Wednesday, June 28, 2006

Lie Number Two: “We are a commodity industry”

You might argue that some industries really are commodity industries if they sell sand, iron ore or oil. I would argue that any business that succeeds for any period of time is surely differentiating itself in ways that are valued by its customers and therefore even if their products are highly commoditized their product offer is not.

I have heard people in many different industries say “we are a commodity industry”. Very early in my career I worked as an export sales manager for a small Swedish company that manufactured welding wire (basically just steel wire for those who don’t know). In that job I could argue for hours about why our product was better that the competitors and worth a small but very important premium. A great many customers paid that premium in order to improve the quality of their own products and manufacturing processes.

Some years later I spent 10 years with Whirlpool, the American whitegoods company, in various marketing and sales positions and let me tell you that people in that industry work very hard to differentiate their products. I don’t know how many times I’ve heard people say that a refrigerator is a refrigerator but the reality is that there is a great variety of appliances on the market and it is not the case that it is only the cheapest ones that sell. Even within what might be called a low-price segment competitors strive to differentiate their products.

Today, it is not uncommon to hear people talking about the commoditization of the telecom industry. On the surface it may appear that everyone is offering more or less the same thing: “A phone call is a phone call!” but nothing could be farther from the truth!

The other day I was talking to someone on the telephone. I was at my office but he was driving through the Swedish countryside in his car. He had a very bad connection and several times the call got cut off and he had to call me again. Finally, I asked him if he was a customer of my company (TeliaSonera). He admitted that he was not. He had recently switched from us to another operator because they offered him a slightly cheaper price-plan. My reply to him was that their price plan still seemed to be very expensive since their phone service was so poor. He laughed and we continued our conversation. A few days later he called and told me that he had changed back to my company. He had been thinking about what I had said and come to the realization that for a small difference in price he received much better quality of service from us. He said “I want to have a cell-phone so that I can make calls wherever I am and if it doesn’t work when I need it to I might as well not have one.” (In reality he probably paid more to the other operator with a poorer network since many price plans are more expensive to open a new call than to continue and old one.)

My point is that although many people talk about their business as if it were a commodity there are very few industries that truly are commodity industries. If you think you are working in a true “commodity industry” ask yourself why your company stays in business? What is your company’s competitive advantage? I think you will discover that although there may be great similarity between the products and services you and your competitors sell the actual offering you make to your customers may vary greatly. Your company may be perceived as being more reliable, giving better service or maybe just more likeable than your competitors. Whatever the differentiators are they are valuable and must be developed and managed. Customers don’t buy products they buy an offer that satisfies their needs. Even if your product truly is a commodity your offer to the customer which includes the commodity may very well be unique.


Aner Ravon said...

Very smart analysis. I have to admit I committed both sins myself at times (price erosion and commodity) and will need to watch myself. There is also a psychological factor (however minor) though. Claiming "price erosion" and "commoditization" makes you appear more sophisticated then you actually are, and in away "above" the "quickly aging" industry. This way when you move to another industry or company it's not because you failed, but because you "moved on". Which is an absurd, because excellent sales people can actually accel better in an educated market (another way to label at a commodity industry)

Kelly Odell said...

Thanks Aner for the comments! I think every marketer has used these "lies" as sometime and the truth is that most of these lies are only lies sometimes! Products do reach the end of their lifecycle and phenomena like "price erosion" do exist. I would hope that if we use terms like these we really mean them and are not simply misguided into missing the real drivers of value creation. If someone uses these lies to "cover their asses" I won't tell anyone as long as we all agree it is BS!