Don’t Get Caught in the Commodity Trap
Entrepreneurs get caught in “The Commoditization Trap,” no matter the size or nature of their businesses, says Dan Sullivan, the Strategic Coach.® The best description of this trap comes from the book, The Lexus and The Olive Tree by Thomas L. Friedman:
“A commodity is any good, service or process that can be produced by any number of firms, and the only distinguishing feature between these firms is who can do it cheapest. Having your product or service turned into a commodity is no fun because it means your profit margins will become razor thin, you will have dozens of competitors, and all you can do every day is make that product or service cheaper and sell more of it than the next guy, or die.”
The forces of commoditization present businesses with a tough decision: Either make your living in the global commodity economy based on volume selling and razor-thin margins, or transform your business so you can raise your prices as you increase the quality of the unique experience you offer.
Three Things To Do
Harvard Marketing Professor John Quelch writes: “Intense global competition, outsourcing, and offshoring are all squeezing margins, increasing customer price sensitivity and making it harder to sustain interbrand differentiation. The product life cycle suggests that, as product categories mature, they become more susceptible to the forces of commoditization.” Quelch suggests that “Marketers can do three things to fight the inevitable forces of commoditization:
Innovate. A new product that better meets consumer needs, even an upgrade of an existing product, can one-up competitors and force them to invest in matching or exceeding the new specifications.
Bundle. Selling a commoditized product with differentiated ancillary services (such as after-sales service) can appeal to buyers willing to pay a premium for the convenience.
Segment. Mature markets are large markets that can be divided profitably into multiple segments. Marketers can focus on providing applications expertise to less price-sensitive customer segments for whom the product is still important.”
However you approach commoditization, try to innovate at all costs to beat it back. Because, as Peter Drucker said, “In a commodity market, you can only be as good as your dumbest competitor.”
Is your company caught in the Commodity Trap? Have you thought about what you could be doing to create a competitive advantage? One place to begin: Estimate the impact your products and services can have on your customer/client’s business results.
You need to sell value by distinguishing your value proposition. Your value proposition is precisely how you differentiate. And there are hundreds of points of value in business offerings. In my book MERGE, we define a value proposition as the offering that describes the quantifiable benefits received from buying your product or service.
But to beat the commodity trap, we need to look at every buying influence to see how we can bring value to each. You need to:
Know your value and know how to quantify it at each level. Sales reps are often unaware of the impact their products and services have on the customer/client’s business. Also, they fail to appreciate that each person in the buying organization─from procurement to senior engineers to the CFO and CEO─has different value drivers: low price vs. time to market vs. payment terms vs. strategic partnerships.
The value-based seller must quantify the impact of their products and services on each of these value drivers and present it to the relevant buyer in a credible way on the path to becoming a trusted advisor, one who delivers value at every opportunity. See chart below.
Identify the “User Buyers” for each purchase decision. The role of user buyers, as described in Strategic Selling®, is to make a judgement about the potential impact of your product or service on their job performance.
User buyers will use or supervise the use of your product or service, and so their personal success is directly tied to the success of your solution. There may be several people playing this role. These are the people who are directly responsible for the business results that your proposed solution will impact; that is, what are they trying to fix, accomplish or avoid.
If the user buyer sees value in your solution, you will not be treated as a commodity. In manufacturing, one of the users typically will be the head of production and his/her quantifiable value likely will be cost of goods sold, manufacturing yield and process cycle time.
In research, one of the users will be the director or VP of R&D. His/her quantifiable value driver could be time-to-market. Even procurement, which seems to focus only on price, has an even more compelling value driver, which could be reliable supply. After all, if the production line goes down because of poor quality parts or the late arrival of supplier materials, the cost to the customer is significantly greater than a few cents saved on the purchase.
Identify the “Economic Buyer” for your solution. Strategic Selling® describes the person who will act as an economic buyer for your sales objective is the one who can give final approval to buy. Only one person or set of people always play this role for a given sales objective.
The economic buyer can say yes when everybody else says no, as well as veto a deal that everybody else approves. Ask early on in the sales process which person this is, then find out how he wins.
As an example, in a recent sales opportunity, the CFO was the one who gave final approval. He was frustrated with not having more predictability with the company’s sales funnel and felt he needed a solution.
Representing a public company, he felt uncomfortable each quarter with his projections. The company spent a lot of money on a new CRM system, but the data coming out didn’t give him the information he needed.
In our solution, we bolted on a tool he needed. With the sales manager, user buyer, we spent time learning he was frustrated with the lack of adaptability of the new CRM. Sales people refused to input data. With the same solution, he saw a win using the solution as a tool for the sales people to improve their sales process. You need to find the value with all buyers, especially the economic buyer to avoid the commodity trap.
Look out for the “poker players.” Reed Holden and Mark Burton in their book Pricing with Confidence define the poker player as a value buyer pretending to be a price-only buyer. Poker players typically reside in procurement and are highly skilled at bluffing sales reps into making significant concessions on price, rather than lose the deal altogether.
Highly skilled sales people can overcome this bluff by clearly knowing their quantifiable value and the importance of this value to each of the buying influencers. Armed with this knowledge, the savvy sales rep can call the poker player, forcing him/her to acknowledge the value in the supplier’s offer, and even reveal the real value your solution brings.
Above all, deliver value at every juncture in the buyer’s journey and to all influencers on the buyer’s journey by uncovering the issue the prospect doesn’t see, as this chart reinforces.
Stay out of the commodity trap by continuing delivering value at all points and to all influences on the buyer’s journey. Zealously innovate, bundle and segment your products and markets. Meticulously learn the impact your product holds for each area of the prospect’s business, then quantify it well. Be sure the user buyer fully understands the value of your product, and he’ll carry you through, along with the economic buyer, who can say yes when everyone else says no.
Be strategic. Play poker.
For more information on how to simplify the complex sale, go to www.pleinairestrategies.com Or call William L. MacDonald in San Diego at PleinAire Strategies LLC at 760.340.4277 or 213.598.4700