Commodity is a Dirty Word

Mark Stiving

Too often in class a student will say “I have a commodity. The market sets my price.” This is almost never true. What’s worse is if you believe it, then you’ve given up trying to make higher profits using pricing techniques.

If you believe your product is a commodity, then it is very likely that some market segment also believes it’s a commodity, that there’s no difference between your product and your competitors. If you want to win those customers, then you probably have to be price competitive. But the trick is to go after the other customers. The ones who don’t think it’s a commodity.

Take aspirin. This product has been around in its current formulation since 1899. That’s 117 years. There are no patents. No intellectual property. An aspirin is an aspirin is an aspirin. In other words, an aspirin is a commodity. Then how does Bayer get away with charging over $6 a bottle when the generics are under $2? It’s called segmentation.

Some people understand aspirin is a commodity, so they rightly purchase on price. 91% of doctors and pharmacists buy the generic brand. However, the average household buys a brand name like Bayer 26% of the time. These buyers want the security of a brand name. They don’t have the same knowledge as pharmacists so they’d rather be sure it works. By segmenting the market, some people value the brand name.

How about HDMI cables, you know the cables you use to hook up your DVD player to your TV. On Amazon, a three-foot cable ranges from $1.49 to $200.00. Wow. What you need to know about HDMI cables though is they are digital. The bits either make it through or they don’t (especially at 3 feet). They don’t go faster on more expensive cables. Brand doesn’t matter.

Yet some people, who are used to buying extremely expensive analog cables assume buying extremely expensive HDMI cables is better too. It’s segmentation.

The airline industry is doing an amazing job at de-commoditizing (if that’s a word). They used to have first class and coach. Coach seats were certainly a commodity. Same service, same seat, people just bought on price. Then airlines put in some seats with more legroom. Then they debundled checked luggage. Some airlines charge for carry-on or using the overhead bins. They are differentiating their product in many ways.

If you find yourself believing your product is a commodity, challenge yourself. Deconstruct your total offering into all of the little pieces. What could you tweak about one of those pieces that some buyers would value? Could you give higher quality service, like Nordstrom or Zappos? Could you deliver your solution faster, like FedEx? Find a way to differentiate your product, even if it’s only a small thing. Some people will value it and will pay you more for it.

If you believe you have a commodity, you do. Don’t believe it!

This post originally appeared on the Pragmatic Pricing blog.

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