Are You Commoditizing Your Products?

 We were at a new client’s offices recently meeting with their senior executives.  One of them was talking about how their existing offering was a commodity.  I remarked that if toilet paper isn’t a commodity (it isn’t), then their offering certainly wasn’t one either.  It has extremely high value to their users and their method of delivery and support added value as well.  He agreed and assured us yesterday that he no longer uses the term in his company.

 There is a lesson in that discussion for all of us.  The term “commodity” is something used by purchasing agents and procurement professionals to undermine a seller’s pricing power.  Their agenda is to short-circuit any discussions about the value of your products and services.  It is an act that is intentionally designed to make you think that your products and services have no value.

The problem is that salespeople hear the term commodity so much that they start believing it.  Then the customer services people believe it and eventually the senior executives believe it.  When everyone believes that your products and services are commodities, you have no pricing power. 

 How about you?  Do you use the term “commodity” freely in your discussions with your people?  If you do, you’re undermining your pricing power.

Here’s a bit of advice: STOP USING THE WORD COMMODITY!!!!

People use your products and services because they value them.  They don’t think they are commodities because they have chosen to use them.  That is a fundamental fact of doing business.  Just because a buyer who has an agenda to get a lower price uses a term like commodity doesn’t mean they are right.  In fact, we find that in most cases they are wrong.

If you need to, go out and talk to your real users and find out what they like about your company.  Find out how they value the things you do.  They’ll tell you.  They’ll be glad you asked.  Then, go back and make other executives stop using the word too.  When anyone—ANYONE—uses the word commodity, stop and tell them that a) your products and services create high value for your customers and b) using the word commodity to describe them undermines perceptions of value with your salespeople and your customers.

In Pricing with Confidence, we use the example of how the executives from a dirt company realized that they weren’t selling a commodity.  We use that example because if dirt isn’t a commodity then virtually nothing is.  We use that example because too often we hear the term commodity from high value technology, software, medical equipment and financial services executives.  The sad part is they honestly believe that commodity really does describe their products and services.

So, start being a value leader in your firm.  Stop using the term commodity.  When other people use it, tell them why they are wrong.  If that doesn’t work, go to the local pet store and get one of those shock collars and start making some of the senior executives wear them–that will work.

Pricing Kudos to Two Industries

Last week was a travel week for some family business.  So, this morning is “writing catch up”.  There were quite a few pricing articles in The Wall Street Journal and there are two that are worthy of a brief mention.

In Recession Specials, Small Firms Revise Pricing points out that “discounts and lower-end offerings” improve the performance of small firms.   What the article really talks about is that small businesses have flourished even in a downturn when they continually innovate their offering and look for ways to offer low value flanking products.  One example was a limousine company that expanding their offering to include larger capacity vans–smart move?  Yes.  But that is an offering move more than a pricing move.

Small firms can move fast, even in a downturn.  But, even big companies can learn from them.  Continually evolving the offering (remember–Innovate for Growth?) provides the revenue and profits needed to survive in a downturn and flourish in an upturn.  Don’t be afraid that you’ll canibalize your offering–be afraid that other firms will.   What the large firms need to do is to constantly anticipate the need to evolve so that they can move fast when they have to.   Failure to do this leads to the pricing death spiral that we see so many firms in today.

Fixed Costs Chafe at Steel Mills talks about how stainless steel makers have finally learned that price discounting in a downturn doesn’t work–it just chews up profits and doesn’t provide more revenue.  And, it leads to going out of business.  The six primary players have moved in lock step with price increases during the downturn.  Customers have accepted the price increases because they have heard about the high cost structure and the need for lots of process improvements in their suppliers.

This is a great example of the major players in an industry recognizing that price competition would be devestating for all.  And that not competing on price would be good for all.  To support that end, the major competitors spend a lot of time communicating about how their costs are going up.  When they increase prices, they pre-announce the move so others can follow.  It’s a great example of an ideal point for pricing communications systems that we talk about in Rule 7 of our book Pricing With Confidence.   The intent of such a system is to be able to better accomodate the need for smart pricing moves and pricing communications in highly competitive industries–especially ones that are going through dramatic downturns.  This article is a great example of firms that are doing just that and are using the press to signal both their concerns and their moves.  I should point out that while it is illegal to “conspire” to fix prices with competitors, it is perfectly legal to communicate your pricing intentions to a market which includes competitors. 

