Overcoming the Fear of Commoditization
Written by Alex Jimenez
He who shall not be named.
In the Harry Potter world, merely uttering “Voldemort” invokes terror; the characters are so frightened by the thought of him, they learn early on to avoid the name at all costs. Without question, while the concept of “commoditization” is not an evil wizard bent on world dominance, it does carry negative connotations in the business world. I have worked side-by-side with business leaders who will do anything to avoid labeling their service or product as a commodity at all costs, even when the consumer would not hesitate to classify it as such. My argument is and has always been that instead of fearing the term, embrace it and move forward. There are 7.8 billion people in this world; if you have a valuable service or product, even if it has fallen into the commodity category as a perception and/or as a reality, then there might be 7.8 billion people who may need it. How you market, price, and provide value in delivering your product are areas where you can differentiate yourself from the competition.
There are a variety of definitions of “Commodity” out there on the internet. The one that sticks with me is:
A good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price. (Merriam Webster)
For this conversation’s purposes, I will focus on the service or solution industry because, for a long time, the idea of commoditization was principally aligned to the goods and products industry. Globalization has accelerated the commoditization of services, and the last six months have only exacerbated this acceleration. How we (yes, even yours truly) embrace this reality and address it moving forward will be critical for our organizations’ sustainability in the future. Here are a few pieces of advice as you begin your action planning:
Running away from the truth will get you nowhere but lost in the woods. Take a good, hard look at the recent history of your market vertical. Has pricing pressure become more regular? Have RFIs and RFPs become the normal procurement method for your offering? Has your win percentage dwindled? If the answer to these questions is affirmative, the reality is that your offering is falling into the “commodity” category. Engaging in this analysis and embracing the data will let you know where you stand and also give you the first actionable areas to address going forward.
Reassess Your Value and Differentiators
What is the thing you do great? What is the unique value you can bring to the marketplace that many others cannot? Do your pricing methodology and value-add align? Remember, intangibles like quality are not differentiators unless there is a prevailing lack of it in the market you serve. Clients and customers cannot touch, feel, or perceive quality in the service industry prior to delivery. Investing in your story, brand, and delivery of service is a great start.
How do you deliver? Are there areas of waste that you can improve or eliminate? Investing in your operations may hurt up front, but the ability to optimize the “how you do it” of your business will help you provide a better service for a lower cost, which will only help you in the long run. While there’s no overnight fix, constant evaluation of your delivery organization should be standard operating procedure and addressed in your strategy planning. As always, iterative, small enhancements that happen frequently are far more effective than broad, sweeping, and sporadic revamps.
Invest, invest, invest. In the service industry, people make the engine run. Now, when I say “invest,” it does not mean you should go out and hire 40 new employees because you think you may need them one day. This would be fiscally irresponsible; instead, invest in the talent you have that will help you deliver more value. The dollar-to-value ratio when it comes to talent is a no-brainer. Making sure you have great people will only help you address the bullets above. Investing in their professional development, exposure, and experience is just as valuable and should not take a backseat to straight compensation.
Addressing the commoditization of your business can be incredibly frustrating and demotivating. As business leaders, we want to provide value and garner recognition for that. It hurts to perceive that your organization’s value is being diluted and simplified by something like price. Once the reality sets in, it becomes a narrowly simple decision point: flight or fight. Unfortunately, even if you run away from it, there is no escape from the eventuality of the market economy. Embracing reality, engaging your teams and partners, and devising a comprehensive business strategy are the only ways to empower your organization for the future.