The Power Of Customer Loyalty

Fighting The Commodity Trap

In the last fifteen years we have witnessed the commoditization of news, cell phones, insurance, personal computers and even housing. We might as well face it the automotive industry looks to be one of the next to fall victim which inspired me to write this post. But I am also going to point out that the power of customer loyalty can once again overcome.

Commoditization, defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers, happened in many industries and the automotive industry, like others, has been heading towards commoditization for quite some time.



Is this the plan of the giants in the industry run by institutional investors? Are they looking to eventually displace the small and medium size franchise? This really gained momentum during the recent recession when companies were running scared and looking for solutions to their plummeting sales?

If this eventually takes hold as it has in other industries, gone will be the Independent/family owned business replaced by fewer Home Depot warehouse style locations to fatten the institutional investor with their profits at any cost mentalities that result in low wages and benefits that will only worsen the customer experience in favor of the bottom line.
And it is happening and already has happened just look around.

Companies that focus purely on price instead of investing in innovation, added value and adjusting their business models will inevitably face steadily falling prices which means profit margins will continuously shrink, the industry will consolidate and many companies will fold.

Studies show that standardized products impact prices and margins and threaten companies in all industries.

And with the transparency of product information available today to consumers in regards to getting value, customer loyalty to a specific provider can quickly wane in both the B2B and B2C sectors if the purchasing decision hinges mainly on price.

The Commodity Trap Coming To A Company Near You

Of the companies already in this trap, few are actually doing something about it. "Many companies recognize the commodity trap and the related dangers too late," says Conrad Günther, Managing Director of the Board of the International Controller Associations (ICV). "Therefore, companies need to be on the lookout for the first signs of commoditization in order to proactively take appropriate action with a suitable strategy or possibly even a new business model." There is a huge gap in industry sectors between their advanced state of commoditization and the actions taken so far.

Roland Berger, global strategy consultants headquartered in Munich, did an analysis and identified three key elements that can push a company into the commodity trap: customers, technologies/ products and competition. "These three elements are closely interlinked," warns Roland Berger expert Michael Zollenkop. "Depending on the company and the industry, the downward spiral can start at any one of these elements, spread to the others and ultimately lead to the commodity trap. The result is continuously plummeting prices and margins."

Technological maturity, technical and qualitative standardization of products and services play a key role. This is leading to fiercer competition. New providers are crowding into the international markets with comparable offers and additional production capacity. Overcapacity may result and the pressure on prices and margins rises.

Ways out of the commodity trap

Companies in or headed toward the commodity trap have two options to get out or avoid it. Either they play by the rules and engage in fierce competition or they change the rules to their advantage. In the former case, companies must have competitive prices to establish themselves as a sustainable commodity provider. "This especially means further cost cutting in order to continuously offer cheaper products and services," explains Günther. "Companies can maintain stable margins by expanding their business, realizing economies of scale and becoming more flexible. Nevertheless, commoditization will always remain an issue."

However, if companies want to escape this price competition, they must first analyze how their products are positioned in the markets and to what extent they are affected by commoditization. After this they can start to define an appropriate strategy. Short- and medium-term actions include marketing and customer loyalty programs, differentiated product portfolios for the various markets and pin-pointed research and development initiatives. "To ensure long-term success, companies need to fundamentally rethink their product portfolios, adjust their business models to the new market conditions and make their organizational structures more flexible," advises Roland Berger expert Zollenkop.

Value-Added Strategies

According to Kamran Kashani, IMD International Professor of Marketing, The answer for a growing number of companies is an affirmative one. Their managements have discovered profitable opportunities in redefining their core business and are offering their customers compellingly differentiated values – values that they are willing to pay a premium price for. These companies have thus found ways of countering commoditization.

When all customers appear to look alike, and the firm’s value offer has a one-size- fits-all quality to it (both features of many commoditized markets), it is time to ask some fundamental questions: beyond the lowest price, what else do customers really value, and how could the present commoditized offer, products or services, be redefined to better respond to their often unarticulated needs?

If there is a single common denominator for all value-adding strategies that can counter commoditization, it is customer success. The added value and the differentiating power of each strategy lie in its attempt to reach beyond a traditional definition of the core product or service, so as to offer customers benefits that boost their success in their own business. Benefits include

*increased productivity

*reduced cost and

*general improvement in competitiveness.

The job of marketers in such demanding context must be multifaceted: understand key drivers of a customer’s business success, discover opportunities for new customer benefits, formulate strategies that deliver those added benefits, and then ensure effective strategy implementation throughout the organization. Not an easy task but short of customer success as a guiding light for strategy and management action, any attempt to differentiate a firm’s products or services will be viewed by the market as nothing more than marketing hype-no way to fight commoditization.

In Conclusion

There are no quick fixes to the pervasive power of commoditization. As a permanent feature of today’s marketplace, it will continue to challenge business organizations, even the best managed.

But your value proposition can be providing a great customer experience without the need to fix prices. I sold for 18 years and always established a good working relationship with my customers. Unfortunately, the experience leading up to and the after the sale experience, the most important customer experience was and still is very much lacking at most companies I have had experience with or whose establishments I have visited.

It will be a sad day, in my opinion, when this comes to fruition. Negotiating for goods and services has been part of the human culture since the beginning of time. Being good at it is an art that not many possess.

I will leave you with a saying I have lived by and keep this written down to be revisited and that is “One of the rules of value creation is if your actions don’t create value, then your actions decrease value. If your sales or marketing presentation does not increase the perceived value of your products or services, it decreases the value your customers or prospects perceive they get from you."