We hear a lot about the effects that technology and developments like AI will have on jobs and workforces. But powerful forces already operate in markets to actively undermine value and drive out distinctiveness. It’s one thing to know that. It’s quite another to develop a broad differentiation strategy capable of stopping it.
Economists sometimes refer to commoditization as a state of “perfect competition”. Although it is primarily used as a theoretical benchmark, perfect competition is regarded as the opposite to monopolised market power. In a market structure characterised by perfect competition, all the products are the same, everyone is a price taker, businesses operate with comparatively small market shares, buyers trade in an atmosphere of complete transparency and the industry is easy to enter and to leave, meaning there are no barriers.
Of course, from a marketing point of view, commodities are the anti-thesis of the value-added products and services that marketers today are tasked with building. True commodities, like milk powder, steel, meat, wool, oil and forestry products, ride the currents of supply and demand, going up and down in response to market forces with little or no ability to differentiate and no margin beyond that provided through volatility. According to research completed in 2012, in the last 150 years, commodities have gone through three super-cycles, each lasting about four decades and each lifting the prices of commodities by 20 – 40% before they dropped back to previous levels. Marcelo Giugale says that we are in the middle of such a super-cycle right now, driven mainly by China, and while the price of some commodities continues to rise because of that, the average price of commodities has in fact lowered and that when the next downturn occurs, prices will fall faster than in the past.
Economists may like that idea because it enables a market to be more pure, but for marketers, commoditization makes it hard for anyone to stand out from anyone else.
I have identified five key forces that drive down the price that consumers expect to pay for products and services:
- Commoditization of price – the one we are all familiar with. Products are inevitably drawn down towards Chris Anderson’s perfect price of free.
- Commoditization of loyalty – the reasons to stay loyal to one brand come under increasing pressure as others match on features and compete for emotion.
- Commoditization of delight – consumers now expect more and more as of right, which means that it is increasingly difficult for brands to surprise and delight. At some point, brands that have relied on their innovation to be ahead can get swallowed by the “high tide” of expectation and subsumed.
- Commoditization of reach and therefore availability – all products become available to the same degree, with the same level of ease in terms of accessing them. This is particularly true of anything bought online of course.
- Commoditization of audience – everyone tries to reach the same market in the same ways with the same offers, leading to lack of recognition and products that come, over time, to have lowest common denominator appeal
The four stages of one: how brands come to commoditize
These forces play out as what I call “the four stages of one”, which together explain how and why perceived value degrades.
- The one – you have market dominance and therefore top of mind amongst the greatest number of consumers active in a category – either because you created the category or you now have significant scale in the category. You drive the market, and the market and your competitors look to you for competitive and innovation signals. You have the world’s attention, and that’s both a good and a bad thing. You’re probably feted and criticised in equal measure.
- Someone – competition intensifies, as others either copy your ‘magic juice’ or create their own. Alternatives appear, sometimes with the same broad formulation, sometimes something completely different. Your market share starts to shrink, but if the market itself is growing, you may or may not even notice or care. You start to lose the ear of consumers. The story that was once yours starts to evolve into a story for the category.
- Anyone – market demand has grown but your dominance as a brand continues to decline. Seeing the opportunity in this area, your competitors now include not only direct rivals but other firms in related markets who have seen an opportunity to converge into the space. Maybe you wrong-footed a couple of product launches, or your competitors stole a march on a category enhancement. Either way, your tide is going out, and you face increasing pressures from your customers on the price and placement premiums you once commanded as of right.
- No-one – you’re gone. Either literally or as good as makes no difference. Ironically, the market itself may have grown to the point where, as a whole, it is exponentially more valuable than when you began it, but because of the number of players, the intensity of the competition and the almost inevitable revolutions in distribution that have occurred, the footprint for the sector is now so widely distributed and the value of each percentage of footprint for participants is so small that this is now a very difficult place to make money. You may decide to continue to hold a presence in the sector you founded, but your exit strategy in terms of income dependence should have been well and true activated by now.
Innovation is not the only answer
It’s easy to say that innovation is the way to fight this inevitable decline in value. But broad differentiation strategy requires more than simply developing something new. There are good reasons why some innovative ideas work and most don’t. Where so many companies go wrong is that they lock themselves into a functions race, trying to redefine the territory they know by adding to what they have and believing that, in doing so, they will head off others around them. It’s a way of thinking that has been perceptively described as “betterentiation”. Ironically, that process often only adds to the commoditization effect, because it delivers consumers even more at little or no extra cost – raising delivery expectations and lowering margin and surprise opportunities at the same time. Brand different and brand difference are not one and the same idea.
