Commoditization, a lack of meaningful differentiation, drives products to have razor thin margins that are differentiated and bought only on price. Unfortunately, we see it far too often:
- Supply Chain/Sourcing driving for a low price
- Contractors don’t see product cost/benefits
- Amazon making it easy for customers to compare prices and availability without picking up the phone
Distribution companies are recognizing the world is dramatically changing and are finding ways to escape the commodity trap by de-commoditizing and differentiating themselves beyond price:
- Segmentation: Driven by market research and analytics, segmentation serves as the foundation of where to focus time and investment
- Determination: A mind shift and attitude to de-commoditize by saying “no” to less profitable customers/markets and “yes” to new higher profit markets. The decision of where to compete accounted for 80% of the differences in growth in a McKinsey & Company study of the 100 largest U.S. corporations
- Product, brand and service differentiation: Expanding the markets served such as MRO, safety, fluid power, power transmission and the industrial market
- Innovation: Being positioned as the market leader for innovative new products and technology then adding value via knowledge and expertise
- Bundle: develop a package of complementary products and services around commoditized products to provide long-term value
- Customer Experience: Maybe most important, create an environment that serves the customer, empowers and enables employees to deliver and finally, drive a customer-centric culture
If you have not read it and are looking for a practical approach to get above the commodity business, check out Blue Ocean Strategy. Recently updated with fresh content, the book discusses how cutthroat competition results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.
