|
Surely,
dirt is no longer just dirt," said
the client, a marketing manager for
diatomaceous earth, a chalky white mineral
used as an industrial absorbent and
filtration medium and sold to a range
of customers, from quarries to multibillion-dollar
food processors.
Indeed, when it comes to commodity products,
the burden of proof is almost always
on the marketer to show why this handful
of dirt is better and worth more to
the customer than that handful. It is
a marketing argument that may have as
much to do with the way the dirt is
packaged, delivered and used as it does
with the dirt's actual quality and characteristics.
Whatever is involved, it is a task that
the marketer must accept and be prepared
to handle with a savvy sense of the
differing needs and cost points of the
relevant marketplace.
Some of the organisations, who have
mastered the art of marketing a commodity,
defined as a specific group of lowly
differentiated products or services
with high levels of substitutability
and straightforward price discovery,
have outlined a step-by-step approach
to develop an effective marketing strategy
to do so. And the said approach is built
around "branding" i.e. creating
a mutually acknowledged relationship
between the supplier and buyer that
transcends isolated transactions or
specific individuals to achieve superior
and sustainable share and price premiums,
even in the most adverse of markets.
Here is how to turn commodities into
branded goods.
The four steps to branding
The four-steps of branding commodities
are as follows:
1. Carving up the market from
every angle and to identify those customers
who are responsive to differentiation.
|
In
the markets of commodity goods,
price is usually the only differentiator.
But if you can brand those goods
and bundle them with services,
even bricks and sand can command
premium prices.
|
2. Differentiating the offering
in one or more of the six "generic"
dimensions of differentiation.
3. Bundling several differentiations
into a brand and communicating the same
consistently and strongly.
4. Aligning the business capabilities
to reinforce and to defend the brand
and the underlying sources of differentiation.
1.
Carving up the market
Carving up the market is the critical
first step. Commodity marketers who
know who will pay for differentiation,
how much can be invested in the differentiation
process and what benefits are of value
to their customers can begin to build
a brand. Those who instead apply a shotgun
approach will likely run out of money
before they see results.
Successful commodity marketers must
start by recognising that no market
is truly homogeneous. Carving up the
market goes well beyond traditional
segmentation. It is a deliberate process
to find those customers who need, appreciate
and will pay for differentiation. In
place of the traditional psychographic
or demographic approaches, the first
step here is to conduct a disciplined
behavioural segmentation of the market
by examining the actual purchase patterns
of the customers. In this case, three
distinct classes of customers are identified
viz. Gold Standard Customers, Potentials
and Incorrigibles.
A. Gold Standard Customers
These are the customers whose concerns
exceed a narrow fixation with rock-bottom
price. They will pay a premium for offerings
that deliver true value in terms of
process enhancements, cost reduction
or benefits to end-users. They typically
represent a small portion, anywhere
from 5 to 25 percent, of the total market.
|
In
search for quality wheat
|
Australian
Wheat Board scans the global markets
looking for buyers who are seeking
high-quality wheat with very specific
characteristics. While most wheat
buyers require wheat to meet only
two or three specifications, demanding
buyers such as the Japanese may
have a list of 20 requirements.
By seeking out the most demanding
customers and efficiently matching
them with hard-to-find supplies
that meet their requirements, the
Wheat Board is able to extract a
significant premium in a business
where most competition is based
solely on price.
Source www.strategy-business.com |
The true Gold Standard commodity customers
will consider long-term, strategic partnerships
with multiple levels of client interaction.
They are usually a lot more demanding
than other market segments and they
are also willing to pay for their demands
(See box: In search for quality wheat).
And the commodity marketers are ready
to go a long way to gain their confidence.
B.
Potentials
A larger segment of the market, generally
ranging from 30 to 45 percent, places
a higher emphasis on pure price, but
is occasionally willing to entertain
the notion of selective relationships
involving certain products or services.
Customers in this segment have some
degree of interest in partnering although
they shy away from long-term commitments.
This group sometimes even includes traditional
cost managers. Because they are concerned
with delivered cost, it is possible
on occasion to interest them in opportunities
to reduce network costs, including transportation,
delivery and warehousing. And supply-risk
managers, rather than fixating exclusively
on cost, are primarily concerned about
the potential to avoid supply interruptions.
