How companies differentiate commodity products

1. CHANGING THE RULES OF THE GAME:
DIFFERENTIATING A COMMODITY PRODUCT
ALAN W. HALE PRESIDENT CONSIGHT™ MARKETING GROUP
“Sell harder” is the rallying cryfrom sales
managers of companiesselling commodity
productsinmature markets. When that fails,
then marketing wantsto lower the price.They
think it will buy market share now,and they
believe they will be able to cutcostsin the
organization later. Unfortunately, this tactic of
lowering the price is easily copied by the
competition. This leads to a death spiral where
the companycan nolonger maintain the
margin they need to survive and thrive. Unless
yourcompanyis truly the lowest costprovider
in the industry, it frequently leads to lower and
lower margins until a death spiral occurs.
The way to avoid this and set a winning
strategy is tochange the rules ofthe game to
alter yourcustomer’sbuying habits. Customers
changetheir buyinghabits whenthey perceive
there is a value to doso. Value = Benefits
Derived/Costs Incurred.Wesuggest that it is
more effective to increase the benefits which
add value to the customerwhile keeping the
costsconstant.AccordingtoPhilip Kotler, a
brilliant marketing professorfrom
Northwestern University Kellogg, “Ifyoucan
differentiate a dead chicken,you can
differentiate anything.” ProfessorKotler
advocates usingservice to augment the core
product,anddifferentiate it from the
competition.
A graphic visualization ofKotler’s
differentiation strategy is as follows:
Augmentedproductincludesservice suchas
delivery, service, customerservice, etc.
This white paper outlines several alternatives of
differentiating your commodity product
withoutresorting to slash and burntactics –
slashing the price and burningthe profitsof the
company.
TARGET CUSTOMER SEGMENTS/DEVELOP
BRAND PREFERENCE
Here are some examples of how some clients
and companiesuse segmentation andbrand
preference tomarket their commoditytype
products:
 A client whomanufacturedspraypaint
gunswanted todevelop brand
preference fortheir product.They
visited technicalschools andsponsored
training sessions to teach the students
how to spray paint. They gave deep
discountsforthe schoolsto use and
train the technicians ontheir brandof
spray paint guns,getting the
techniciansto feel comfortablein using

2. 2
CHANGING THE RULES OF THE GAME
their brand. Oncethey went outto
practicetheir trade, they wouldmore
likely requestthat brandofspray paint
guns.
 A client manufacturedsteam traps
whichwere usedin manufacturing
plants and purchasedbyeither
purchasingorthe facility manager.
These productswere viewed as
commodities by the plant manager and
couldcosttens to hundredsof
thousandsofdollars to purchase.The
client offered free audits to larger
manufacturingplants tomaximize the
efficiencyof the steam system as well
as lower the energy costsso the
customerwouldspecify andpurchase
their brand ofsteam traps.
 A manufacturerofsteel fibers used in
strengthening concrete,foundseveral
competitors nippingat their heels.
They increased their technicalstaff,
and developed softwareto help
structuralengineers design the
specificationsfor new jobs.
 A supplier of cartonswasconstantly
losing bids as they were priced too
high. They finally determined they
couldnot competeon price alone and
changedthe rules of the game. They
workedwith the R&D departments of
clients at their ownexpense to create
custompackages fornew product
launches.They offered justin time
shipments, and offeredvendor
managed inventory forthose
customerswhowanted it. They
quantified these expenses and
described how these services were free
onbids. The companyhas grown
exponentially.
 Anothercompanydecided to launcha
line of“me-too” portable electric
generators in the market targeted to
home owners.Rather than spending
the hundredsof thousandsofdollars to
develop a brand, they decided to
negotiate witha leading industrial
companyto license their brandon
these products,andpaying them a
royalty to legitimize the product.
MAKE IT EASY TO DO BUSINESS
Everything being equal, price, quality, selection
etc, a customerwouldrather buy froma
companythat is hassle free, i.e. does not take a
lot of pain andheartache to resolve issues.
 Sears has a line of Craftsmantools
whichwere sold to homeownersas well
as contractors.Theyoffered a lifetime
warrantyof bringingin yourdamaged
tool, and they wouldreplace it, no
questionsasked.
 A wholesaler ofelectronics wantedto
understandhow they were perceived
by their larger accounts.Whenwedid
the research, a commoncomplaint was
whentheir call was transferredto the
next available service representative,
where they had to explain again their
situation. We worked withthem to
assign a primary and secondary
customerservice representative to the
largest ofthe accounts.Thatway, they
wouldnot have to repeat the story, and
wouldbe able to develop some rapport
over time.
 A supplier of lighting used in
commercial buildings woulddeliver all
ofthe productsjustintime to the floor
the contractorswereworking onthat
day at 6:30 a.m. This also prevented
productsfromwalking away fromthe
jobsite.
 Some companies offerVMI (Vendor
Managed Inventory) wherethe vendor

