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Fighting the Commoditization of Your Products and Services Fighting the Commoditization of Your Products and Services Chris D’Alfonso, Partner & Tim Mullane, SVP of Sales and Marketing The authors challenge companies to resist the pressure from customers to commoditize their products and services. Rather, they argue that companies need to do a better job of understanding the value they deliver specifically in comparison with competitor offers to their key customers and segments. By gaining this understanding, companies are more able to create product and service bundles that require clients to make trade-offs based upon what they want, minimizing the commoditization of your products and services. Fighting Off Commoditization at the Product and Account Levels in B2B For many B2B enterprises, achieving and commoditization gives organizations the sustaining profitable growth has never been competencies and capabilities they need to more difficult. Customers have invested heavily identify and increase value at both the product in procurement organizations to extract and account levels. Typical results in critical aggressive price concessions from sellers. Global measures of success include: competitors are emerging with new business • Price realization: Price increase of 1-3% in models, lower costs, and higher quality to products/SKUs; 3-5% in accounts undermine the value proposition of incumbents. Products are perceived to be increasingly • Margin Improvement: 10-15% uplift in products commoditized, leading customers to demand /SKUs; 8-10% uplift in accounts lower prices for undifferentiated offers. Worse, after being relentlessly beaten down on price • Cost-to-Serve Savings: 5-10% decrease in by customers, many suppliers have themselves products/SKUs; 5-10% decrease in accounts begun to believe that they are offering only Working with us, clients have been able to commodities. Even suppliers that are clearly determine the unique value for target customers differentiated may come to accept their and capture their fair share of it. Additionally, commoditization. So the problem is not only a they have built trust and perceived enhancements commercial reality with customers but also a in the source of value they are offering. Instead mindset among sellers, and in B2B it has become of losing ground, they are gaining it, and stopping the new normal. the erosion of brand equity. In essence, they are But B2B sellers don’t have to resign themselves remaking their businesses through the marketing to this fate. They can fight back. By adopting a and sales functions. Before embarking on training comprehensive and concrete approach to value, – or other solutions like instructional software they can shake off their resignation, repel or aggressive hiring and firing – you should first commoditization, and even roll it back. EMM know exactly what you are trying Group has developed an approach to de- to achieve. commoditization that helps B2B sellers get value right. Our proven, five-step approach to de- EMM Group, Inc. 269 372 2311 office 269 585 5900 fax emmgroup.net 2 Solving the Four Major Problems of Commoditization While each seller’s situation is to some extent • Product line margins are being squeezed unique, there are some familiar causes of to unprofitable levels. commoditization that we encounter with clients Put simply, you’re getting beat up on the price over and over. The key to solving these problems of your products. But instead of simply trying lies in moving a negotiation from merely haggling to hold the line on price, you can develop a about price to a discussion of value, where tiered offering with a price menu or fee “value” is comprehensively understood and structure, introduce design or service inno- carefully defined. Consider these four perennial vations, and develop a brand architecture that challenges of commoditization and their value- reflects the tiers. This approach allows based solutions: customers to select a bundle that meets their price point, instead of leaving you with the choice of conceding ground on price merely to maintain volume. Four major causes • A major account negotiation is controlled of commoditization by Procurement. With Procurement increasingly getting a voice 1. Product line margins are being at the table in major account negotiations, the squeezed to unprofitable levels. pressure on sellers to be merely low-cost providers is greater than ever. And because a 2. A major account negotiation is handful of major accounts may represent a controlled by Procurement. majority of your business, it is critical to resist commoditization in annual contract reviews, price reviews, renewals, and other negotiations. 3. The sales team faces product We have found that addressing this issue matches from China and India. through a value-based deal structure and cost- for-value tradeoffs is one of the fastest ways 4. A new, differentiated service to reverse the tide of commoditization. You offering is driving up your choose a critical major account and become cost-to-serve. highly proactive with multiple price point offers keyed to the differential value each provides , offering clear trade-offs between price and value. EMM Group, Inc. 269 372 2311 office 269 585 5900 fax emmgroup.net 3 • The sales team faces product matches • A new, differentiated service offering is from China and India. driving up your cost-to-serve. The selling strategy of many low-cost com- To protect volume , you introduce a new offering petitors, especially those based in China and that sets you apart from the competition, but India, is to assert that their products are as good your cost-to-serve is unacceptably high given as anyone else’s. In many cases, however, their the commodity pricing the customer expects. products, though not great, may be good To recover that higher cost-to-serve, you can enough to make Procurement believe that there price the offering in terms of its Unique Economic is little difference. In fact, your products may be Value (UEV) – the economic return the customer far better, which means that you are already realizes as a result of the offering to the exclusion differentiated, but you may not know how to of your competition. The key is to make sure the calculate the additional value that your customer knows where the commoditized part superiority generates for the customer. The of the offering ends and the differentiation – and solution is to develop a customer value tool that its unique economic value – begins. And it is at salespeople can use to show customers how that critical divide that you begin the negotiation. they may be hurting themselves economically by buying product matches. You can also put Clearly, such value-based solutions are preferable additional distance between your products and to the steady drip-drip-drip of commoditization. matches by innovating in the total solution you Unfortunately, while many people understand offer. the idea in principle, few are able to put it into practice – often stumbling on the difficulties that “value” presents. EMM Group, Inc. 269 372 2311 office 269 585 5900 fax emmgroup.net 4 Five Steps to Getting Value Right – and Reversing Commoditization “Value” is , of course, one of the most misused account teams who may be providing value. and misunderstood concepts in the industrial The specific elements of the grid will differ world. When it is loosely defined, inexpertly according to the specific nature of your business, calculated, inadequately developed, or poorly but once you have created the appropriate grid, communicated, the result is not only money left you can then identify the discrete elements that on the table, but another step toward the death deliver value at the intersections of the product spiral of com moditization. We recommend a five life cycle with commercial transactions. These step approach to reversing the tide of may be places where you are currently creating commoditization, which we have implemented value; they may be places where you are creating successfully with many of our clients: differential value; or they could be places where 1. Map the value landscape. you have opportunity to fulfill an unmet need. Too often, when resisting commoditization, sellers emphasize product differentiation but go no further. By mapping the value landscape Offering Life Cycle you can disaggregate your offering into discrete (typical) elements that deliver value, instead of simply RFP/Receive Order trying to differentiate the offering as a whole. Specify Solution There are two dimensions to the value landscape: Technical Exchange (1) the offering life cycle and (2) commercial Process/Produce interactions. The offering life cycle consists of Delivery/ the different points at which you start delivering Logistics value, from the RFP stage to field support once your solution is in use by the customer. The Field Support commercial interactions are all of the touch points with the customer – interactions in which Transaction Channel Region Global/Account Commerical Interactions (typical) you may be delivering value. Often, however, sellers focus only on the transaction – the sales Each cell represents a value person knocking on Procurement’s door and creation opportunity trying to sell a product – and forget that they value creation activity The presence of a cube have commercial discus sions at many levels of indicates a potential the customer’s organization. Each of those touch opportunity to differentiate differential value points may hold potential for your identifying unmet need and delivering value. For example, there may be opportunities to identify the unique value delivered through your sales channels or Not every cell in the grid will yield a value element, delivered at the regional or global levels by but the number of possibilities that this exercise teases out can be surprisingly high. EMM Group, Inc. 269 372 2311 office 269 585 5900 fax emmgroup.net 5 2. Generate value insights. 3. Estimate unique economic value Through careful research, you can then determine (UEV). what is of ultimate value to a particular customer.
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