Once it is possible to move the dialogue
beyond delivered price, the potential
for differentiation exists.
|
Rhône-Poulenc
branded sand
|
In
a last-ditch effort to rejuvenate
a disappointing silica business,
Rhône-Poulenc's re-searchers
were developing highly dispersible
silica, or HDS, for vehicle tires,
which made it possible for the first
time to decrease rolling resistance
without diminishing wet traction.
As a result, HDS was priced at premiums
up to 75 per cent over common grades
of silica. And as fleet fuel efficiency
standards grew tougher in the United
States, Rhône-Poulenc entered
into a long-term agreement to provide
a major manufacturer with HDS silica.
The customer would use HDS to produce
tires that could provide up to 9
percent higher fuel efficiency than
those made with standard silica.
Source www.strategy-business.com |
C.
Incorrigibles
No matter what one does, customers are
not going to love one. One can rent
their affection but only until his money
runs out. These are not strategic thinkers.
They are tightly focused on a single
goal: making the best possible deal
on the transaction at hand.
These are the pure price buyers, who
treat suppliers as the enemy and focus
exclusively on current delivered price.
They will switch suppliers with lightning
speed for even the slightest price differential.
Not only is it often a waste of time
to market to these bottom-feeders, it
is sometimes not even worth the trouble
of having them as customers; their greatest
use is often as gifts to competitors.
Unfortunately, these incorrigibles constitute
half the market, or more, in some commodity
businesses. They are so prevalent that
no supplier can seriously think about
"firing" all of them.
The behavioural segmentation of the
market is just the first step in understanding
customer potential, albeit the most
important. Marketers also need to analyse
the extent to which customers truly
contribute to their profitability, rather
than eating up profits by failing to
pay the true cost-to-serve. The result
of these segmentations is a short list
of the customers around which real marketing
can take place.
The next step is to acquire an in-depth
appreciation of the needs of these customers.
The supplier must develop insights into
needs the customer might not be able
to either articulate or even understand.
That means understanding not only the
needs of the direct customer but sometimes
also those of an end user, the true
customer. (See box: Rhône-Poulenc
branded sand) This becomes necessary
when the direct buyer, someone internal
or external who is other than the true
customer, is acting as an agent and
does not appreciate all the nuances
involved in the commodity's actual use.
Getting "close to the customer"
may have become a cliché, but
that doesn't negate the underlying concept.
Insight requires understanding, and
understanding requires proximity.
2.
Differentiate
Commodity differentiation must be tangible,
robust and capable of withstanding intense
scrutiny. The marketed offering must
significantly enhance some element of
the customer's value chain in ways other
competitors cannot match. This requires
the development of a unique, tangible
source of value - technological and
engineering support, special distribution
and delivery or specific application
of the commodity product to the end
user. Once in place, that differentiated
source of value is difficult for competitors
to duplicate.
There are always ways to differentiate,
through both how you add value and how
you deliver it. Value is created in
commodity products through improving
the consistency of the offering, making
it more convenient or aggressively customizing
it to the customer's operation. This
value can be delivered either through
the product itself or through service
enhancement. (See box: Dow cashes in
on growing need for value) Exhibit I
demonstrates what happens when one combines
the two different dimensions.
What results from that combination are
the six "generic" ways to
differentiate:
A. Quality Control: Value
from Product Consistency.
Today's buyers are more fastidious about
quality of the product they buy than
ever before.
|
Dow
cashes in on growing need
for value
|
The
Dow Chemical Company was one of
the first suppliers to capitalize
on this growing interest in value.
In the late 1980's, it developed
and branded "The Diamond Service
Plan," through which it guaranteed
a response within 24 hours to any
customer question or problem involving
its chemicals. Dow built an infrastructure
that allowed it to provide, within
the promised time, a broad range
of technical support regarding its
products and their application.
Dow's branding of service has been
enormously successful. It has paid
dividends in terms of market share,
customer loyalty and price premiums.
Because of this service and the
partnerships it has produced,Dow
enjoys high plant utilization and
low plant complexity, leading to
low costs and correspondingly high
margins. Moreover, by investing
in an infrastructure that could
deliver a unique service, Dow succeeded
in providing a valuable offering
that its competitors have yet to
match.
Source www.strategy-business.com |
B. Reliability: Value from consistent
service
Over the past decade, new quality standards
have driven a significant behavioural
change among chemical buyers, for example.
