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You’ve been commoditized, now what?

August 10, 2012

Commoditization of a product is a natural evolution of the market and is not the worst case scenario. If you are responsible for a commodity product, that means there is still a viable market for what you build. This is a much better proposition than being obsolesced.

Your main problem is that while you have been working to build brand awareness, optimize distribution channels, add features, improve quality, reduce costs and shorten lead times, your competitors have been doing it faster and better. Or it could be as simple as your patent expired.

You still have some options. Performing some market and customer research may yield some ideas to breathe new life into those now low-margin products. Below are some time proven strategies for increasing the value of a commodity product.

Create a new category for the product

Don’t confuse this with marketing efforts like new labeling or exciting new advertisements. I’m thinking about thoughtful extensions to a product. Let’s look at the wholesaler of proteins such as fish, poultry, pork or beef. How much of a premium are you willing to pay for a different brand of fresh fish? Much of the product is packaged under a store label.

Now take a look at the prices for marinated chicken or a breaded fillet of fish. There is often a 100% premium for this category. That doubling in price per pound is not due to the increased cost of production. It’s only a couple cents worth of ingredients and a small amount of labor. It’s not that it takes significant skill. Putting meat and marinade in a bag is pretty easy. What the processors have figured out is that there are enough consumers who don’t plan well, who are too tired or don’t have enough time between work and dinner to prepare this style of food. Producers have filled this lack of planning and time by offering a convenience. They have taken the marinating process offline for the consumer and give their customers something that is highly valued: The ability to deliver a delicious meal in less time.  The result? A high margin market for a previously commoditized product with an extremely limited capital investment for the producer.

Reduce risk and uncertainty for your customer

Are your products used in critical applications where downtime is expensive or causes bad publicity? If so, your downstream supply chain may be stocking up on inventory to ensure this downtime is minimized. Excess carrying cost, excess real estate costs and product obsolescence are all now costs that reduce profits for your customer. By providing 24×7 hour rapid replacement of parts, you can eliminate the excess inventory and create a differentiated service without making any changes to your product. Even better, determine if you can have an impact on reducing that downtime and make the changes necessary.

Improving outcomes and reducing costs for your customers

Visit with your customers all through the downstream supply chain and review their processes that relate to your product. Are they performing processes that you could perform more efficiently? Do they lubricate the product before it’s installed? Is it kitted in a warehouse with other products that you can provide? Are field installers modifying the product because they have found a different use or there’s a new requirement that never made it back through Purchasing?

Your customers can receive value from your existing data

The hot buzzword these days is Big Data. Any data that your company possesses was expensive to collect. Re-using it to provide value to your customer is a great way to differentiate from your competitors. If they are not capturing that data, it will be a difficult to duplicate what you are doing. Here are some suggestions that I have seen where manufacturers have re-purposed data they collect that was originally intended for use in timekeeping or labor productivity management:

  • Use real time labor tracking to provide the status and completion time of components to your customer. When they have a downed machine, being able to confidently predict when it will be back up is very valuable to them. The value of this information has no relation to the cost of the part they are waiting for.
  • Provide detailed records of the charged services that you provide to your customers. This ensures them that what they are being billed for is accurate and that your company is in control of the services it delivers. One company details and presents the services it delivers during natural gas extraction to its lease-holding customers. It turns out to be exactly the same data the company uses to track time for payroll and understand its labor cost per project.
  • Provide an auditable history of the product . It’s one thing to have a quality sticker applied to a product. It’s a different level of control to provide an auditable trail of quality checks throughout the production process. This is exactly how one company re-used its labor tracking data to increase its customer’s confidence that it was shipping high quality components.

 

Lean selling is the prescription for a commodity market

These are just a few examples of how to differentiate your company’s offering with little or no change to the product and limited capital investment. What’s different is that it requires your company to understand your customers supply chain and the challenges they face. Fortunately there is a tried and true process to get there. It’s called Lean and the first step is training your sales force in the basic principles.

Think this will be tough to justify with management? First, this isn’t the Lean that reduces waste inside your company. This Lean project increases revenues and differentiates your company from the competition. Second, your sales force already has a name for this. They call it solution selling. The reason solution selling is so hard for them is that the vast majority of sales trainers they hire don’t provide a formalized method to analyze their customer’s supply chain. They train the sales people to ask the customer to describe their challenges. Sales people are then supposed to eliminate those challenges with the products they offer. This approach is extremely difficult for salespeople because if a customer knows it’s a problem, it’s probably not an easy one to solve. The real opportunity is identifying previously unknown waste. It’s what’s called latent pain: Everything seems to be working fine from the customer’s perspective and no one is complaining. Your company’s opportunity is to teach the sales force about the “system” the product lives in and provide the tools (i.e. value stream map, 5 why’s) for the sales force to use to uncover those opportunities. You can probably name some situations where an enterprising sales person has done this already. The opportunity is to institutionalize that analytical and creative behavior throughout the sales force.

The good news is that these techniques apply to every product whether commoditized or not. Secondly, it’s a profitable experience for everyone. Customers, your sales people and your company all benefit when waste is removed and value is added back to a commoditized product.

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