Product Management Library of Knowledge
July 6, 2004
8 Ways to Differentiate Your Product Offering in Price-Driven and Commodity Markets
Selling on Value in a Wal-Mart World, part II
by Steve Rankel
In part I, we talked about how to use Value Pricing to Sell Value in A Wal-Mart World. The reality for some of us is we are STILL in commodity and fiercely competitive markets where the market seems to dictate the price, and where our only decision seems to be accept the price or get out of the market.
Today we are going to explore some of the most effective options we've seen and recommended to help companies overcome the pricing challenges inherent in commodity and price-driven markets. 1. Product Innovation Clearly, when you can add features or functions to your product, you can command a higher price, or at least defend your price from being 'Wal-Mart-ized' (rhymes with downsized or put out of business). Features can be added through your own in-house product development team, or via licensing or acquiring complementary products or feature sets. This is the model that Microsoft has used so well for years - partner and then acquire differentiating feature sets. Regardless of how you feel about how they achieved that, I'm sure you agree their approach has been very effective.
One CEO said adding features and functionality is a core strategy his organization employs so they can afford to keep doing business with Wal-Mart. You see, Wal-Mart demands that vendors consistently reduce the price of products they buy, year after year. Clearly, no product has infinite potential for margin reduction (and besides, what kind of way is that to live?). So, this innovator has his internal R&D group develop new products which they sell to Wal-Mart at higher prices since there is no established pricing model. They offer Wal-Mart a first-right of refusal - whereby Wal-Mart gets a unique product and the company enjoys slightly higher profit margins.
Diagnostic: What product features or innovations could you add that would give you a competitive advantage in your market? Ask your sales team and R&D teams what they think. 2. Packaging
Sometimes all it takes to re-energize and differentiate a commodity product is to change the packaging. In combination with some OTHER commodity product, or delivered in an innovative fashion, this can be very effective.
Consider the consumer products industry that has mastered and applied this technique for years. Not impressed anymore with Glad's high-quality plastic bags for food? Unwilling to pay a premium for them? Well, next they offer Zip-Lock bags. When those lose their mystique they offer Zip-Loc containers sold at far lower prices than Tupperware plastic. Then they offer freezer bags, storage bags, and colored Zip-Loc tabs so you can tell if something is closed or not. Does any of this innovation offer SO MUCH more value that it changes your life? No. But for the way it's packaged, offering more convenience, they charge more and people are willing to pay it.
Another example in consumer products is Hellmann's mayonnaise. Instead of mayonnaise in glass jars, there are now squeeze bottles, Dijonnaise, and various other products that are merely repackaged versions of the original. Oh, and they all cost 10-20% more, generating more MARGINS and NET PROFITS for the parent company.
Diagnostic: Are there several ways you can re-package your products or services in order to make them more 'palatable' or valuable to customers? 3. Pursue New Market Niches, Especially in Unsophisticated Areas
'Wee Willie' Keeler was a major-league ballplayer in the late 1800's that had 8 record seasons in a row which earned him a hall-of-fame spot despite the fact he was only 5'4" and used a 30" bat. When asked what the secret of his success was, 'Wee Willie' simply replied - "I hit 'em where they ain't."
One regional consulting firm in New England kept coming up empty when trying to pursue market leaders (household names) for consulting engagements using their proven, but not really breakthrough, approaches. Their solution? They began approaching old-world manufacturers in un-trafficked sectors who were wide-eyed and excited about the prospect of applying new tactics. Not only did this approach minimize competition, it ensured their clients were EXTREMELY impressed with the results because the consulting firm raised the performance bar for the client as part of what they delivered.
Diagnostic: Are there some new market segments you haven't focused on and are below the radar screen of your competitors. 4. Generate More Referrals
It never fails to amaze us in our revenue-generation engagements with clients how many of them absolutely love referrals but do nothing to cultivate them. In a recent meeting with a new client, their CEO mentioned that they were hiring sales people to go out and 'bang on doors,' cold call and generate appointments. When I asked him how most of his business had come in, he said 'Oh, people just call us because they have heard about us.' Unfortunately, too many companies operate in this manner. They build a sales model around cold calling or traditional 'push selling' despite the fact it is not how their business runs then wonder about why their missing their revenue targets.
Our advice to them? Cultivate the referrals, and build sales model around that type of selling more consultative and less confrontational.
In another recent meeting I was told by a company division head that they had THOUSANDS of people in their customer database and many were happy, but they had NEVER SENT THEM ANYTHING to generate a referral. When a referral did occur, the firm would send them a form letter saying thank you. That's terrible - and I told him so!
All things being equal, in a hotly contested market space, new prospects who are referred to you by happy customers are much more likely to do business with you than a cold lead. Figure out how you can offer incentives to past customers to encourage them to send referrals - your sales force will love you for it. And so will the CEO when he sees the sales pipeline and the bottom line.