Many customers now understand the importance
of reliable quality and supply, as well
as consistent service.
They encourage their suppliers to fully
understand their value chain - and those
of their own customers - in order to
foster partnerships that create value
over time.
C. Packaging: Value from Product
Convenience.
Consistent quality and service, though
essential, constitute only the most
basic forms of differentiation. Adding
convenience to consistency provides
a major new dimension to the offering,
making it substantially harder for competitors
to match.
D. Taking Responsibility:
Value from Convenient Service
Delivering supplies as soon as customers
order them is important. Automatically
supplying them on time without the customer
having to place an order is infinitely
better.
E. Matching: Value from Product
Customisation
The wheat market provides a clear example
of selective customers - the Gold Standard
customers described earlier - who are
willing to pay a premium to a supplier
who can match them with the exact commodity
they need.
F. Knowledge-based Applications:
Value from Customised Service
The most intense form of differentiation
also requires the deepest involvement
in the customer's operations. Exhaustive
knowledge of the customer's processes
can be used to provide substantial value
and pave the way for long-term partnering
relationships.
3.
Bundle
If the supplier can bundle multiple
sources offering, the challenge facing
competitors becomes immense.
Defining and delivering a differentiated
attribute that provides real value to
the customer is essential, but not necessarily
sufficient. Often, a single attribute
can be matched or at least neutralized
by agile competitors. Differentiation
tied to a specific product is the most
tenuous basis for branding. Ideally,
commodity branding is associated with
an offering (the basic product or service
enhanced by various forms of differentiation)
rather than with a particular product.
The goal is to bundle multiple sources
of differentiation and then to fight
ferociously to prevent competitors from
unbundling them.
In the end, the goal is first to build
the brand identification with a bundle
of integrated offerings, and then to
extend the brand relationship to the
institutional level, where it affords
the greatest opportunities for leverage.
Striking the right chord with customers
The objective of institutional branding
is to create customer relationships
that are broad and deep - broader than
the traditional link between a salesman
and a purchasing manager, and deeper
than a teenager's emotional attachment
to a particular brand of designer jeans.
In commodity brand relationships, those
emotional bonds are replaced by shared
goals and common values. For example,
one major agribusiness supplier believes
that, when toe-to-toe with competitors,
ethics and culture are our tie-breakers.
Polyethylene
resin is a commodity used in making
plastic products ranging from trash
cans to freezer storage bags. Du
Pont's tests showed that pipes made
from its Alathon 25 resin were 5
percent more durable than competitive
products. But despite several years
of price cuts, Du Pont failed to
persuade pipe manufacturers that
its product was worth a premium.
Finally, Du Pont launched an all-out
program to educate its customers
about the true value of its higher-grade
resin. It produced a detailed analysis
of the comparative costs involved
in installing and maintaining in-ground
irrigation pipe made from Alathon
versus the competitors' standard
resin. The direct savings from the
reduced need to buy replacement
pipe turned out to be fairly minimal.
The real savings - 10 times the
savings on new pipe - came from
the diminished need to pay the labor
and crop damage costs associated
with digging up and replacing the
underground pipe. As a result, Du
Pont was able to increase the price
of Alathon by 7 percent, resulting
in an overall premium of nearly
38 percent, and still see its sales
double the following year.
The people who market Du Pont's
chemicals and mineral products understand
they have a considerable advantage
because of the company's reputation
for innovation, reliability and
stability. Even if there is nothing
particularly innovative about a
specific product they might be selling,
one manager acknowledged, "people
buy from us because we are Du Pont".
That is the essence of commodity
branding.
Source www.strategy-business.com |
Brand marketing requires multiple points
of company-to-company contact as both
partners seek mutual ways to create
value through aligned processes, applications
and capabilities (See box: Du Pont grooms
its resin). It demands an entirely new
focus on relationships rather than transactions,
on offerings rather than products, on
premiums rather than discounts. Relationships
used to be one to one - now it's across
the company and across the customer.
Effective communication of the brand
All these require effective communication
of the brand. But years of disappointing
experience, stemming from the costly
and inappropriate use of consumer marketing
techniques, have made commodity suppliers
wary. Indeed, some have an almost pathological
fear of communication in general, and
of advertising in particular.