“The first step to combat commoditisation is to understand what customers are really asking for”
Cindy Barnes suggests that the secret for companies looking to combat commoditization is to listen differently. The plea from customers for “cheaper, faster, better” may in fact be masking a very different need, she suggests. “So the first step to combat commoditisation is to understand what customers are really asking for. This involves understanding what they mean and not necessarily what they say. Then you’re in a position to start mapping out what you are selling, who you are selling to and what it is that different groups of customers value.”
Michael Porter famously characterised the best responses as three generic strategies. Companies faced with the dilemma of how to stand out in markets that looked and behaved more and more the same should target cost leadership, differentiation or focus as their ways forward. Differentiation was not the only option in other words, nor was it always the best: “A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy.”
Rebuilding perceived value through decommoditization
Personally, I’ve always liked the idea of decommoditization: of rebuilding perceived value in a market by reversing the commoditization process. However, there is one important difference. Decommoditization skips the third stage of one – anyone – and instead looks to shift a brand from ‘no-one’ to at least ‘someone’ in a category. The reason is simple. You need to be ‘someone’ before you can seek to unperch ‘the one’. To do that, you must generate distinctive and competitive meaning for what you offer: meaning that positions you as the rightful challenger and potential market leader. As Thomson Dawson has put it, “To lock onto relevant differentiation means to provide something that is highly valued and not in abundant supply … Innovate greater meanings not more function.” We’ll come back to this a little later on.
The broad differentiation strategies of other brands
So what have companies done by way of broad differentiation strategy, and what can we learn from them? Let’s take a look at the differentiation strategies of a number of brands.
Virgin Airlines employs a two-sided strategy: pricing and service. By reducing the costs associated with air travel in order to keep its fares competitive, and yet maintaining a full service offer, Virgin Airlines is able to compete directly with both budget offers and full service airlines.
While Wal-Mart would be seen by many as a company that drives commoditization into the markets it operates in through its unrelenting pricing strategy, the strategy works because the company orientates its whole way of working around driving out cost, meaning it takes an integrated, rather than opportunistic, approach to sharper margins.
Apple’s nuanced differentiation strategy combines daring technology with beautiful design, an ambitious ecosystem of related products and services and a powerful reputation to continue being the player that everyone looks to in the personal technology space. In addition to this generic strategy based on broad differentiation, Pauline Meyer suggests that Apple uses three intensive growth strategies:
- Product development – the company develops unique new products for the mobile market that enable it to generate more revenues and higher margins
- Market penetration – Apple sells more of its current products by increasing the numbers of authorized sellers in markets where it has capacity to do so, and using advertising to encourage people to become more engaged with the Apple ecosystem.
- Market development – the company creates new markets for new products or enters completely new markets in order to establish a presence there. By developing products like Apple Watch for example, the company not only extends its product development, it also develops new ways of achieving reach in the smartwatch market.
What’s important about each of these examples is that no brand, with the exception perhaps of Wal-Mart, depends on just one differentiating factor. Rather, they look to combinations of ideas that enable them to compete for attention on a range of fronts.
It’s interesting too to look at Amazon because here we have one of the companies that is driving others to commoditise, and yet Amazon itself is well versed at how to use commoditization dynamics to its own advantage. Consider these three aspects of Amazon’s approach:
- Relentless iteration and evolution – Amazon has not only moved from one sector to another, it has also modified, recycled and evolved its product lines to keep pace
- Customer service, at speed – while others have pursued eco-systems that are tightly integrated to maximise loyalty and returns, Amazon has developed platforms that enable the business to serve customers, often using learnings taken from adjacent sectors
- Amazon not only bridges the physical and online worlds, it also intermeshes products and services to keep people involved and buying. Take Amazon Prime as an example. At one level it’s a service mechanism, but at another it’s an active research input that enables Amazon to continue to hone what it offers and outsmart its rivals: “If you somehow manage to take advantage of every Prime membership feature, it’s undeniably a good bargain … What Amazon Prime is selling most of all is time … The more products and services Amazon is able to cram into Prime, the more likely users are to renew their membership and buy more stuff, which gives Amazon more data about their tastes and what they are likely to buy next. That information is used to spin out new products and services …”
The Amazon example shows that, if you are going to use innovation to out-pace your competitors, to close out opportunities for them and to force them to compete in ways that work in your favour, then you need to do so from a relentlessly customer-focused point of view.
