I’m fascinated by the comparison between Apple and Dell, as loyal readers of my blog may have noticed before. In light of the release of their most recent financial statements I felt compelled to write about them again.
Apple, of course, has proven to be the master of de-commoditization. Historically Apple has never subscribed to the commodity mindset that besieges much of the technology industry. They have continued to find ways to keep their computer offerings unique. They where never lured into being like everybody else, and, now with the iPhone, they have managed to de-commoditize the cell phone too. With non-commodity products, Apple has the ability to “create their own weather”; they are in control of their own marketplace. And Apple does not miss an opportunity to use the pricing lever for their non-commodity products. Their products are more expensive than commodity products, yet they provide unique value for a small, yet significant, portion of the market. And when it comes to consumer satisfaction, in study after study Apple comes out on top.
Dell, on the other hand finds itself squarely in the commodity space. Their product offering is not particularly unique and, as with all commodities, buyers end up making their decisions on price alone. Dell faces stiff competition from a slew of like-wise commodity computer vendors, all vying for the product with the lowest price.
Now let’s have a look at the business results of these vastly different strategies:
Last quarter revenues 8,337.00 12,342.00
Growth from previous quarter 2.1% -8.08%
Last quarter profits before tax (EBT) 1,732.00 412.00
Growth from previous quarter 1.1% -10.9%
Percent profit 20.7% 3.3%
Market cap $143.32B $26.38B
So what does all of this mean? It means that the company who chose the non-commodity business strategy, and successfully executed on that strategy has ended up with larger profits and higher shareholder value.
There is, of course, nothing wrong with pursuing a commodity strategy. It is a safer choice and it requires a very different corporate focus and skill-set than choosing a non-commodity strategy.
But most companies are not like Apple or Dell. They are in-between the two. Most companies have some products that are commodities and some products that are unique. And most companies have simple pricing schemes; like cost-plus, where every product gets the same standard margin; 15%, 50%, 200% - whatever is deemed to be common in the company’s industry.
These companies lose out on profits they would rightfully earn if they priced their unique products differently than their commodity products. So, a quick fix for a company like that is to analyze and document what products are unique and thus have pricing power, and consequently increase prices on these products.
Another risk almost every company faces is to be forced into believing their products are a commodity when in fact they are not. The reason this happens is simple - buyers tend to ground down salespeople in their quest to get a lower price, and a better deal. All but a few salespeople can resist this force for a long time. Eventually they succumb to believing that whatever they are selling is a commodity, and they resort to selling on price alone. This only helps to enhance whatever downward pricing pressure already exists in the marketplace, zapping away at profits a company rightfully should earn. The fix here is training. The sales people must know the true value of their product delivery to the buyer and must be trained on how to defend that value. When the salespeople start spending more time explaining to their management that prices must drop than they are spending convincing customers no additional discounts are available - then it is time to send them off to training on how to sell value!
So, the moral of the story is: Differentiation and uniqueness provide pricing power - define it and use it to increase profits - for the whole company or just the unique products. Never fall into the commoditization trap!
With hot summer regards,