Diagnostic: What can you do to generate more referrals for your products and services? 5. Offer Increased Service
Superior service combined with a commodity product can really differentiate. Consider the case of the 'Silent Lawncare Service.' Unlike other lawn care services (who are a dime-a-dozen, just check your yellow pages) this one uses reel mowers, hand shears and hand tools. What does that mean? It means that during the one day a week when lawn care is done, the residents (or tenants of the corporate building with a lawn that gets maintained) have peace and quiet instead of the typical crew of service people on loud mowers that disturb their peace for hours.
Of course, there's a small extra charge for the premium of that valuable peace and quiet. But best of all, this firm is winning new business because of their unique approach, when larger competitors could muscle them out if they simply chose to play someone else's game. By redefining their service, they redefined the playing field and gave themselves the home-court advantage.
Diagnostic: What kind of creative, unexpected service can you offer that will set you apart from your competition? 6. Figure Out What You Can Guarantee
We all know we have to deliver on client expectations or we are going to have to refund their money. So why not offer a guarantee up front and really shock your clients? In the fall of 2001, just before 9/11, we worked with a marketing services firm that was seeking to generate new business with major corporations. Big, slow buyers. These were marquis names anyone would want on a client list. These were the very buyers who generally became very risk adverse after 9/11.
Just days after 9/11 in the US, we had two significant projects approved. Why? Because we offered a guarantee that during the pilot project,;if our client's results didn't exceed the customer's internal results by at least 15%, we would refund their money. Basically, we minimized their risk of doing business.
Staples (the US-based office supplies superstore) does a great job of this - they call it their 'Low Price Guarantee.' It basically says that if you find a lower price elsewhere, they will match the price, and give you money back too. That makes it pretty easy to buy just about anything you think you need for your office at Staples.
Reality check: Just like most of the people I know, I am much too busy to check the competitive price of pens, envelopes or anything else to see if I've been overcharged. Now I don't have to worry about it because I am guaranteed a lower price. Staples achieves higher revenues and we consumers feel like we got a good deal. Nice.
Diagnostic: How can you be the safe bet for your prospects and customers? 7. Partner With Complementary Product / Service Providers Often when your product or service can not stand alone as a unique offering; partnering with another company's complementary offering can do the trick. HBO (Home Box Office's premium movie service) built a relationship with motels as one of their early channels of distribution in the US. Working with these motels gave HBO a brand boost, and news customers. It was a successful partnership for the hotels as well. I remember when I was a kid traveling on vacation, I kept busy watching to see the signs on our motel - 'Color TV, HBO.' HBO eventually got free advertising on the signage in front of most motels in the US.
The motels clearly benefited from this type of partnership as much as HBO did. In it's heyday in the US, HBO was a hot property. Motels weren't. By partnering with an appealing service offering, motels took their normally mundane product and turned it into something kids and adults could use to feel comfortable. Since most motels allready have HBO, what's next? HBO comes out with additional channels, and voila! The motel has something else - HBO family, HBO2, etc. The cycle starts all over again.
Diagnostic: What complementary product- or service-firm can you partner with to differentiate your offering to a competitive market? How can you help differentiate their offering? 8. Employ Your Hidden Assets Every business has two businesses: the one that faces the customer (delivery of overnight packages, implementing accounting software, selling information services) and the one that exists internally to make the business run smoothly.
For example, FedEx is actually a transportation and logistics company that happens to be able to deliver overnight packages. The recognition of this core competency within FedEx has actually enabled them to establish a logistics consulting group. This group consults to major organizations and is highly regarded. FedEx uses this group to roll out new product lines one after the other, like FedEx Custom Critical, Ground, Home Delivery, etc.
IBM did something very similar. In the fiercely competitive world of IT Services, IBM began drawing from the resources of it's R&D staff to put PhD's on sales calls and began to offer PhD brainpower to solve customer problems, not just come up with new internal innovations. That has CSC and EDS (major competitors in this space) scrambling to figure out how to respond to IBM's value differentiator, even though the basic outsourced IT and computing services are EXACTLY THE SAME.
If you would like a copy of a case study we developed on IBM differentiating itself successfully in a competitive market, email me at firstname.lastname@example.org and I'll be sure you receive a copy.
Diagnostic: What hidden assets do you have in your business that you can use to differentiate you? Additional Resources First, you can email me at email@example.com and I'll forward a copy of the IBM case study explaining how they differentiated themselves in a commodity market.
Second, you are also welcome to join us for an AIPMM-sponsored Teleseminars on 'Developing a KVP (Killer Value Proposition).' These Teleseminar will address many issues surrounding developing a value proposition and value-based selling approaches and are announced in the Product Management News and Views Newsletter, the Product 180 and AIPMM websites.
Finally, we will be leading a conference session at the AIPMM annual conference on generating revenue and overcoming marketing obstacles. If you have not yet registered for AIPMM 2004, I highly encourage you to do so!