Not everyone is convinced that differentiation is the answer to commoditizing forces
In a paper published in the Australasian Marketing Journal in 2007, Byron Sharp and his colleagues challenged whether differentiation was a critical element of brand strategy. Differentiation is such a tenet of the marketing establishment, the writers contended, that it goes largely unquestioned. “Effectively, we were investigating whether buyers needed to perceive a reason-to-prefer in order to buy a brand. We found that the majority of buyers do not explicitly state that they perceive their brand to be differentiated from other brands. Therefore it is questionable whether perceptions of brand differentiation are significant drivers of buyer behaviour.” They continue: “The main implication of this research for marketing practice is that marketers do not need to convince buyers that the brand is different in order to get them to buy.”
I agree. Consumers simply don’t wander round looking for brands that feel different to them. In somehow assuming they do, it’s too easy for brands to go looking for reasons to prefer that are little more than semantic. Instead of focusing on why their brand is different, brands should focus on what makes them distinctive in the eyes of the people they are trying to talk with.
Nike’s whole approach seems at first glance to be focused on their products. They produce high quality products that meet customer expectations and they market them in ways that people love, using celebrities.
But more important and effective than what it makes is how Nike makes its customers feel. Consumers pay up to a multiple of four for Nike products not because of how they perform but because of how the brand makes people feel: “If you want to steal share in this crowded market, your brand must recognize that every purchase a consumer makes, no matter how small, holds within its nucleus the DNA of self-description … Show me myself, not as I am but as I wish to be and I will buy it every time. In fact, I will feel incomplete without it once I know it exists.”
Consumers pay up to a multiple of four for Nike products because of how wearing Nike makes them feel
Rather than concentrate on what makes the shoes better, the brand has zero-ed in on what makes the wearer feel better. In other words, as best practice has effectively closed any noticeable gaps in competing products, the cues for differentiation have also changed. Today, as Cindy Barnes points out, it’s about helping the customer to feel differently. And the drivers for that come from being able to read the patterns in the big data and to transform them into very human ideas that people wish to make their own. Prime is a sophisticated product, but it talks to an elemental human need: the wish to save time.
Why broad differentiation strategy (in a new form) is important
I think there are important take-outs from all of these viewpoints:
- Commoditization super-cycles will accentuate the roller-coaster effects of supply and demand in the years ahead. Brands can expect to enjoy greater organic growth when they are linked to product categories that are ‘on the up’, but they should also allow for the fact that the downturns will be more extreme.
- There are now so many ways for consumers to lose interest (price, loyalty, delight, reach, audience) that companies need to focus on excelling in one or two key areas, and at least maintaining competitiveness in others.
- Brands that have fallen out of favour can find their way back, but to do so they need to take a systematic approach to regaining currency and distinctiveness. As they do so, it’s vital that they retain the brand codes they are known for, and connect those to the differentiated position they are striving for. Such references will give their story and their re-emergence continuity.
Exploring new ways of avoiding the commodity trap
The way back for companies that need to reassert their value is not just to make better products. Companies are going to need to deliver distinctive relevance across five broad areas in order to counter commoditization forces:
- The difference you represent in people’s lives – companies will increasingly need to lock onto the key priorities in people’s lives (information, time, ease, self-importance, affordability etc) and build their brands and their stories around those ideas. To do that, they will need to develop points of view on those priorities that their products report to, rather than the other way around
- The difference you make to the world – responsible trading will increasingly become a standard expectation (in other words, it is commoditizing). To over-ride this, companies will need to show more proof that they deliver better ethical outcomes. In other words, they will need to hammer home where and how they change the physical world for the better through what they provide, and they can expect to be increasingly judged on that. This is about a lot more than transparency and the reporting that happens today. It’s about proof-of-benefit, and it needs to remind customers why they should value you over others.
- The difference you celebrate – as the context for consideration becomes broader, so the need for brands to be more inclusive and aware will also increase. Businesses that fight the conventions of their sector and, through action, show new and more human ways of doing their business will draw more people to them.
- The difference you enable – who would have thought that Lego could be used to repair city walls and masonry? Jan Vormann’s work is both a powerful statement about what must be fixed and a colourful celebration of optimistic interventionism.
- The difference you stand for in the world – purpose is a powerful tool in the fight against commoditization. Brands that stand for a point of view that people value will find it easier to easier to explain the value they represent and to build communities that, in turn, reinforce that value amongst themselves. Few brands that I can see have thought of their purpose as an anti-commoditizing influence, and so few have galvanised their culture and their strategic planning around the profitable, distinctive and sustainable pursuit of that idea.
Stuck on how you can differentiate your brand and counter commoditization in your sector? Here are 50 ways to differentiate your brand.
Updated: This article was originally published in August 2013. It has been updated in December 2017 to include more detail and discussion points. A shorter version of this article was posted elsewhere under the title Why Perceived Brand Value Degrades.