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How to Escape the Commodity Trap

(February/March 2017) posted on Tue Mar 21, 2017

Why do things become commodities? More importantly, how can you prevent your business from becoming a commodity? It all starts with understanding your customer.

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By Mark A. Coudray

Competition was not a problem because people did not travel and they had a low level of literacy. Trade was confined to the village or town. But then towns grew into cities and people started to travel. Transportation and roads brought goods and services to new markets. Customers became aware that there were other sources for goods and services.

As commerce and competition grew and the Industrial Revolution picked up steam, craftsmanship met automation. Technology spread as the railroads connected far-flung locales. Now there were cheap alternatives to local craftsmen and a lot of competition. But there was also confusion because the quality varied widely.

This led to standards, which temporarily differentiated between providers of machine-produced goods. If your product was manufactured according to the standard, you had some degree of assurance, but it didn’t last long. As soon as enough automated providers met the standard, the differentiation was gone.

Once standards were widely met, the only remaining distinction was price. As a result, production began moving to locations where goods could be made more cheaply. This has been going on for a long time, but has peaked in the last decade. China became the big, low-cost producer, but now their standard of living has increased. Just as it did years before in the UK and the US, industrialization led to the creation of a middle class.

It’s a cycle that repeats itself across all industries, and it’s happening everywhere, but businesses aren’t responding to it proactively. They are passive in that they are aware of increasing competition and price sensitivity, but their only action is to complain about how bad things have gotten. They are reactive in that their next move is usually to match the lower price or conduct negative public relations aimed at the low-cost competition. Neither approach serves them well.

Once a market has been commoditized, vendor loyalty disappears. As long as the buyers can get whatever they want easily, quickly, and at a quality and price they are happy with, there is little basis for loyalty.

This leaves suppliers in a frustrating spot. The constant focus on low price strips profit to the point where there is little incentive to invest in developing the business. Eventually, service and reliability are compromised. And the customers don’t care that the supplier is having a hard time: They’ll just go to the next one that promises to deliver.


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