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Driving Forces of Commoditization

Commoditization is a big word for a phenomenon that salespeople face every day, that is, the pressure from the customer to devalue the differences between their goods and services and reduce their decision to the lowest common denominator—the selling price. The pressure to treat all entries in a category of products and services as identical is driven, in some instances, by very real forces and, in others, by emotional needs. In either case, the pressure exists and sales professionals must deal with it.

Technology is one of the real forces driving commoditization. A good example of how emerging technology can commoditize a product is the personal computer and development of electronic commerce. Before the Internet, enterprise-level personal computer (PC) sales were considered enterprise sales and all the major computer manufacturers had large sales organizations dedicated to that task. Today, a large portion of those sales positions have been eliminated. PC makers still maintain salesforces for their high-volume customers, but buying a number of PCs for a company can also be accomplished in a self-service, commodity-based transaction.

Even a short visit to a web site such as Dell.com makes the point abundantly clear. Dell Computer Corporation played a leading role in the commoditization of the PC and has profited handsomely from its work. The company was founded on a direct-to-the-customer model that eliminated the external sales and distribution chains that other PC manufacturers depended on. When e-commerce technology appeared, Dell was the first to move online. Starting in 1996, Dell customers who wanted a self-serve transaction could research, configure, and price their PCs, associated hardware, and off-the-shelf software on the company's web site. They could do the same at two or three of Dell's major competitors. They ccould compare prices and make their purchases without ever speaking to a salesperson. What was once solely considered a relatively complicated product (and sale) had been transformed by experience, knowledge, and technology into a product (and sale) that can just as easily be treated as a commodity.

Dell has successfully created the best of all worlds. For the customers who can determine their own needs, configure the computer they want, and set up and use the computer without assistance, Dell has provided the lowest cost of manufacturing in the industry and has enabled its customer to order a computer with little or no sales support. On the other end of the spectrum, for the customer looking to set up an elaborate network of PCs or for a complex e-commerce business, Dell has assembled a team that can provide high-level support in Diagnosing, Designing, and Delivering sophisticated solutions.

The second real force driving commoditization is the lack of differentiation between competing products in the marketplace. The growing similarity between the products and services that compete in specific market niches is not a figment of our imaginations.

To return for a moment to the personal computer, corporate buyers often see little difference between one company's PCs and the products of its major competitors. Who can blame them? Perhaps the shape and color of the computer is different; so is the name on the box. But, the main components of the computer—the processors, memory, disk drives, and motherboards—are often identical. Therefore, many buyers make this purchase decision based on price.

The similarity between competing products and services is a function of industry response times. Unless they are protected by law (as in the case of new prescription drugs), the length of time that the inventors of new products and services enjoy the advantage of being first into the market is getting shorter and shorter. Competitors see a successful or improved product and quickly match it. Therefore, one important reason for the increasing difficulty in differentiating products and services is that, in actuality, they are increasingly similar.

Another reason it is getting tougher to differentiate products and services is that customers don't want to differentiate them. The more complex products and services are, the more difficult it is for customers to compare and evaluate them. Analyzing and deciding between long lists of nonidentical features is hard. Simply comparing the purchase prices is much easier. Customers, by the way, are the third driving force of commoditization.

Customers are always trying to level the playing field. They attempt to reduce enterprise sales to their lowest common denominators for good reasons. The most obvious is financial. When customers are able to convince vendors that their offerings are essentially the same, they exert tremendous downward pressure on the price. For instance, if General Electric's jet engines are the same price as Rolls Royce's jet engines and the customer can't or won't see any difference between the two, what must those vendors do to win the sale? Unfortunately, the easiest answer, and the one that takes the least skill to execute, is to cut the price, which is why so much margin erosion occurs at the point of sale.

An example of the extreme impact this can have on a business involves a client who came to us after their business had taken a devastating hit. This company had developed a manufacturing technology that became a standard in the chip manufacturing industry. They produced a piece of capital equipment, sold about 300 units per year, and enjoyed a very large market share. The situation was too good to be true, and a competitor entered the marketplace offering the "same thing" for 32 percent less. The original manufacturer did not initiate the diagnostic process we describe and, faced with the threat of losing customers, lowered prices in response. Their average selling price dropped by 30 percent during the following year, resulting in a reduction of $24 million in margins. The irony of the story is the upstart competitor, who made the claims, sold only 15 units, a 5 percent market share. The manufacturer's inability to respond in a more productive manner nearly destroyed their business.

Customers also try to oversimplify transactions for emotional reasons. Often they are in denial about the extent of their problems. Think in personal terms: If your stomach burns and you chew an off-the-shelf antacid, your problem must be temporary and is easily solved. If you go to your doctor, who discovers you have an ulcer, your problem jumps to an entirely different level.

Fear drives customers to oversimplify transactions. Our customers are professionals, and it is difficult for professionals to admit that they don't understand problems and/or solutions. We need to take into account that our customers may be concerned about appearing less than competent in front of us and in front of their bosses. So, instead of asking questions when they don't understand something, they may simply nod and reduce the transaction to what they do understand—the purchase price.

Finally, there is the emotional issue of control. We regret the negative stereotype of a professional salesperson that exists in many customers' minds. Customers are fearful that by acknowledging complexity and admitting their own lack of understanding, they lose control of the transaction and open themselves to manipulative sales techniques. The simpler the customers can make a sale, the less they must depend on salespeople to help them. This is their way to maintain control of the transaction and protect themselves from unprofessional sales tactics.