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CompensationMaster Newsletter Article, March 2004 If your profit margins are being squeezed tighter and
tighter, there's a good chance that you're becoming commoditized.
What is commoditization?
Commoditization is the process that transforms a profitable, differentiated
product or service into a commodity.
As markets for any product or service develop over time,
they coalesce. The products and services evolve to the point where they
fully satisfy the needs of most customers. As soon as one company identifies
and launches a differentiator, it is quickly met by competitors, who
introduce the same feature.
The products and services come to be viewed as commodities,
despite attempts to brand them and preserve their distinctive value
propositions.
Once reduced to commodity status, the most visible
difference between products becomes price. Price wars ensue, forcing prices
lower and lower.
When products are perceived to be interchangeable, the focus
shifts to the selling process. Highly skilled sales representatives become
superstars. They develop a following among their customers, who express a
strong preference to work only with them. Because they have the ability to
bring their customers with them should they choose to move to another
company, they can command higher and higher commissions, perquisites and
other concessions from their employers.
At this point, not only is the product a commodity to the
customer, but the company is a commodity to the sales representative.
Businesses are caught in the middle, between declining
prices and ever-increasing salaries. Profit margins, already under pressure,
diminish to the point where all but the most competitive firms are forced
out of business.
How do you deal with commoditization?
The answer is to acknowledge what is happening to your industry and embrace
the change—if nothing else, it will remove many of your competitors.
Study what has happened in other industries that have
already passed through this stage and look for a way to differentiate your
firm—preferably with something that can be sustained over the long term
and can’t easily be copied by competitors.
The strategy we recommend is to find a way to better meet
the needs of your sales force. When you devise a powerful way to
differentiate your firm from other employers, you can attract and retain the
best sales force, creating a long-term competitive advantage. You can differentiate by offering styles of compensation not
available from competitors, such as salaries or high-split plans, or give
associates a choice of compensation plans. Or you can offer packages of
training, administrative support, marketing support, and benefits that fit
associates’ needs better than competitors.
The key is to ensure that your firm retains its
profitability while gaining that competitive advantage. To read more about
how our contribution-based approach lets you do that, visit
http://www.compensationmaster.com/contribution.html.
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