For many years, it was considered that there were two types of market; commodity markets where all competing businesses offered similar products; and differentiated markets where businesses would offer significantly different options to meet the needs of consumers.
In commodity markets, the main competitive strategy was based on price. In a differentiated market, product attributes were key and designed to meet the wants and needs of particular customer segments. Often price in a differentiated market would be used in a psychological manner; to indicate prestige or rarity.
This definition of markets has broken down in recent years and increasingly products that were once classified as commodities have been marketed using the strategies once reserved for differentiated markets.
Take as an example Albert Bartlett Rooster potatoes. These are sold at a price premium and are advertised as being the choice of top chefs, including Michel Roux Jnr. They are marketed to attract a particular segment, the upwardly mobile foody. This is a fairly recent change in the marketing of potatoes which were previously sold loose or in plain packaging.
When considering whether you are operating in a commodity market or a differentiated market, it is important to remember:
- Just because a market is undifferentiated, it does not necessarily a commodity market.
- The definition of your market is not out of your control.
- You don’t have to cut your price just because everyone else does. Lemmings are not clever animals.
- You don’t have to continually cut prices.
- Consumers do not buy on price alone
- Retaining market share should not be at the expense of profit margins and if you collapse your profit margins, you are at fault.
On that last point, the new CEO of Asda today announced a new aggressive price cutting strategy in an attempt to reverse his firms falling market share. Having recently visited my local Asda, he would be better off concentrating on making his stores a more pleasant place for customers. My local Asda feels like you are walking through the stock room, not a modern supermarket.
If you operate in a differentiated market place you must also avoid the commodity slide. This is where, over time, in the minds of consumers, your product goes from a distinct brand identity to simply that of a commodity.
An example of the commodity slide is Findus. Findus was a well-respected frozen food brand known for distinct products like its Crispy Pancake range. Findus was bought in the 1990’s by Young’s Seafood. Earlier this year Young’s announced it was retiring the Findus brand and that crispy pancakes would be sold as a discounted product. Findus had gone from a high-profile differentiated brand to a generic in under a decade.
As differentiation appears to be the strategy of choice, even in markets which were previously considered as commodity markets, how do you decide if it is an appropriate strategy for your business.
Aufreiter et al (2003) compared the relevance of products to consumers with the amount of differentiation in the market. The defined four classes of differentiated goods:
- Neutrals – Where a products features are irrelevant to consumers and there is low differentiation in the market
- Hygienes – Where product features are important to consumers but they are offered by all competitors in the market
- Drivers – Where product features are highly relevant to consumers and the market is highly differentiated
- Fool’s Gold – Where features are distinctive but they do not drive customer loyalty i.e. product differentiation is an unnecessary driver of cost.
Obviously, if your products are Driver’s, you need to ensure product features meet the expectations of your target customers and you need to ensure that you offer different attributes to defined segments. If your products are Hygienes, you need to match the features offered by your competitors. If your products are Neutrals, you need to focus on the commodity nature of your products and not market on the basis of differentiation (e.g. price, value for money or reputation). If you are offering Fool’s Gold, you should not waste effort in creating significantly differentiated product features.
To decide whether differentiation strategies are important, ask yourself the following questions:
- What market segments are you targeting? (market segmentation)
- Where are most of your competitors concentrated? (perceptual mapping and Porter’s five forces analysis)
- Where is your market offer credible? (Strengths and Weaknesses, SWOT analysis)
- Where is it easy to maintain your differences (Product Life Cycle Analysis, adoption of innovation by consumers)
- Where can you protect differentiation? (use of intellectual property rights). If your differentiation can be easily copied; don’t differentiate.
- Are there areas of differentiation outside your knowledge base/expertise? (directional policy frameworks such as the Shell Matrix).
An example of a firm failing on the last question is Kodak. Kodak invented the digital camera but let other firms such as Canon and Pentax exploit the technology. Kodak continued to focus on film stock. The result was that Kodak failed to recognise that their market was moving away from their core competencies and they did not invest in digital. This error eventually led Kodak to apply for bankruptcy protection.
Philmus Consulting can help your firm to develop marketing strategies and plans which identify the opportunities for differentiation in your market and which ensure that your business is not wasting resources trying to inappropriately differentiate commodities