Understanding "Commoditization"
"Commoditization" is the term economists use to describe a combination of effects seen when price cutting becomes the dominant competitive force in a market or industry.
Though it can be argued that by driving prices lower, commoditization benefits the consumer in the short-run, the long-term effects are rarely beneficial to the industry as a whole. Price cutting drives ever-shrinking margins and can also be significantly detrimental to quality.
It's happening in the foodservice industry on a large scale. To succeed in a commoditized market, successful people like you are adopting new strategies to stay above the fray and find ways to compete effectively by providing real value - the kind of value customers are willing to pay a premium for.
Commoditization in foodservice
The hallmarks of a market slipping into commoditization include rampant price cutting, lack of differentiation between market suppliers, and a high level of perceived uniformity among prospects and customers - the idea that substituting one supplier for another does not make much difference.
In equipment, commoditization is in the later stages, with both domestic and foreign competitors waging price wars and engaging in shortsighted business tactics. It is becoming increasingly difficult for equipment suppliers and manufacturers to differentiate themselves.
In food products, commoditization occurs on a rapid, regular cycle. Like most product-driven economies, resisting commoditization is largely what drives new product development and brand extension products. It's a bit of an arms race: manufacturers roll out new, truly unique products and for a short time, pricing can support better margins. But the cycle is endless because virtually every new product is copied and replicated. What's new and different today rapidly becomes just another commodity tomorrow.
Even the service side can become a commodity, when a "business as usual" approach seeps in - with many providing adequate service and few providing extraordinary service. Commoditization of service is also often to blame when shrinking margins drive suppliers to outsource human resources and charge for services that used to be included after the sale. The banking and telephone industries are examples, where nickel-and-dime fees have become commonplace.
Delivering value overcomes the overwhelming force of commoditization
The news is not all bad. Commoditization also brings significant opportunities for those smart and savvy enough to address the issue head-on. The companies and individuals that win in a commodity market are those that never stop investing in innovation and growth.
The keyword is value.
Tom Snyder is president and CEO of Huthwaite, Inc., the "Spin Selling" sales and business performance consulting firm. Co-author of Escaping the Price-Driven Sale: How World Class Sellers Create Extraordinary Profit, Tom will share his expertise with FIA members at the upcoming Symposium, May 1 in Atlantic City.
"One of the things we do in sales is reassure ourselves that we understand what we need to be doing to create value for the customer - that we understand what value is," Tom says.
"But I don't know too many people who can define value in the eyes of the customer. How does the customer define it? What is that defines value from the standpoint of the only person we care about - the customer who is willing to pay a premium for it?" he asks.
Tom has taught thousands of Fortune-500 business decision makers how to create client value and develop innovative ways to strengthen competitive differentiation in the crowded marketplace.
His work has uncovered a set of core differentiators - attributes of value for which customers will pay a premium, even when the price point is higher than the competition's.
"The goal is to provide the customer with a compelling reason to redefine the relationship, seeing you as an advisor instead of just a vendor, permanently putting up a barrier between you and your competition," he explains.
Tom recommends a three-pronged approach based on key research of customer attitudes and psychology:
- Customers will treat you differently if you help them discover problems they did not know they had, helping them look over the horizon for unrecognized issues. They will pay extra for that expertise
- Customers will pay a premium for unanticipated solutions, when they know they have a problem but did not see the solution that you bring to the table - the "better path to heaven"
- Customers see value in discovering unforeseen opportunities, when you can help them discover new ways to expand their business and become better at what they do.
Collaboration and innovation are key weapons
How do you build real value? Investment, collaboration and innovation are paramount.
Resisting commoditization takes dollars - the same dollars commoditization removes from the industry's financial lifeblood.
FIA's May 1 symposium will address these questions and more:
- How do we resist?
- How do we invest in innovation while margins shrink?
- How do organizations in other industries succeed in a commodity market?
- Is commoditization inevitable or can we adopt a business model that will break the commoditization cycle?
- What roles do research, development and innovation play?
Get up-to-the-minute tools and techniques from FIA
Foodservice Institute of America has assembled a dynamic program of real-world solutions that will make a difference for your organization at the upcoming Symposium, May 1 in Atlantic City.
"Industry Survival: Overcoming Commoditization - from Food to Equipment to Human Resources," is your opportunity to get exclusive insight - the tools you need to rise above lowest common denominator thinking.
You'll gain powerful tips and techniques custom-designed for the foodservice industry:
- Know the warning signs
- Identify ways price-cutting can derail your business plan
- Supercharge your sales process
Retool your business model to overcome price-cutting pressure with value
- Rethink the way your organization provides long-term value
- Reposition your core message to cut through the chaos
- Build forward momentum with a healthy organization
The second program in the FIA Advantage Series, we will begin the day with an overview of the market conditions that drive commoditization, then examine ways to overcome the situation through innovation, differentiation and the creation of value-added products and services.
The second half of the program will involve small group discussions led by individuals who have kept their companies out of a commodity position. Groups will exchange ideas about how to maintain positive momentum through a variety of strategies and discuss business models to maintain healthier organizations and a prosperous industry. Each attendee will receive a comprehensive reading list of commoditization resources and a whitepaper will be developed following the event.
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