. They think it will buy market share now, and they believe they will be able to cut costs in the organization later. Unfortunately, this tactic of lowering the price is easily copied by the competition. This leads to a death spiral where the company can no longer maintain the margin they need to survive and thrive. Unless your company is truly the lowest cost provider in the industry, it frequently leads to lower and lower margins until a death spiral occurs.

The way to avoid this and set a winning strategy is to change the rules of the game to alter your customer’s buying habits. Customers change their buying habits when they perceive there is a value to do so. Value = Benefits Derived/Costs Incurred. We suggest that it is more effective to increase the benefits which add value to the customer while keeping the costs constant. According to Philip Kotler, a brilliant marketing professor from Northwestern University Kellogg, “If you can differentiate a dead chicken, you can differentiate anything.” Professor Kotler advocates using service to augment the core

product, and differentiate it from the competition.

A graphic visualization of Kotler’s differentiation strategy is as follows:

Augmented product includes service such as delivery, service, customer service, etc.

This white paper outlines several alternatives of differentiating your commodity product without resorting to slash and burn tactics – slashing the price and burning the profits of the company.TARGET CUSTOMER SEGMENTS/DEVELOP BRAND PREFERENCE

Here are some examples of how some clients and companies use segmentation and brand preference to

market their commodity type products:

A client who manufactured spray paint guns wanted to develop brand preference for their product. They visited technical schools and sponsored training sessions to teach the students how to spray paint. They gave deep discounts for the schools to use and train the technicians on their brand of spray paint guns, getting the technicians to feel comfortable in using their brand. Once they went out to practice their trade, they would more likely request that brand of spray paint guns.

A client manufactured steam traps which were used in manufacturing plants and purchased by either purchasing or the facility manager. These products were viewed as commodities by the plant manager and could cost tens to hundreds of thousands of dollars to purchase. The client offered free audits to larger manufacturing plants to maximize the efficiency of the steam system as well as lower the energy costs so the customer would specify and purchase their brand of steam traps.

A manufacturer of steel fibers used in strengthening concrete, found several competitors nipping at their heels. They increased their technical staff, and developed software to help structural engineers design the specifications for new jobs.

A supplier of cartons was constantly losing bids as they were priced too high. They finally determined they could not compete on price alone and changed the rules of the game. They worked with the R&D departments of clients at their own expense to create custom packages for new product launches. They offered just in time shipments, and offered vendor managed inventory for those customers who wanted it. They quantified these expenses and described how these services were free on bids. The company has grown exponentially.

Another company decided to launch a line of “me-too” portable electric generators in the market targeted to home owners. Rather than spending the hundreds of thousands of dollars to develop a brand, they decided to negotiate with a leading industrial company to license their brand on these products, and paying them a royalty to legitimize the product.

MAKE IT EASY TO DO BUSINESS

Everything being equal, price, quality, selection etc, a customer would rather buy from a company that is hassle free, i.e. does not take a lot of pain and heartache to resolve issues.

Sears has a line of Craftsman tools which were sold to homeowners as well as contractors. They offered a lifetime warranty of bringing in your damaged tool, and they

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would replace it, no questions asked.

A wholesaler of electronics wanted to understand how they were perceived by their larger accounts. When we did the research, a common complaint was when their call was transferred to the next available service representative, where they had to explain again their situation. We worked with them to assign a primary and secondary customer service representative to the largest of the accounts. That way, they would not have to repeat the story, and would be able to develop some rapport over time.

A supplier of lighting used in commercial buildings would deliver all of the products just in time to the floor the contractors were working on that day at 6:30 a.m. This also prevented products from walking away from the job site.

Some companies offer VMI (Vendor Managed Inventory) where the vendor keeps track of when to order additional products.

BE IN THE APPROPRIATE CHANNEL

We have had clients who wanted to sell their products direct to the market and avoid the additional cost for the margin for the wholesaler/distributor. In addition to the perception of reducing their cost, the client did not want to sell their products to channels who sold competitive products as well. Unfortunately for the client, research showed that many customers wanted

to reduce the number of vendors they had on the books, and they preferred to do one-stop shopping rather than purchase products from many sources. The client was actually losing market share by refusing to sell their products to these channels.

There are certain exceptions to the one stop shopping phenomena. One example is power tools. Contractors are very loyal to the brand of power tools, and will go to another channel that offers his or her preferred brand.

WORK ON PERCEIVED BENEFITS NOT COSTS

Companies who are able to change the rules of the game in commodity markets fare better in terms of sales and margins than those companies who try to rely on reducing price either by lowering the price or offering special promotions.

A SUGGESTED FRAMEWORK

We propose that companies take a much more rigorous process to determine what customers really value, a structured voice of the customer process.

Step One: Discovery ResearchUse a variety of methods to determine what is of value. This includes focus groups, personal interviews, in-depth phone interviews and ethnography where a team follows a group of customers using this type of product. Conducting customer satisfaction surveys seldom

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gets to the heart of the issue. You must define unmet needs.

Step two: Internal BrainstormingTake the initial voice of the customer findings and generate potential ideas for differentiation in a brainstorming meeting. This meeting should last two to three hours. It is critical not to criticize initial suggestions, nor take the first few mentioned. Then assign some type of value scale for each idea which would include being able to differentiate the product, ability to provide this, cost of implementing etc.

Step Three: Validate FindingsGo back out and test these ideas to determine which ones resonate with your customer base. This would include both qualitative and quantitative measurements.

If this sounds like a lot of work, it is. But unlike reducing pricing, these tactics are much harder to replicate by the competition.

The key is to make investments in areas that are valuable to the customer, and reduce/eliminate investments in areas that are not valued by your customers. Let your competition waste their time and resources on chasing the unimportant.

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About Consight™ Marketing Group, LLC

6104 W. Wawrick

Chicago, IL 60634

847.800.1685

Consight™ Marketing Group combines consulting and insight from market research to provide actionable strategies for companies in business to business markets. Voice of the customer services include:

Customer satisfaction and loyalty

Market assessment Developing go-to market

strategies New product/new service

validation Designing effective channel

strategies Lost account analysis

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About Alan W. Hale

Alan Hale is President of Consight™ Marketing Group and has 35 years experience in working with clients serving business to business markets. He has served as Past President of the Chicago Chapter of Sales & Marketing Executives International as well as served on the board of Sales & Marketing Executives International.FOR ADDITONAL INFORMATION

To discuss a marketing issue in more detail, call Alan at 847.800.1685 or visit www.consightmarketinggroup.com

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