Don’t get caught in the commodity trap

A few days ago I read a recruitment advertisement for a local small business.  The advertisement could be summarised as follows:

Joe Smith Ltd requires a marketing person to support our sales team. The person should be able to think of tactics which will help our sales team increase revenues. The successful candidate should be a marketing graduate and have experience of graphic design software. Touch typist essential.

This type of advertisement infuriates. It takes an extremely old fashioned view of the marketing profession. It also indicates a firm that may be falling into the commodity trap.

The first issue I have with this type of vacancy is that it treats marketing as a function of the sales team. It sees marketing as an exercise in gimmickry and as an exercise in solely promotion.

As we have regularly discussed in this blog, this definition of marketing gets things the wrong way round. Marketing is no a function of sales; your sales force is a function of your marketing planning.  A sales force is one aspect of an extended marketing mix (covering, in part, people, promotion, process and physical evidence).

Rather than your sales force driving the activities of your marketing team, your marketing team; the strategies the develop and the plans they put in place; drives the activities of sales representatives.

This is a firm which is not using marketing strategically.  Marketing is clearly seen as a short-term function moving from one unrelated activity to another; rather than as a strategic function which brings together different activities into a cohesive whole.

But that isn’t all that is wrong with this advert and it points to a management attitude that the firm is trading in commodities.

So what is a commodity?

The Oxford English Dictionary defines commodity as a raw material or an agricultural product.  This definition doesn’t really help much.

the Oxford Dictionary of Marketing doesn’t define the qword commodity but it does define commoditization:

The process of becoming a commodity categorised by higher volumes, less differentiation, wider availability and usually lower prices.

Some of the signs of commoditisation can be inferred from the recruitment advertisement:

  • Sales over marketing
  • Turnover over profit margins
  •  A marketing mix reduced to one P – Price
  • New customers over customer retention
  • Increasing revenues over reducing costs through value chain analysis
  • A ‘perfect competition approach: Every competitor in the market offers identical products and services and the only point of differentiation is price.

Some academics see commoditisation as an increasing phenomenon as the rate of technological change increases.  This is especially the case with Professor Patrick Minford, the Brexit-supporting academic whose economic modelling of the UK economy assumes price as the sole determinant of consumer choice.

But the commoditisation of markets is not a foregone conclusion.  Firms have control over their position in a market.  they can choose where to compete in a market and they can target the most appropriate segments in a market.

If your competitors reduce their prices, that does not mean you have to reduce your prices; and you have the ability to weaponize other aspects of the marketing mix to compensate for the discrepancy between your price and that of your competitors.

Continued price reduction is not an immutable law and customers do not buy on price alone.  You are not serving the best interests of your organisation by letting your profit margins slide.

Lemmings are not the brightest animals. If a market collapses on your watch and you collapse your prices to match that market, you are at fault.

It is your job as a manager not to wait on the commodity slide. there will be more winners in a market containing distinctive brands than in an unbranded commodity market. be a brand, not bland.

We know, through the work of academics like Professor Malcolm Macdonald that only ten percent of the customers in any market will have price as their primary buying criteria.

Let’s take a closer look at price.

We know that in developed markets, like the United Kingdom, 90% of customers would prefer to purchase on the basis of non-price criteria and 10% will buy solely on the basis of price.  That 10% don’t care about non-price attributes and are not engaged with a brand

We also know that in undeveloped markets, a given proportion of consumers would like to opportunity to purchase on the basis of non-price criteria. However, in undeveloped markets you will still get the same 10% of consumers who are price-only purchasers.

Often it is assumed that purchasers in undeveloped markets are influenced only by price because no research or analysis has taken place to discover appropriate non-price criteria.  This latent need isn’t addressed because of bad marketing practice.

The only winner in a commodity market will be the last business able to sustain a profit margin whilst being the lowest cost producer.

As a small to medium-sized enterprise, can you sustain the pressures of being the lowest cost producer? Do you have economies of scale to allow this?  Do you have a plan which can eradicate all your competitors from the market? Do you want to invest your reducing levels of profit to maintain this position?

Some products could be considered as commodities but there is no such thing as commodity markets.  Whatever business you are in, you have the full marketing mix at your disposal which includes product halo elements like customer service and delivery efficiency.  Use the full mix to maximise your market position, not just price.