How To Avoid Commoditization
Believe it or not, there is a way to avoid commoditization even if you sell a commodity. The typical pricing strategy is to sell at the lowest price possible. At the same time, setting the price as low as possible means that profitability is also very low. This is because, in a commodity marketplace, buyers perceive all products or services as equal, with no differences between them, and they are complete substitutes for each other. This means buyers will make their buying choices on price alone—the lowest price wins.
And when the lowest price wins, it typically further leads companies to the commoditization death spiral. This death spiral starts with low prices. Maybe the lowest among competitors. The low prices lead to low margins, leading to fewer resources to develop new products or services, fewer resources to market, fewer resources for sales development, and so forth. Products or services that are not continuously developed and improved will fall behind the competition, reducing the company's ability to hold prices. This leads to even lower prices, fewer resources for developing new products or services, fewer resources to market, and even smaller resources for sales development. Eventually, the product and the company are on life support, and there's no way out. Probably not a situation you want to be in.
Some companies enter that commoditization death spiral by accident, others by simply being lazy. They decide to go to market with a product or service equal to competition in virtually all aspects, thinking that "by default, we will get some business." And they are correct, especially if they can keep their prices low. But is it going to be a successful business? I don't think so.
Laziness is not the desired quality of a business leader. It is someone who has given up. Someone who doesn't want to take the extra effort to understand what is essential in their market and for their customers and how the company and its products and services can differentiate itself in a meaningful way to the buyers. This means that differentiation increases buyers' willingness to pay and buy and thus supports higher prices even in a competitive environment with similar (but not identical) products or services.
And this differentiation doesn't necessarily have to be based on product or service features or functions. It could be creating different bundles. It could be adding services to a product or having delivery methods different from the competition. It could be marketing that is better in understanding what customers truly want and simply having a marketing message that is more effective in driving demand. Or it could be a better understanding of the market's decision landscape and purchase behavior. It leads to a customer segmentation focus that leads to a higher perception of value than the competition for the target customer segment, even if the product or service is the same for all customers.
The differentiation between one commodity seller and other commodity sellers doesn't have to be huge. Still, it has to be significant enough to lead to a higher willingness to pay and command slightly higher prices. While this does not sound much, consider that all competitors operate on thin margins and are thus all resource constrained. So even the ability to charge a few percent, maybe 3-5% higher prices, will, in many cases, provide the company with more resources than the competition. Resources to develop appealing products and spend more on marketing and sales development. That will then increase revenue channeled back into more product development and sales development.
And that's where the company's pricing strategy comes in.
A pricing strategy based on willingness to pay research will avoid the commoditization death spiral and focus on the customer segment that will support higher prices, with the product, marketing, and sales method that generate the highest willingness to pay.
And that strategy may consist of creating different product bundles, doing product and service bundles, or having a stratified pricing strategy based on variables discovered in the willingness-to-pay research that customers especially desire, even if just by a small portion of the entire market. But this (possibly) small portion of the market that is willing to pay higher prices becomes a leverage point that the company can use as a first step towards de-commoditization. In addition, it will give the company more resources to continue differentiating itself from the competition. For example, to increase product development, sales, and marketing efforts, and eventually, elevate itself to the next level.
And that's why a company needs a pricing strategy based on willingness to pay research to de-commoditize itself and generate superior business results. As a result, the company will earn higher profits than the competition, serve its customers better, capture higher and higher market share, and drives shareholder value.
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