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Get out of the Commodity Trap!

Many companies are facing the challenge of product ´commoditization´ over time. Commodities are offerings with no unique differentiators, sold primarily via low prices. Example: 10 years ago, the mobile phone was something special and the privilege of important decision makers who had to be accessible at any time. Today, mobile phones offering the basic ´telephoning´ function have become a commodity (throw-away product), and competition has shifted from hardware (the mobile phone) to software and internet connectivity.

What can companies do to fight commoditization? They have to find possibilities to differentiate themselves. That is, they should seek ´to be significantly different from the competition in areas which are important to the customer´. Differentiation is not limited to the product, but includes all aspects of an offering. The objective of differentiation is to increase the customer´s perceived value, thereby reducing his price sensitivity.

Here are 5 Differentiation Approaches

1. Differentiation through the optimal Product
   To what extent can you create differentiation by offering a ´better´ product? Better does not mean that all performance parameters should reach 100%. Rather, in line with the ´less is more´ principle, it is important to offer a product which is ´optimally´ suited to the customer´s wishes.
   
   Possibilities for differentiation can be identified by asking the following questions:
   • Which product features are not (or no longer) required by the customer and can be eliminated?
   • Which product features are more important than expected and should be enhanced?
   • Which product features are less important than expected and should be reduced?
   • Which new product features that have not been considered so far should be added?​​​​​
2. Differentiation through product-enhancing Services
   Especially in the B2B business, companies increasingly differentiate themselves through product-enhancing services. Often, their physical products are more or less undifferentiated, but their service makes the difference. Successful B2B companies market their services actively, often achieving higher profit margins than with physical product sales.
3. Differentiation through Customer Relationships
   An excellent personal relationship with decision makers on the customer side represents a high barrier to entry for potential competitors. Of course, a supplier must not take such a relationship for granted. Rather, it has to be continuously strengthened and reconfirmed through excellent service, flexibility, quality, fast response times, etc.
4. Differentiation through the Business Model
   From the customer´s point of view, it is not only important what is provided, but also how it is provided. Therefore, the ´how´ also offers differentiation potential. Example: Producers of formwork systems for the building industry don´t sell their products any more, they rent them. As a result, building companies have no capital lockup, they don´t require extra storing space and they need not care about repair and maintenance.
5. Differentiation through Branding
   Consumer goods manufacturers sell brands, not products. By building strong brands, they make their products something special in the consumer´s eye and can charge high prices. Brands also function in the B2B business with technical products, because, here as well, decisions are taken by people susceptible to emotional messages. In many cases, the company name is the brand here. If a company´s name is, e.g., associated with values like high trustworthiness, reliability, and continuity, customers will buy from that particular company, although, objectively, its products may not be better than the competitor´s.

Which of these differentiation approaches can you enhance or newly introduce to your company?

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