My guess is that the Justice Department will look at this one since uniform moves like this, also called conscious parallelism, is often an indication that illegal activities might be taking place.  My hope is that there isn’t and that this is just a great example of good competitive pricing strategy.  Thanks to Dave Phillips for forwarding this article.

A Great Value Story

Jeff Kaplan is President of Thinkstrategies ; his blog tells a great value story about software provider Concerro.  Concerro uses a SaaS solution to “reduce the amount of monies spent on premium labor” for its client hospitals. 

Kaplan points to key areas where the Concerro solution saves the hospitals money and provides not only the total dollar savings but also the six month ROI for the investment required for the solution. 

We call this Case ROI–that is a return on investment tool that provides specific case-by-case returns on investment for client investments in software, service or product costs.   Since it deals with a specific customer’s investment and return, it has more credibility than traditional “static” approaches.  We remember talking with one software company that had done more than forty of the static approaches (they were cheaper to build) and wondered why the salespeople never used them! 

Building a case-by-case approach takes time to build out the questions and the spreadsheet for salespeople to use but it is worth the effort because it drives sales at a higher price.  You can get a copy of Mark Burton’s article on Case ROI from our website.

I’m a bit tired of hearing that doing this is too complex and time consuming–as Jeff proves, it really isn’t   Plus, it works because it helps close sales at a much higher profit.  Go figure!

Pricing in the Press

I have a number of articles sitting on my desk that are worth a comment:

Time Warner CEO hints at online fees:  Time Warner is thinking about charging people for on-line content in their magazines.  Well, it’s about time.  Publishers seem to keep making a critical error in classifying their business.  They think they are in the printing business where you charge for a printed document.  The problem is that they are  in the knowledge business where they give people information.   That difference leads to a huge gap in the business models for publishers.  Just look at a huge success: The Wall Street Journal: they’ve spent the past five years developing their on-line content and have a successful business model for both sides.  And, they’ve developed adequate fences and pricing models so that one side doesn’t cut into the other–instead each side supports the other.

Printing is slowly by surely dying as a business.  It is inefficient.  It spends lots of resources distributing content rather than developing it.   In today’s world, more and more people want their content electronically.  Failure to make content available to people when and how they want it at a reasonable price leads to a competitive disadavantage.  I look at our Boston Globe, which is on the brink of closure.  They just raised their rates 33% and they don’t have a business model (aside from advertising) on the electronic side.  Even an old dog like me is thinking of drinking his morning cawfee in front of the computer screen.

P & G Looks Beyond Premium Goods:  Mighty Proctor and Gamble is getting beat up with the economic downturn just like the rest of us.  Their premium brands are slipping.  Fortunately, they had already introduced lower value flanking products in detergents (Gain) and diapers (Luvs).  The net result is that growth is still predicted to be 2-3% this year and while lower than expected, profits are still healthy.  Bottom line: when we say to “innovate for growth”, in a downturn it means that you’ve got to introduce lower value flanking products.

Xilinx Loses in Ruling:   Chip maker Xilinx has been embroiled in a battle with the IRS on how they cost their products and allocate expenses to various subsidiaries.  The IRS is taking the position that cost allocations have to relate to a “standard”.  The issue seems to be that the standard has to be consistent across all costs–in this case, R & D costs and the cost of options for workers.  Clearly the IRS is trying to keep profits in the US when they can.  The question I have is whether this will therefore limit a company’s ability to offer lower value flanking products within the legal limits of what costs are.  Should be a fun one to watch–the law of unintended consequences could be that this could make companies more competitive abroad but less competitive domestically.  Since this is the larger market–that could be a long term bad thing for global competitiveness for US companys.