Are you Becoming Commoditized?

By David J. Cocks, CEO

If your profit margins are being squeezed tighter and tighter, there's a good chance that you're becoming commoditized.

Commoditization is the process that transforms a profitable, differentiated product or service into a commodity.

As markets for any product or service develop over time, they coalesce. The products and services evolve to the point where they fully satisfy the needs of most customers. As soon as one company identifies and launches a differentiator, it is quickly met by competitors, who introduce the same feature.

The products and services come to be viewed as commodities, despite attempts to brand them and preserve their distinctive value propositions.

Once reduced to commodity status, the most visible difference between products becomes price. Price wars ensue, forcing prices lower and lower.

When products are perceived to be interchangeable, the focus shifts to the selling process. Highly skilled sales representatives become superstars. They develop a following among their customers, who express a strong preference to work only with them. Because they have the ability to bring their customers with them should they choose to move to another company, they can command higher and higher commissions, perquisites and other concessions from their employers.

At this point, not only is the product a commodity to the customer, but the company is a commodity to the sales representative.

Businesses are caught in the middle, between declining prices and ever-increasing salaries. Profit margins, already under pressure, diminish to the point where all but the most competitive firms are forced out of business.

How do you deal with commoditization?

The answer is to acknowledge what is happening to your industry and embrace the change – if nothing else, it will remove many of your competitors.

Study what has happened in other industries that have already passed through this stage and look for a way to differentiate your firm – preferably with something that can be sustained over the long term and can't easily be copied by competitors.

The strategy we recommend is to find a way to better meet the needs of your sales force. When you devise a powerful way to differentiate your firm from other employers, you can attract and retain the best sales force, creating a long-term competitive advantage. You can differentiate by offering styles of compensation not available from competitors, such as salaries or high-split plans, or give associates a choice of compensation plans. Or you can offer packages of training, administrative support, marketing support, and benefits that fit associates' needs better than competitors.

The key is to ensure that your firm retains its profitability while gaining that competitive advantage.