Escaping the commodity trap

The commodity trap in business is like the Bermuda triangle. Once you get near it there seems no escape possible and you’re doomed. There is also a more positive view on the commodity trap: the commodity trap in fact means that a business has become so attractive that many suppliers are trying to get a piece of the pie. In doing so, the main focus is always on product and price. This narrow range of (only 2) strategies used by commodity players opens up a vast range of alternative strategies that can be used by players who want to get out of the commodity trap. This whitepaper describes 11 of those strategies.

The commodity trap is the situation a company finds itself in when it sees no other options than to sell its – mostly standardized products – based on price.

Various market situations cause commodity traps to occur:

1. Too much production capacity
2. Too little market demand or strong concentration of buyers
3. Standardized products, or the clients perception thereof
4. Strong focus on products (and product features) only
5. Insufficient marketing, sales and service competences

The commodity trap is really hard to get out of, that is why so many companies suffer from it and why it is called a ‘trap’ in the first place. Most companies that do try to get out of it take the path of product differentiation, this means adjusting the product to differentiate it from its competitors. However, in many of these cases clients fail to see the differences and the product continues to be a commodity in the perception of the potential client. In other cases the products are that much standardized (conforming to certain industry standards or even laws and guidelines) that product differentiation is simply impossible.

Even if a product cannot be made any different from its competing products, there are ways to get out of the commodity trap, or at least minimize its effects. These ways can be found by looking at:

• all other aspects of the company’s value proposition
• the strength of the company’s commercial process

A value proposition is much more than the product a company delivers and the price it charges for that product. Any value proposition can consist of 7 aspects. As agreed, product and price are not included, as we are trying to get out of the commodity trap. The remaining 5 aspects (and how they can help to get out of the commodity trap) have been listed below.

1. Service:

   Service is everything that you get without actually having to buy it. Examples of good service are: always call back, ‘not satisfied money back within a day’, extended warranty, free prototype, transparent quotations, quotation within two hours, clear instructions, excellent logistics services, and so on. Sonepar for instance delivers installation materials on building sites actually on the exact floor that the materials are being used.

2. Relationship: 

   A good relationship with a supplier is a key reason why many companies (actually: people) are doing business with that supplier. Regular contact, showing genuine interest – even if there’s no business at the moment -, also about other things than just business, knowing when someone’s birthday is, and so on. These are all things that give a huge boost to customer preference, buying behavior and loyalty. In terms of Professor Robert Chialdini (psychiatrist and marketeer), the reciprocity effect is being used: You do something for me (show interest), I will do something for you (buy your products).

3. Image: 

   Image is what the world outside feels and thinks about your organization. A clear image consists of only a few key points that ensure that a relevant association with your business and the reasons to prefer your company and to buy from it. Image can be ‘high quality’, ‘very flexible’, ‘high end’, ‘cheap’, ‘value for money’, ‘go for you all the way’, etc. Well known examples are Rolex (exclusive), BMW (sporty), Apple (user friendly and innovative). The products of all these companies are not that much different from their competitors (Rolex compares to Panerai, Jaeger LeCoultre, BMW compares to Audi, Apple compares to Samsung).
   It’s really the image that makes the difference although buyers of these products would say it’s really about the product. In B2B: Cisco, McKinsey, SAP, etc.In many cases companies (again: people) buy from a certain company to eliminate risk and to belong to the group of ‘buyers from company x’. According to Professor Chialdini: using social proof. “If so many people buy from them, they must be a good company.”

4. Availability:

   Availability relates to the product or service at any time and any place you want to purchase or use. Or not … A technical wholesaler ensures that they can deliver from stock. Almost all their products are within a day at the customer. Some wholesalers actually open small warehouses at the customers building site, making it super easy to get their products. Recent developments include mobile ordering and the like.

5. Assortment:

   For most products (especially in the B2B environment) you need other products. If these products can be bought from one supplier this makes life easy. Most commercial companies use this USP and therefore handle very large product ranges. Often they also suggest some products together (as a concept or total solution).

A whole different way to find strategies to get out of the commodity trap is to look at the commercial process. According to the Top Line Growth method of BoerCroon this commercial process consists of 6 steps. In each step we can find ways to get out of the commodity trap, or at least minimize the effects from it.

1. Choose attractive business segments.

   Segments can be regions, types of clients, industry sectors, countries, channels, distributors, or even operating companies or BU’s in portfolio companies. Some segments are more attractive than others. More attractive segments usually face less of a commodity trap. Many technical wholesalers are currently developing their industrial clients, and are developing renewable energy solutions, since the clients in building construction are facing severe market downturn.

2. Get more potential clients to know and appreciate your company (or your sales channels if you’re a producer).

   Before a potential client will visit you to potentially buy from you, he should at least know you and have a positive attitude towards you. Most B2B companies are so much product or technology focused that they totally forget the power of branding, both from a qualitative perspective (how attractive is your brand) as well as from a quantitative perspective (how many people know and appreciate your brand).

3. Get more potential client contact.

   The more potential clients you have, the more you get to choose the interesting leads. Companies with empty sales funnels experience much more price pressure than companies with full sales funnels. Being able to select your most interesting leads also creates an image of scarcity and authority around your company and your products. According to scientific research, scarcity is one of the strongest influencers of buying behavior. There are many techniques known to fill sales funnels with the right amount of the right leads.

4. Convert more potential clients in to buying clients.

   Companies that continuously develop their outside and inside sales people, their channels / resellers, and on line presence also have lesser pressure from the commodity trap than companies who think they already have the best sales force, or believe that sales people can hardly be developed. Recently completed research has proven that best in class sales people sell three times as much as average sales people. Regardless of their industry. This research has been translated into new training and coaching methods that helps sales people to perform 80% better than they have done before. Even in commoditized markets.

5. Get clients to buy more.

   Specific cross, up, and deep sell programs can generate vast amounts of additional revenues from existing clients. These programs do not focus on getting more orders for the same products (these products are already known to the client, they therefor do not stimulate interest and curiosity, resulting in limited growth of wallet share), but they focus on new products, new ways of doing business, etc. By stimulation of clients curiosity, interest can be developed and additional revenues can be generated.

6. Build loyalty.

   By actively engaging clients with your company (have them participating in your company’s strategy sessions, etc) your clients become true fans. Creating communities of these fans will make the bond even stronger, a lot stronger! They will feel really appreciated and they will start to help you to get new clients and additional business. Even bonus schemes to reward existing clients to bring in new leads can be put into place.

In this blogpost 11 strategies to minimize commodity trap effects have been discussed. None of these strategies are about price or product. They are either about everything that’s around the product, or about the way the product is being brought to the market. Of course various adaptations can be made to these basic strategies, involving new technologies such as online community building, mobile marketing, online and off line psychological client profiling, etc.

We realize that most companies will have embarked on one or maybe a few of these strategies and believe they have done all they can to escape the commodity trap. The author of this whitepaper has actually never come across a company that has actually used all these strategies, not in 20 years of marketing and sales in B2B environments. Therefore I believe it is safe to say that there is always a way out of the commodity trap. It will not be easy, it may not be fast, but there will be a way. It just requires creativity, determination and perseverance to actually get it done.