Well-targeted, sharply focussed communication
does work well in commodity markets;
it just doesn't bear much resemblance
to the mass advertising most commodity
suppliers automatically associate with
brand marketing. The key is to communicate
the value clearly, using economics rather
than emotion.
4.
Deliver
The extraction of a premium for a differentiated
offering demands that the supplier make
good on the promise of added value.
Execution is critical; the supplier
must have the business systems and processes
required to deliver the marketed offering.
It must also have the business systems
to not deliver to customers who do not
pay for it. The Australian Wheat Board
has to locate and deliver the high-quality
wheat it promises. Tires containing
Rhône-Poulenc's HDS silica have
to provide increased fuel efficiency.
And irrigation pipe made from Du Pont's
Alathon 25 polyethylene resin has to
last longer and produce tangible savings
in replacement costs.
Offer real value
When commodity buyers pay a premium
for value, it can't be skin deep. The
value has to be real and tangible, because
they will constantly measure and reevaluate
it. If the customer paid for the highest
quality product or the highest level
of service, then that is what the customer
has to get. At the same time, business
systems must enforce internal discipline
to insure that buyers of the most basic
commodities are not over-served.
Re-educating the sales people
Changes in the business capabilities
are not restricted to production and
logistics, but are even more important
on the "soft side" - customer
management. Employing a traditional
sales force to market a branded commodity
is the epitome of the Pogo Principle:
"We have met the enemy and he is
us."
|
Pricing
- a difficult task anyway
|
Commodity
suppliers are accustomed to charging
a wide range of prices; the rational
basis underlying those price variations
is not always evident. But haphazard
pricing practices will not support
a long-term branding strategy. Marketing
branded commodities involves a set
of basic pricing principles as appended
below:
* Be aware of the true cost of
differentiation
Commodity suppliers, rather than
risking the loss of a customer by
demanding a premium, often provide
a particular service upon request.
Over time, they incrementally increase
the value of their offering without
extracting an appropriate premium.
And this ultimately proves to be
ruinous. Effective branding requires
an accurate calculation of the true
cost of initiating, delivering and
supporting the offering.
* Command value for differences
This is evident as was obvious in
the case of Du Pont's irrigation
pipe in which a 5 percent difference
in durability did not seem particularly
significant until customers were
educated about the substantial costs
associated with replacing worn-out
pipe lying beneath cultivated fields.
* Understand the true value of
the offering
It is needful to understand the
true value of the offering in terms
of the customer's operations and
ability to switch. One producer
of refractory brick charges a premium
for its high-grade brick but that
premium pales in comparison with
the the enormous cost of taking
down a glass furnace for repairs
stemming from the use of inferior
brick.
* Do not allow differentiation
to be unbundled
Differentiation should not be allowed
to be unbundled, either by competitors
or by your own sales force. The
bundled offering is the core of
the brand.
* Be prepared for trade-offs
between volume and price
Effective marketers must be prepared
to make continuous and complex trade-offs
between volume and price. That means
deliberately surrendering market
share on occasion when the tide
is running the wrong way, then moving
aggressively to regain share when
conditions are right. It requires
a dynamic, day-to-day approach that
the Australian Wheat Board describes
as "guerrilla marketing"
- prowling world markets for opportunities
that play to your strengths and
passing up fights when the cost
of victory appears too high.
* Maintain market discipline
A successful pricing strategy requires
the supplier to maintain market
discipline - a deliberate, unemotional
approach to outbreaks of price wars.
It requires careful analysis of
what competitors are doing, and
why, in order to avoid misreading
signals that might actually point
to a spot phenomenon or geographical
aberration rather than across-the-board
price cuts. It is imperative to
avoid getting panicked into price
slashing, which undercuts the long-term
strategy.
Source www.strategy-business.com |
Brand marketing requires massive re-education,
new values and tailored incentives.
Traditionally, commodity salespeople
have had two concerns: volume and the
immediate transaction. Their basic tactic
is to enhance their personal relationship
with the buyers. To close the deal,
they will offer practically anything,
culminating in the pitch: "I know
what the rate card says, but here's
what I'll do for you." And that
approach will spell disaster when applied
to brand marketing. With alarming speed,
the salespeople will un-bundle your
offerings. They will erase your premiums.
They will offer unfathomable discounts.
