There Is No Such Thing as a Commodity

There is no such thing as a commodity. All goods and services are differentiable.—Theodore Levitt G.K. Chesterton once wrote:

Competition is a furious plagiarism.

Yet the fact of the matter is there is no such thing as a commodity. Anything can be differentiated, which is precisely the marketer's job. Believing that your firm—and the services it offers—are commodities is a self-fulfilling prophecy.If you think you are a commodity, so will your customers. How could they believe otherwise? This notion of selling a commodity is a pernicious belief. It leads to price wars, incessant copying of competitor's offerings, lack of innovation, creativity, and dynamism, as well as suboptimal pricing strategies.Consider this story from The Tom Peters Seminar:

Transformation. Breaking the mold. Anything—ANYTHING—can be made special. Author Harvey Mackay tells about a cab ride from Manhattan out to La Guardia Airport: First, this driver gave me a paper that said, "Hi, my name is Walter. I'm your driver. I'm going to get you there safely, on time, in a courteous fashion." A mission statement from a cab driver! Then he holds up a New York Times and a USA Today and asks would I like them? So I took them. We haven't even moved yet. He then offers a nice little fruit basket with snack foods. Next he asks, "Would you prefer hard rock or classical music?" He has four channels. (This cab driver makes an above-average amount per year in tips.)

If a taxicab driver can establish a rapport with a complete stranger in a 15-minute ride to the airport, what is possible with a customer relationship over the course of a lifetime? Note how the cab driver differentiated himself with low-cost items (newspaper, candy, and so on). It is not the cost that counts, but the value perceived by the customer; and, in this instance, the little touches make all the difference. If a taxicab driver can be this imaginative and creative, what is the excuse of today's firm leaders not to do this?Imagination Is the Only LimitationThe potential for competitive differentiation is only limited by your firm's imagination. Many leaders lament that since their industries are mature, commoditization is inevitable, despite all the empirical evidence surrounding them that this is simply not so.Consider candles, an industry literally in decline for the past 300 years. Yet Blyth Industries bucks the trend by custom tailoring its candles for the specific location, companion, and occasion, growing from $3 million in sales in 1982 to nearly $500 million in 1996, with a market capitalization of $1.2 billion dollars in 1997.Even the declining lettuce business has been differentiated by prewashing, cutting and packaging the vegetable—along with some salad dressing on the side—for the customer in order to save time. As a result, from the late 1980s to 1999, a $1.4 billion industry was created. And Great Northern Wholea Lettuce has come up with the innovation of ripped lettuce (not cut), offering restaurants a way to handle waste and save time. Wholea Lettuce commands a premium price.Would you ever pay more for a share of stock—whose price is publicly listed and traded on the New York Stock Exchange—to one broker over another? After all, how can a share of stock be differentiated? It may be one of the few examples of a pure commodity. Before you answer, visit oneshare.com, where you can only purchase one share of stock at a time, which are valued primarily as gifts for babies and teenagers. You pay the market price for the stock and a $39 one-share fee. You also may choose a special frame (costing from $34 to $64 depending on your style choice), and this may be further customized by your choice of matte and an engraved message for additional fees.How fast is Starbucks growing? "I don't know for sure," quipped one comedian, "but I do know they just opened one in my living room." Opened in Seattle, Washington in 1971, Starbucks—named after the coffee-loving first mate in Herman Melville's Moby Dick—has grown to over $9.4 billion a year in revenue. Howard Schultz, the founder, earned a business degree in 1975, and worked for Xerox until he joined Starbucks in 1982 as an employee. In 1987 he bought the Starbucks chain for $3.8 million and took it public in 1992.The success of Starbucks has been so meteoric, Harvard Business Review has labeled it the Starbucks Effect:

Ten years ago, only 3 percent of all coffee sold in the United States was priced at a premium—at least 25 percent higher than value brands. Today, 40 percent of coffee is sold at premium prices. We've found plenty of evidence of the Starbucks Effect. When individual companies increase the perceived "premiumness" of a product through innovations in the product itself or the way it's delivered, the entire category can reap higher prices and profits.

Basic economics teaches that it is very difficult to sell something someone else is giving away for free. Yet notice bottled water. Water covers nearly three-fourths of the Earth's surface. Could there be a larger commodity than water? Yet it's a $35 billion worldwide industry, with a plethora of premium priced brands. Perhaps this is why Evian is "naïve" spelled backwards.Purging the Commodity WordUnless your firm decides its strategy is to compete based on price—such as Wal-Mart, Costco, H&R Block, and Southwest Airlines—you cannot create a loyal customer based solely on being the low-cost provider. If customers are attracted by your low price, they will easily leave for another firm that offers an even lower one. Cutting your price in order to attract a customer encourages buyers to ask constantly for future price concessions, thereby subsidizing your worst customers at the expense of your best ones.The notion that consumers get excited over a low price anyway is not grounded in reality, as Roy H. Williams points out in his book, The Wizard of Ads:

"I WAS CHARGED A FAIR PRICE" is not the statement of an excited customer; yet many business owners mistakenly believe they need only convince the public that they will be treated "fairly" to win their business. Phrases like "Honest Value for Your Dollar" and "Fair and Honest Prices" tempt me to say (with no small amount of sarcasm), "Yippee Skippy, call the press."If the most your customer can say when he walks out your door is: "I was treated fairly," your business is pitifully stale, and you have virtually nothing to advertise. Why? Because the expectation of "fair treatment" is such a basic assumption in business dealings that most people take it for granted. What we really hope to find is the "delight factor."

This is true whether you sell to businesses or consumers, since ultimately all commerce is conducted by us human beings. As Sean Finn, Senior Vice President of Public Affairs, Chief Legal Officer and Corporate Secretary of the Canadian National Railway Company in Montreal, said about its law firm:

Any time a law firm realizes that we don't view their services as a commodity, we get a better product. It's not just a question of money...we look at the value provided.

Why do so many firms ignore this message? Many firms are prisoners of their past, assuming that the way they have always done it is the only way. Yet it takes creativity and innovation to separate yourself from the competition. Offering only a cheap price is the last refuge of a marketing department out of ideas for creating value for customers.In any event, there is absolutely no excuse—none—for firms to think of themselves as commodities. Any company can compete on price; it is truly a fool's game. On the other hand, competing based on Total Quality Service, positive customer experiences, and transformations requires more thought, creativity, and investment. The commodity trap is a self-fulfilling prophecy, which breeds cynicism and stifles creativity, dynamism, and innovation.The stale and overused canard—usually expounded by noncreative types—that good ideas are everywhere and it is really execution that matters, would be relatively easy to overcome if only it were true (see my post for why this is not true).For if it were true, we would have better movies (not remakes of Bewitched and I Dream of Jeannie), books and products; more memorable experiences and longer-lasting transformations from the companies we patronize. Both ideas and execution are important. There is no effective way to implement a bad idea. History provides many lessons, from Napoleon invading Russia to countries attempting to implement socialism. Were these bad ideas, or simply a case of poor execution?As the examples here illustrate, each firm should seek to differentiate itself from the competition and develop a value proposition that customers are willing to pay a premium for to obtain. If your firm finds itself continually competing on price, it is taking the easy way out—since price is always the easiest way to make marginal sales.It is also the obvious factor to blame for an organization's failure to offer an awesome service and a memorable experience. Constant price discounts signal that you are targeting the wrong customer segments, lacking a viable value proposition separating you from the competition, not getting your share of sales success, or offering too much service in your basic package.Do not let your firm acquire a core competency in cutting prices by falling into the commodity trap. Especially since there's no such thing as a commodity!