DeCommoditization for Profitable Pricing

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A commodity is a good or service that is the same, ie it is undifferentiated from that of other manufacturers or sellers. Consequently, competition can be based only on price, specifically the lowest price. Examples include table salt, water, public transport and electricity. Consider other examples that are readily and commonly available in your area like agricultural produce, bananas, beef, eggs, fish and so on. None of the sellers can raise their prices as they will quickly go out of business because the market will stop buying from them. The market places value for a commodity on price. Customers expect low prices. Consequently, sellers suffer low profit margins and can make money only if they sell in high volume. They also suffer further when new competing products enter into the market like how 'pH-balanced beauty bars' entered into the personal care market with claims of being gentler on the skin, thereby challenging the emerging desire for real natural soap (which is often sought after based on perceptions of being gentler than chemical bars).

The solution to this apparent trap is product decommoditization or differentiation ... ie 'branding' and brand repositioning. Ways in which this can be done is by adding value to products in ways that are meaningful to your target market like adding new inputs (like ingredients, labor, experiences within services) that are sourced and or managed in a special way, adding a service to the otherwise commodity product and so on. Since competitors will follow when they realize you succeeded in increasing the profit margin, you will need to advance your differentiation strategy. For instance, when you start to differentiate, prepare to decommoditize your product in planned stages that does not seek to immediately achieve the maximum. For instance, after your competition follows your approach of converting your products into being 100% natural, you can then convert into 100% natural and another feature that is meaningful to your market like 'certified organic' or 'vegan'. This step-by-step approach may make it easier to raise your price in the market to a bearable extent in a particularly price-sensitive market. Otherwise, if you have the wherewithal to raise entry barriers and your market can bear higher prices, decommoditize your product to the maximum extent.

After going through the extra trouble of differentiating your product, it is imperative to raise your price accordingly, not only for the sake of benefiting from the opportunity but as a means of avoiding potential future commercial suicide if you are operating in a highly competitive environment. Imagine this! If your decommoditized product is priced like a commodity or higher to such a limited extent that it is not noticeable, your competition can decommoditize and price his product more appropriately. Since a differentiated product becomes competitive on the basis of perceived or real quality rather than price, your relatively low price may signal lower quality to the market, especially if shrewd competitors capitalize on your faux pas, even without direct attacks. By such a point, you can not easily raise your price. You will be in reactive rather than proactive mode engaging in damage control of your brand's reputation.

Here are some case studies of decommoditization.

Case study: Air travel is a form of public transportation. As seen in the cases of no-frills air travel like Ryan Air, Easy Jet or Southwest, air travel can be allowed to remain as a commodity. However, consider the way in which exclusivity marketing and also tiered loyalty rewards programs decommoditize air travel. Essentially, airlines decommoditize their product by adding a new type of experience to the basic concept of moving from point A to point B, specifically, they provide comfort (like nicer facilities in their special lounges), extra services (like free WI-FI), convenience (like shorter waiting times) and an emotional boost (like the pleasure of being seen in a 'high financial status' situation).

Case study: Some utility companies created their own 'new type' of electricity called "digital electricity" (even though the electricity they sold was the same as any other utility company). They succeeded by overcoming an important pain point of the highest resources market segment. Specifically, they targeted businesses that depended heavily on electrical technologies like computers. Current fluctuations and power outages were a pain point for such companies like Google, IBM and Microsoft. Consequently, by assuring such companies of the solution to the problem, the utility company was able to sell their 'new' decommoditized product. Over time, not only did other technology-dependent businesses (like banks) follow the lead of the first 'digital electricity' customers but high-resources households with the same perceived need.     

Case study: To counteract falling sales in the beverages market, Cadbury Schweppes improved inputs that aging baby boomers, a key market segment valued highly, ie 'natural ingredients'. This segment was particularly preoccupied with aging in a healthy way. As a result, Cadbury Schweppes saw sales continue to rise for years after making this change.

Case study: When 7-Up competitors began to imitate their 'natural ingredients' approach, 7-Up decommoditized further to an extent that would make it hard for competitors to catch up. Specifically, rather than merely offering some 'organic' ingredients, they converted their 'natural' products into '100% organic'.

Case study: The chemical formulations of any brand of bleach or aspirin are regulated by law. Consequently, all bleach or aspirins, regardless of brand are the same. However, because of branding, people will sometimes even knowingly pay more for the same product. Clorox  and Bayer remain the leading brands regardless. Consumers generally pay 55% and 43% more respectively for these brands.

CONTENT RELATED TO DECOMMODITIZATION FOR PROFITABLE PRICING

• Branding 101.
• Brand repositioning 101
• If you are concerned that selling at higher prices will encourage sales objections, master the art of overcoming sales objections
• Learn about subscriptions boxes as another strategy for decommodization of your product. 
• Use persuasion psychology to help you convince your market to pay higher prices.
• Psychological pricing
• *IMAGE ABOVE. While water is abundant, Perrier has created a high end brand by bottling natural mineral water, its distinctive green bottle, and boasting its competitively higher levels of naturally occurring carbonation.