The commoditization death spiral.
If you think about it, your salespeople are out in battle every day. They call prospects, they meet them, and they talk with them all day, every day. And almost every time they hear the same story; your product or service is not good enough, and the price is too high. Competition is both better and cheaper. From the customers’ point of view, this is all a negotiating tactic.
I bet you do the same when you are the buyer. Buyers want the seller to believe them when they say a product or service is inferior, so they get a lower price or more features for the same price. It is obviously true sometimes, but often it is not, and just a tactic is to get a lower price. Why do buyers do this? Well, hold on for this — because it works! Not every time, but, from the buyers’ perspective, often enough that it is always worth doing.
It’s hard for salespeople to hear their customers complain and denigrate the product or service they sell, all the time. I’m a firm believer in that salespeople need to believe in what they sell. Need to know that their products or services do have benefits over and above the competition. And deliver true value to the buyer. But when they are constantly being bombarded with what sounds like complaints, they will eventually lose some of their confidence. Their self-motivation is slowly being ground down. They start to believe what they hear every day, all day, from customers and prospects.
When salespeople believe customers a little too much, it leads to a failure to properly defend your pricing, and an incapability to defend the unique value of your products or services. They will have a hard time focusing on the unique selling points of the products or services. The features, functions, and benefits that give you pricing power.
The result of all of this is that salespeople start resorting to rampant discounting to close every sale. They report back to the company how inferior the products or services are. How hard it to sell. How overpriced it is. This cascade of bad news also makes the company somewhat lose faith in its products or services. The enthusiasm that once drove the company forward dissipates. Product or service development becomes more focused on reducing cost than developing new features and functions that deliver unique value to customers. Marketing has less to work with, as products or services become more me-too, and thus become less value-focused, and more low-price focused.
With me-too products or services, the company reduces prices. Budgets are slashed, and so are product and service development and marketing. The outstanding salespeople — those who sell with a minimum of discounts — find other, more rewarding jobs elsewhere. This result in even more price pressure and lower overall prices.
The company has entered the commoditization death spiral.
This is the commoditization trap all companies with all their products and services are on. Over time, commoditization is inevitable, but the speed to complete the journey, with the consequent loss of pricing power, can be reduced or even halted — for a while. Giving a company the time to develop new products or define new services and continue to deliver superior value to its customers.
So how can companies reduce the speed of commoditization?
- Companies need to gain a more in-depth and more accurate understanding of what features, functions, and benefits affect willingness to pay and how the entire decision landscape works within their customers.
- They need to use this information to train and retrain salespeople on what customers are genuinely willing to pay. Salespeople also need to be trained on how to defend the company’s prices better. Salespeople need to know what features, function, and benefits that genuinely increase willingness to pay so they can emphasize these in conversations with customers.
I started to say that customers are not always truthful in their feedback to a company and that this grinds down salespeople — and eventually a whole company. The company loses its pricing power and ends up in the commodity cesspool, bringing a pricing race to the bottom. There is a four-step process for companies looking to avoid ending up a complete commodity vendor,:
- Companies need to conduct price-focused market research. To understand in detail what customers are willing to pay and what features, functions, attributes, even what marketing messages and brand associations drive a higher willingness to pay.
- Companies also need to conduct a version of the same research on its staff: sales and marketing people, customer service, and support people as well as executives. The purpose of this internal exercise is to capture what the various groups in the company believe its customers find important.
- The company or an external agency should then develop a gap analysis between the two research projects. What will become apparent is that there is a gap between the externally-focused and internally-focused research projects. What customers’ say is important, and what affects their willingness to pay is going to be different than what the company believes about their customers, their willingness to pay, and what drives their purchase behavior. Likewise, there will be a difference between what the company believes customers are willing to pay and what customers are actually willing to pay. Customers will almost always have a higher willingness to pay that is higher than what the company believes. Different groups in the company typically have different perceptions of customers; marketing is different than sales, and executives are different than either one.
- From the studies and the gap analysis, training needs to be developed and implemented. Salespeople need to be trained on how to defend prices better, and it starts by them understanding the actual willingness to pay in the market. Marketing people need to be trained on what messages and positioning drive a higher willingness to pay, and therefore identifying the most effective messages in generating pricing power. Executives need to get an all-around view on customer preferences, as this might alter the company’s strategy.
So, how significant will the differences between customers and the company be? In my experience, when it comes to some product or service attributes, some factors that affect customers’ willingness to pay, the company is pretty close. When it comes to other attributes or factors, there is a wide gap between the company and its customer base. And when it comes to willingness to pay, the company almost always believes customers have a willingness to pay that is lower than they say.
I’ve also seen wide gaps in what marketing perceives is valuable to customers; compared to what sales believes is important to customers and compared to what execs believes are important for customers. These gaps in perception among different groups in the company mean the company’s entire operation is not as effective as it can be. The company becomes unfocused, mistakes and misunderstanding between groups becomes legion. In short, the company does not live up to its potential.
In closing, the way companies can avoid commoditization is to gain a better understanding of its customers and undertake a gap analysis to understand its own, often imperfect, perception of its customers. What are you waiting for?
The Price Whisperer™
Sjöfors & Partners Inc
Pricing has always been an interest area for Per. As a serial entrepreneur, running companies in Europe and the US, he did pricing experiences. Some of these worked spectacularly well, some did not work at all. As a result, Per founded Atenga (now Sjöfors & Partners) out of his frustration that what business schools teach about pricing is too abstract, too academic for a business executive to act on. Likewise with books about pricing. Consequently, he set out to make pricing practical and actionable. Pricing for business people. Since then, he has been at the forefront as thought leader in everything pricing and he is a sought-after speaker for a variety of conferences and business circuits.
Per appear regularly on business radio shows and gets quoted regularly in the financial press, including Forbes, Fortune Magazine, Inc., IndustryWeek, Business Insider and the Financial Times.
About Us: Sjöfors & Partners has developed a unique method for data-driven pricing based on price-specific market research, that generate precise measurements of customers’ willingness to pay or buy for a product or service. Armed with this knowledge, companies can focus their sales, marketing and product development efforts towards the market segment with the highest willingness to buy at the highest prices. The measurement also allows Sjöfors & Partners’ clients to accurately predict the results of different prices, taking the uncertainty out of pricing decisions.