I’ve been thinking about the process by which brands actually become commodities in the first place. Economists sometimes refer to commoditization as a state of “perfect competition”. Of course, from a marketing point of view, that could not be further from the truth. Commodities are uncompetitive as brands. They ride the currents of supply and demand, going up and down in response to market forces with little or no ability to differentiate and no margin beyond that provided through volatility. They have become trades.
Three key forces drive down value-added margin:
1. Commoditization of price – the one we are all familiar with. Products are inevitably drawn down towards the perfect price of free.
2. Commoditization of loyalty– the reasons to stay loyal to one brand come under increasing pressure as others match on features and compete for emotion.
3. Commoditization of delight – consumers now expect more and more as of right, which means that it is increasingly difficult for brands to surprise and delight. At some point, brands that have relied on their innovation to be ahead can get swallowed by the “high tide” of expectation and subsumed.
These forces play out on your brand in what I call “the four stages of one”. These four stages explain how and why perceived value degrades.
1. The one – you have market dominance – either because you created the category or you now have significant scale in the category. You drive the market, and the market and your competitors look to you for competitive and innovation signals. You have the world’s attention, and that’s both a good and a bad thing. You’re probably feted and criticized in equal measure.
2. Someone – competition intensifies, as others either copy your ‘magic juice’ or create their own. Alternatives appear, sometimes with the same broad formulation, sometimes something completely different. Your market share starts to shrink, but if the market itself is growing, you may or may not even notice or care. You start to lose the ear of consumers. The story that was once yours starts to evolve into a story for the category.
3. Anyone – market demand has grown but your dominance as a brand continues to decline. Seeing the opportunity in this area, your competitors now include not only direct rivals but other firms in related markets who have seen an opportunity to converge into the space. Maybe you wrong-footed a couple of product launches, or your competitors stole a march on a category enhancement. Either way, your tide is going out, and you face increasing pressures from your customers on the price and placement premiums you once commanded as of right.
4. No-one – you’re gone. Either literally or as good as makes no difference. Ironically, the market itself may have grown to the point where, as a whole, it is exponentially more valuable than when you began it, but because of the number of players, the intensity of the competition and the almost inevitable revolutions in distribution that have occurred, the footprint for the sector is now so widely distributed and the value of each percentage of footprint for participants is so small that this is now a very difficult place to make money. You may decide to continue to hold a presence in the sector you founded, but your exit strategy in terms of income dependence should have been well and true activated by now.
Decommoditization reverses this process, but with one important difference. It skips the third stage of one – anyone – and instead looks to shift a brand from ‘no-one’ to at least ‘someone’ in a category. The reason is simple. You need to be ‘someone’ before you can seek to unperch ‘the one’. To do that, you must generate distinctive and competitive meaning for what you offer: meaning that positions you as the rightful challenger and potential market leader. As The Blake Project’s Thomson Dawson put it recently, “To lock onto relevant differentiation means to provide something that is highly valued and not in abundant supply … Innovate greater meanings not more function.”
Where so many companies go wrong is that they do indeed lock themselves into a functions race, trying to redefine the territory they know by adding to what they have and believing that, in doing so, they will head off others around them. It’s a way of thinking that the people at Bizshift perceptively describe as “betterentiation”. Ironically, that process often only adds to the commoditization effect, because it delivers consumers even more at little or no extra cost – raising delivery expectations and lowering margin and surprise opportunities at the same time.