Commodity: a class of goods and services for which there is demand, but which is supplied without qualitative differentiation across a market. The market treats commodities as equivalent, with no regard to who produced them.
What’s the biggest threat to solo businesses? In my opinion, it’s letting your products and services become commodities.
Traditionally, we think of products like salt, milk, flour, and gasoline as commodities. Coffee was a commodity until Starbucks turned it into an experience.
Now technology and communications are turning services into commodities, threatening the livelihoods programmers, freelancers, musicians, and even plastic surgeons.
Be a Price Maker
In a 2003 article titled “Commodity Busters: Be a Price Maker, Not a Price Taker,” author Benson P. Shapiro, the Malcolm P. McNair Professor of Marketing Emeritus at Harvard Business School, says there are seven steps to avoid becoming commoditized.
1. Create customer value. Shapiro says you must provide a reason for the customer to do business with you, focusing on the customer values of convenience, availability, product or service functionality, and relationship. You also must eliminate reasons for the customer not to purchase.
2. Choose your customers. The corollary to providing customer value is to choose customers or purchase situations where the value is recognized. Focus on the market segments to which you can bring superior perceived value. In other words, find a niche.
3. Be different. Many successful companies choose to appeal to a different set of customers or set of purchase situations than their competitors.
Progressive Insurance, for example built its business by selecting relatively low-risk customers from among generally high-risk motorcyclists.
Starbucks created an extraordinary, emotional experience around its products and service based on over-the-top, five-star service, an experience that engages more than just one of the senses.
At Buffalo Wild Wings, parents (and the kids) don’t have to worry about being too loud, because volume is at the core of the “B-Dubs” experience.
I haven’t been to CherryBerry yet, but based on what my daughters tell me, CherryBerry’s self-serve, charge-by-weight strategy has succeeded in making frozen yogurt fun.
4. Keep it simple. By and large, simple product lines and service offerings are easiest to manage and the most profitable to offer.
5. Determine customer value. Develop a way to charge for each customer transaction based on either the quality or the quantity of value you provide. Each transaction provides the opportunity to price relative to customer value. To do this, you must focus on the basis of your pricing.
For example, when the Xerox copy machine was introduced, it was neither sold nor leased on a time basis. Instead, a lease meter was installed in each machine to count the number of copies. This enabled Xerox to charge heavy users, who found greater value in the machine, more than it charged light users.
Shapiro says, “The person who chose to price advertising services as 15 percent of the media buy, instead of by time and materials, created an enormous amount of profit for advertising agencies.”
6. Deliver on your promise. If you don’t, your customer will have a reason to negotiate on price. “Happy customers whose expectations are met tend to dwell less on price,” Shapiro says.
7. Be courageous. In large transactions, customers will emphasize price negotiation. During the process, it will be tempting to cut price to keep the customer or to gain market share. But, if you erode the integrity of your pricing, you become a price taker, not a price maker.
• Harvard Business School, “Be a Price Maker, Not a Price Taker”
• Gaebler.com, “Avoid the Commodity Trap”
• PatrickMahan.com, “Avoid Becoming a Commodity the Starbucks Way”
• ImagingBiz.com, “Avoid Becoming a Commodity the Lego Way”
• AllBusiness.com, “How Entertainment Can Avoid Being a Commodity”