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Commoditisation: Changing before you must

by | May 16, 2017 | Blog, Strategic Thinking

Commoditisation in many markets is symbolised by a gradual erosion in the buyer’s perception of the differences between products/ services from multiple suppliers in a defined procurement category – encouraging buyers to focus on price. In formulating the right strategic response, Business Leaders need to correctly interpret the causes, potential impact and timescale.

 

The Causes of Commoditisation

  • Increasing competition – especially where the number of low-cost suppliers is rising and the difference between suppliers is diminishing
  • Product mirroring – where the prevalence of me-too products is increasing and suppliers focus on a limited number of features/ benefits above everything else
  • The introduction of new industry standards – specifically minimum performance standards
  • Government intervention in setting prices, standards, approved suppliers, etc.
  • New market entrants that strip-out unwanted or unnecessary product features
  • The availability of substitute products that create a price ceiling or minimum performance standard
  • Globalisation providing buyers with access to many more suppliers with lower operating cost models
  • The internet affording greater knowledge of potential suppliers and price differentials to centralised procurement functions in buyer organisations

The Changing Behaviour of Buyers

  • belief (rightly or wrongly) that all suppliers are fundamentally the same
  • A diminishing desire to look at new features and benefits
  • The issuing of overly prescriptive Request For Quote (Invitation to Tender) procurement documents to suppliers that largely devalue or ignore any meaningful points of differentiation in either the product or customer experience
  • An increasing preference to select suppliers based on price and little else
  • A reluctance to pay for anything they consider unnecessary
  • The introduction of electronic bidding where suppliers start at zero with the lowest priced supplier awarded the work

The Impact on The Company (Supplier)

The most obvious impact on the company is the erosion of product margin and/or shrinking of the addressable market segment that will accept the company’s price positioning. But a more profound impact takes place over time as the supplier’s instinct to maintain product margin by reducing costs that are principally driven by lowering performance levels (quality, specification, value-added service elements, customer experience). This serves to accelerate the speed of market commoditisation as suppliers look more and more alike and intensify the buyer’s focus on price as the principle supplier differentiator.

Strategic Options for Business Leaders

In part, the most appropriate strategic response depends on the causes and speed of commoditisation but typically Business Leaders can consider the following options:

  • Consolidation – becoming bigger by acquiring or merging with other suppliers with the intention of achieving economies of scale that percolate through to reduced operating costs and, importantly, raise the supplier’s negotiation strength through increased market share
  • Multi-segment – some buyers (customers) will always want the best product (physical and customer experience) and whilst they may be smaller in number, the company (supplier) can create separate products under the same brand (modularizing with menu pricing determined by specification/ benefits) or alternatively creating two separate brands that compete in different customer segments (e.g. a fire brand that focuses exclusively on price-sensitive buyers). Fundamentally, the choice is to evolve the company to compete in two ways instead of one
  • Focused differentiator – the company transforms itself by focusing exclusively on the smaller customer segment that wants the highest product quality, at the expense of all other customers; Over time developing bespoke products and high levels of customer intimacy as a defense against low-cost alternatives

Whilst dealing with market commoditisation is difficult for any Business Leader, without doubt, choosing not to respond and continuing with the status-quo increases the degree of difficulty over time, especially when competitors respond first.

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