A couple of months ago, I wrote a post on Commoditization at my other blog, and it hit a few cords with readers. I explained what I meant if a business was being commoditized. Some readers were a little disturbed to know that they were being commoditized right out of their own market place. Others desperately wanted to know what can be done. Let’s explore what we can do to avoid commoditization in your industry, or how to change our business models to counteract this change. Here are four ways:
1. Consider how new technologies are affecting your business. Commoditization is often caused by technological changes that allow services to now become automated, thereby making human intervention no longer necessary. This may cause you to totally revamp your services and offer new ones. Technological changes (much like the Industrial Revolution) often abolish older methods of production and require innovations toward totally new methods of service and production. It may be time to change your business because of new technology. Consider it.
2. Make your product or service different. Here is a quote from my other blog on this topic: “…if what you are doing shows no effectual differentiation between your competitors, then you better wake up! You are being commoditized.” When a service becomes so like its competitors then there is no value-added piece to one service provider over another. That means you can’t charge a value-added fee or price, and the lower price dealer always wins. It stinks to play there. There is no reason a consumer would pay more for the service because what they are receiving is the same from all providers. So, develop a different way to serve. Add a piece to your service or product that packages well with the core service or product that you offer, and charge for it.
3. Move your production or service upstream. Commoditization happens downstream form the early initial innovation, creation and great value found upstream. In my industry, offering payroll and accounting services is becoming commoditized, so we moved upstream. We still offer these core services to those who need them, but now we’ve created some innovative models of service for our clients. We also offer business coaching, process improvement consulting, fraud/forensics litigation support and other specialized methods of service for the entrepreneur (e.g., dashboarding). We can charge more for these services because they offer higher value to the client. Think about where the most profit is made in your business, and move your service there. Hint: it’s probably going to be where the most brain-intensive thought and innovation is needed. Generally, avoid offering automated services.
4. Question your industry and how things are delivered or created for the consumer. Don’t get too carried away with questioning the way things have always been, this is just an exercise to make sure you are on the cutting edge of what you do. Questioning your industry makes you explain why things have always been done the way they have been done – and sometimes you figure out that things are being done poorly. Questioning often leads to innovation, which is the purpose of this questioning process. And, as mentioned above in #3, innovation often comes along with the highest profit in most businesses.
Do you have any other ideas on how to avoid commoditization?
Thanks, Jason M. Blumer, CPA