Commoditisation Is Destroying Your Margins. How and Why Going Digital Is the Right Choice for Your Company

September, 2017

What is the commoditisation process?

Every business and every industry is characterised by a certain level of commoditisation. Precisely, commoditisation happens when a product or service loses its differentiation within its usual market, often by:

- the open diffusion of the knowledge necessary to acquire or produce it efficiently; or

- a decreasing interest of customers in the differentiating points of the product.

In general, the commoditisation process of both products and services is often the cause of a strong margin decrease in any business, due to increased competition.

What is the commoditisation spectrum?

There is a continuous spectrum of commoditisation, rather than a binary distinction of “commodity versus differentiated product”. Most products show a certain degree of differentiation, variable upon the perception of users. However, buyers often perceive the products they are willing to purchase as commodities. Why?

The degree of commoditisation mainly depends on the buyer’s perception and needs. For instance, a product can be perceived as totally commoditised by purchasers, who believe the price is the main driver of choice. However, the same item can appear much more differentiated to other customers. These buyers’ mindset – even for basic products – is to make their purchasing decision relying on many factors, not only price.

The degree of commoditisation depends also on the products application purpose. Several parameters shall be considered when buyers select the desired product. Indeed, they want to be sure that it will fulfill the required performance and design purposes. For instance, requirements for a circuit breaker used in a highly corrosive environment (e.g. an oil & gas drilling site) are different than for a circuit breaker used in a white space data center environment.

How can you, as a producer and distributor differentiate your products?

- Firstly, it is essential for you to know in which part of the commoditisation spectrum your products fit – in other words, if you sell high or low commoditised products. You can get to know this factor analysing the comparative gross margins per product line. In general, the products with lower gross margin are the most commoditised ones. This will help you to define the selling strategy of your products.

- The second strategic point, to avoid losing revenues and profits, is to build means for differentiating your products or services. Going online represents a powerful tool of differentiation.

What does commoditisation mean for your business?

Is your business facing the risk of becoming commoditised? It is easier to believe that you are protected from the effects of commoditization. Anyway, the most realistic approach is to start from the position that everything you do will become commoditised if not now, then certainly at some point in the future.

In fact, in several business sectors, commoditisation is going on right now. The profit margins of established (and previously very profitable) manufacturers and distributors are steadily decreasing, as they are facing the tough competition with low-cost manufacturers, from whom they do not differentiate anymore. Consequently, they need to align their price positioning with the prices of very aggressive competitors, thus implying a sharp reduction in margins. If your company refuses to align with the low prices of highly commotitised products from low-cost producers, it will suffer a sharp decrease in revenues and market shares.

But is there any way for overcoming the loss of profits and/or revenues caused by the commoditisation process?

How can you react to the commodisation process?

Especially for B2B players, finding an escape from the upcoming commodisation of the market is definitely a strategic decision. A B2B manufacturer and distributor has to find ways of promoting its sales, other than lowering its prices.

As said above, going online is a powerful tool for differentiation. These main online paths can be followed by resourceful B2B entrepreneurs willing to become tech savvy.

You can differentiate your products by displaying on your website a unique value proposition (“UVP”) – it means: beyond selling your products, your website should offer broad and highly relevant contents, technical data about the products you sell along with a very large set of SKUs (not just the top selling 50 SKUs), in order for them to understand which products they really need… and for you to know their purchasing habits and preferences.

You can differentiate your products by delivering a high-value customer service – it means: continuously providing the right assistance at the right moment. In particular, it implies to shift from the old paper ordering process, without any update concerning order status and delivery, to a new purchasing experience, through a state of the art e-commerce website. Your employees will help you make your customers’ purchasing experience unforgettable.

By going online, you will obtain as well to either sell more products to your existing customers (through the practice of “cross-selling”) or to find new customers who strongly need the specialty products you sell.

First and foremost, for successfully carrying out these strategies, you need to create your personal online shop.

Take-away lessons from this post:

- Commoditisation is lowering revenues and/or margins of B2B operators.

- There is only an effective solution – differentiate your products and/or services. How?

- The digitalisation of your business is the right strategy to differentiate.

- You need to implement a three-step digital strategy: 1) create your online shop; 2) offer a sustainable customer value proposition; 3) deliver a high-value customer service.