fighting-commoditization-pricing-power

The problem so companies are facing is loss of pricing power and commoditization. We will explain why commoditization happens, what it will do for pricing power, and how you, as business leaders should look at commoditization and customer loyalty.

Commoditization, loss of pricing power, and lack of customer loyalty are problems every business face. But - there are always way for companies to stand out, to gain back pricing power, and at the same time keep customers happier and more loyal. We will talk about the results you can expect from the process.

Let's start by analyzing the problem.

In every industry there is pressure to commoditize and when industries commoditize they stagnate. It occurs in every industry in every part of the globe. Profits decline until someone comes along inventive enough or smart enough to disrupt the industry - sweeping aside the players that allow themselves to become commoditized. This move towards commoditization develops at different speeds in different industries. The high tech industry has the fastest commoditization pace, but other industries commoditize very slowly.

Let's take for example, many years ago the cellphone industry was highly profitable. Companies like Nokia became global market leaders and made huge profits. Eventually though, profits declined, and Nokia issued profit warnings and went through a deep restructuring - ultimately deciding to sell off its head-set division. Then the iPhone, the de-'commoditizer' , established new levels of performance, new offers of convenience, new values, and new price points at which they were able to earn superior profits.

It is always our role as managers to fight commoditization, find ways where we can stand out, where we can gain pricing power and customer loyalty. The example I gave you was a high tech industry, because the products are familiar, but since commoditization happens in every industry so does de-commoditization. So there is hope, we all have the chance to rise to the occasion and fight back.

So, how can companies rise from the sea of commodity and differentiate themselves to gain pricing power? The answer is innovation, in fact the general rule is that when you price for profits, you get the resources to innovate and you innovate for growth. Innovation doesn't have to be technical - It can be how you market yourself, how you sell, and what you sell.

For example the cost of jet engines used to be huge impediment to sales, until vendors came up with charging customers for usage for every hour the engine was used, as opposed to a huge capital cost.

Lets summarize the key points - we said commoditization forces are inevitable, but innovation will allow you to fight back. The marketplace is never homogeneous and you can leverage your insight of differentiators to gain pricing power in the marketplace. The way to de-commoditize is to know what segments are willing to pay more, how much more, and most importantly, for what.