Avoiding The Commoditization Trap, Part 1
By Douglas G. Davidoff
Founder & CEO, the Imagine companies
To download a .pdf version of the complete article click here.
How easily can you quantify the differences between your products and services from those of your competitors? How easily can your clients or prospects make those same distinctions? How can you continuously differentiate your company when market forces are constantly commoditizing your business? Think about that question for a moment. It is the biggest challenge facing businesses of all sizes in the 21st century.
Commoditization is the evolutionary process that reduces all products and services to their lowest common denominator. The Commoditization Trap is the situation businesses find themselves in when their focus is mainly on the product or service they offer instead of a quantifiable difference between their product and their competitor’s.
Imagine Consulting has asked over 2,000 business owners and salespeople “Why should people buy from you instead of your competitors?” Here is what many answered:
These answers may sound familiar. But as nice as they sound, and even as true as they may be, these answers are all indicative of a we are better value proposition. Distinguishing your company in such a manner puts you in The Commoditization Trap™. These answers do not differentiate you. No one is out there saying: “We’re not as good.” Even companies for which price is the primary selling point insist that their products are just as good.
The Commoditization Trap, ensnaring businesses, impacts businesses in ways not readily apparent to them. Unaware of the causes of commoditization, businesses often unnecessarily expend valuable resources. Addressing the symptoms of commoditization, rather than focusing on their origin, businesses look internally to solve the problem. This actually propels them deeper into the trap. Businesses invest in new product development. They change their marketing plans. They change their advertising. They reprint their brochures. They change the sales process by eliminating salespeople if they have a sales force or hiring salespeople if they do not have a sales force. In an attempt to get out of the trap, businesses do all of this under the mantra of “ giving added value” to their customers. The problem, however, is that businesses fail to ask themselves if any of these changes actually add value.
What is “Added Value”
Colorful new brochures, catchy new advertising, Blackberry’s for the salespeople – do any of these things actually give added value? Value creation is among the most common buzzwords used in business today. With so many uses it is important to define value. There is only one definition of value that is sufficient to use in business – something someone is willing to pay for. Your company can create great things, but if people aren’t willing to pay for what your company creates it gives no added value. This is an economic judgment, not a worthiness judgment. This definition is both very simple and also very powerful. The only way to avoid or escape The Commoditization Trap is to identify how your company can deliver more of what people are willing to pay for. Nowhere is this issue more important that in the implementation of your business development systems.
A Brief History of Sales and Marketing
Modern sales and marketing tactics came in being into the post-World War II period. America and much of the world had an economy primarily based in manufacturing. People and companies bought things. In the late 1940s most of Europe was focused on rebuilding its cities. Such rebuilding generated a tremendous demand for products .
As the 20th century progressed, a new force propelled the evolution of sales and marketing: information. The sales techniques that are used today were developed when information was not easily available to buyers. As recently as the early 1990s if a traveler wanted to find out a flight schedule or how much an airline ticket cost, she had to call a travel agent. If an investor wanted to know the price of GE stock, he had to call a stockbroker. If a company wanted to know how to install a new printing press and how much that installation would cost, they had to call a salesperson. A salesperson’s primary job was to communicate the value provided by a business’ products and services and to process orders. Companies implemented control-oriented systems because they were efficient. Commoditization was not a significant issue because there was not enough supply to keep up with the demand.
As the 21st century neared, buyers were able to get more information on their own. Consequently the value of what salespeople provided (information) decreased, and buyers began controlling the sales process. This has created the need for new sales and marketing tactics.
Giving Added Value Instead of Communicating Value
In 2004, information is ubiquitous, and supply exceeds demand. Buyers often have more information than the people selling to today’s consumers. The primary value a sales force provided in the past is no longer valuable today. The impact of commoditization is impacting businesses more powerfully and faster everyday. How can business successfully compete in this new era?
Businesses must change their focus. The sales force must add value. Salespeople can no longer simply communicate information about the product the company provides they must add value themselves. A good way to test whether or not your sales department is sufficiently adding value is to answer the following question from the point of view of your prospect and clients.
Would your prospects or clients pay for a sales call from your salespeople?
The point of this question is not to encourage you to start charging for sales calls (though there are some organizations that have begun to do this). Imagine Consulting has studied the concept of value creation in depth. We have discovered that one of the rules of value creation is: if your actions don’t create value, then your actions decrease value. If your sales presentation does not increase the perceived value of your products or services, it decreases the value your clients or prospects perceive they get from you.
Our study of best practice value creation demonstrates that there are three opportunities when your sales force can add value: The Diagnosis Phase™, The Collaboration Phase™, and The Solution Phase™.
The Diagnosis Phase
If your sales process helps clients more fully understand the issues they are dealing with, you will immediately differentiate yourself from so-called solutions providers. While this does not guarantee a completed sale, it puts your company in a stronger position and will enable you to spend your time and resources much more effectively.
The Collaboration Phase
The Solution Phase
The tighter The Commoditization Trap is on a company or an industry, the more that company or industry must look outside – to its customers, clients and prospects to find, and, more importantly, understand the unique problems that face them. Companies must stop being “solution” specialists and become “problem” specialists. If you want to avoid or escape The Commoditization Trap you must find ways to add value (something people are willing to pay for) before the product or service becomes an issue.
Sales organizations must focus more on effectively delivering value instead of efficiently managing a sales territory. An organization must review all aspects of its business development systems to make sure those systems are supporting value creation and not unwittingly placing the organization into The Trap.