Left to their own devices, they will
destroy your brand faster than any marketing
effort can build it back up.
|
A
Self-Test For Commodities
|
"Commodity
markets" is a term used so
often that it tends to be meaningless.
Rather than debate the definition,
the following test may be suggested:
Which, if any, of the following
five characteristics apply to ones
market?
* Customers evaluate each purchase
Customers carefully evaluate each
and every purchase. In some markets,
purchases are made automatically
and receive little or no scrutiny.
Even if consumers had the time and
inclination, few possess the resources
or technical capability to accurately
compare competing offerings. In
fact, the consumer is paying for
the luxury of not having to think
about the purchase. The brand offers
instant clues - highest quality,
lowest cost, reliable service, greatest
cachet - that relieve the consumer
of the effort required to weigh
the pros and cons of each purchase
systematically. Commodity buyers
possess not only the resources and
capability but also the incentive
to evaluate each purchase. The risk
factor involved in each purchase
far surpasses those faced by consumers
and justifies the investment in
increased attention.
* The true customer is anonymous
The product is purchased by a buyer
or agent who is not the final user
of the product and who may not appreciate
subtle but important differences.
For example, in the case of the
Australian Wheat Board, in which
different wheat characteristics
make for tremendous differences
to an end user, like a baker. A
sudden change in supply can result
in loaves of bread an inch too high
or too low. However, sellers of
wheat deal not with bakers, but
with a purchasing agent, who is
often located far away at a flour
mill, and who may have little appreciation
for the differences in performance
that even small variations can create.
The baker is the true customer,
not the purchasing agent or the
miller, but is anonymous to the
wheat board.
* You have dumb competitors
Not all competitors act in ways
that support market-focussed strategies.
In fact, the traditional commodity
strategy of pure lowest price based
on lowest cost rarely works in practice.
Even a supplier that truly has the
lowest costs and prices accordingly
is vulnerable to price wars initiated
by aggressive competitors gunning
for volume and share. Nonetheless,
many competitors persist in rushing
to market with well-disguised but
inferior product offerings, emphasising
price, price and price. |
Pricing
Few issues are more problematic for
commodity marketers than pricing. There
are very few commodity marketers that
sell on the basis of value - it appears
to be a foreign concept. The norm, instead,
is cutthroat bidding aimed at moving
volume.
The traditional commodity pricing mentality
dictates that all consumers must pay
the same price, with reasonable adjustments
for transportation and volume. That
view of the marketplace is blatantly
wrong. The notion that all customers
of lowly differentiated commodities
pay essentially the same price is a
myth. In one commodity segment, for
example, an analysis of more than 100
customers found that 61 percent were
paying a price that varied by more than
10 percent from the moving average.
In some cases, customers purchasing
comparable volume paid effective prices
that differed by multiples of three
or four. And in general, the largest
discounts were enjoyed by the smaller-volume
purchasers (See Box: Pricing - a difficult
task anyway).
To sum it up all, man has now learnt
to brand all the mundane objects with
dexterity. And within reasonable limits,
successful commodity branding has yielded
a substantial payoff in the form of
a brand premium. However, marketing
has been found to carry major risks
as research shows that while effective
marketing can bring commodity businesses
with high returns, ineffective marketing
is worse than no marketing at all. However,
given the economics of commodity businesses,
the margin for error is incredibly thin.
And the key to success is to take a
disciplined, deliberate approach that
begins with the market, to understand
how to create and to deliver value and,
most importantly, to figure out how
to get paid for it. Getting paid for
it requires branding and extending the
relationship beyond the transaction
to encompass the full organisation.
References:
* The above article has been abstracted
/condensed from the views of the following
articles/books. All rights of the authors
and
publishers are reserved.
* Segmenting Customers in Mature Industrial
Markets: An Application, Rangan, V.
Kasturi, Harvard Business School,
Case Study 9-594-089, 1994
* Strategy and Tactics of Pricing, Nagle,
Thomas T., and Holden,
Reed A., Prentice Hall, 1995
* The Effect of Marketing Orientation
on Business Profitability, Narver, John
C., and Slater, Stanley F., Journal
of Marketing, October 1990
* How to brand sand, Hill, Sam I., McGrath,
Jack, and Dayal Sandeep, www.strategy-business.com
* Strategy-Management-Competition, Second
Quarter, 1998
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