3. 3
CHANGING THE RULES OF THE GAME
keeps track of whento orderadditional
products.
BE IN THE APPROPRIATE CHANNEL
We have had clients whowanted to sell their
productsdirectto the market and avoid the
additional costforthe margin forthe
wholesaler/distributor. In addition to the
perception ofreducingtheir cost,the client did
not wantto sell their productsto channelswho
sold competitive productsas well.
Unfortunatelyfor the client, research showed
that many customerswanted to reducethe
number ofvendorsthey had on the books,and
they preferred to do one-stopshoppingrather
than purchaseproductsfrommany sources.
The client wasactually losing market share by
refusingto sell their productstothese
channels.
There are certain exceptionsto the one stop
shoppingphenomena. Oneexample is power
tools. Contractorsare very loyal tothe brandof
powertools, and will go to another channel
that offershis or her preferred brand.
WORK ONPERCEIVEDBENEFITSNOT
COSTS
Companies whoare able to changethe rules of
the game in commoditymarkets fare better in
terms of sales and margins than those
companies whotry to rely on reducingprice
either by loweringthe price or offeringspecial
promotions.
A SUGGESTEDFRAMEWORK
We proposethat companiestake a muchmore
rigorousprocessto determine what customers
really value, a structuredvoice ofthe customer
process.
 StepOne:Discovery Research
Use a variety ofmethods to determine
whatis ofvalue. This includes focus
groups,personal interviews, in-depth
phoneinterviews andethnography
where a team followsa groupof
customersusing this type ofproduct.
Conductingcustomersatisfaction
surveysseldom gets to the heart of the
issue. Youmust define unmet needs.
 Steptwo: InternalBrainstorming
Take the initial voice of the customer
findingsand generate potential ideas
fordifferentiation in a brainstorming
meeting. This meeting shouldlast two
to three hours.It is critical not to
criticize initial suggestions, nortake the
first few mentioned. Thenassign some
type of value scale foreach idea which
wouldinclude being able to
differentiate the product, ability to
provide this, costof implementing etc.
 StepThree:Validate Findings
Go backout andtest these ideas to
determine whichones resonate with
yourcustomer base. This wouldinclude
both qualitative andquantitative
measurements.
Ifthis soundslike a lot ofwork,it is. But
unlike reducingpricing,these tactics
are muchharder to replicate by the
competition.
The key is to make investments in areas
that are valuable to the customer,and
reduce/eliminate investments in areas
that are not valued by yourcustomers.
Let yourcompetition waste their time
and resourcesonchasing the
unimportant.

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CHANGING THE RULES OF THE GAME
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About Consight™MarketingGroup,LLC
6104W.Wawrick
Chicago,IL60634
847.800.1685
Consight™Marketing Groupcombines
consultingand insight frommarket research to
provide actionable strategies forcompanies in
business tobusiness markets. Voiceof the
customerservices include:
 Customersatisfaction and loyalty
 Market assessment
 Developing go-tomarket strategies
 New product/new servicevalidation
 Designing effective channelstrategies
 Lostaccountanalysis
AboutAlanW. Hale
Alan Hale is President of Consight™Marketing
Groupand has35 years experience in working
with clients serving businessto business
markets. He hasserved as PastPresident ofthe
ChicagoChapter ofSales & Marketing
Executives International as well as served on
the board ofSales & Marketing Executives
International.
FOR ADDITONAL INFORMATION
To discussa marketing issue in more detail, call
Alan at 847.800.1685orvisit
www.consightmarketinggroup.com
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