By Paul Morin
How do you differentiate your company and its offerings in the marketplace? What do your products and services provide to your customers that add value to them? Is what you offer differentiated from what your competitors offer, or are you at risk of becoming “commoditized”?
What does it mean to be commoditized, you may ask? The way I’m using the term in this article, it means that the product or service that you’re providing has absolutely nothing that differentiates it from what other providers in the market are offering. That would be “fully commoditized.” There may be other cases where there are some small differentiating factors, but even though in that case you’re not fully commoditized, effectively you are, because in the minds of consumers those differences are minimal and relatively meaningless.
Okay, so what are the implications of being commoditized? Is it a good thing or a bad thing? As you can imagine from the way I’m describing it, from your perspective as a provider offering your services or products in a “commoditized” market, it is typically a very bad thing. I could illustrate the negative effects of commoditization for you with numerous examples from my entrepreneurial and advisory career, but I will use just one that occurred recently, which I think will be more than enough to get the point across.
A few of the facts in the example I’m about to provide you have been changed to protect the innocent, the guilty and the commoditized. None of those changes has any impact on the point of the story.
Last week I was on a conference call for one of my businesses regarding a deal with a total value to the service provider of roughly $250,000 and a total potential implication for the customer of more than $25 million over time. The deal was in the information space. The service provider in this case was essentially a broker (aka intermediary) who, in the eyes of the customer, brought no more value to the table than introducing the buyer and seller. The service provider has several large competitors, not quite as large as they are, but large nonetheless, that offer essentially the exact same brokerage services.
The story got interesting last week because this service provider, who had been doing business with the customer for five years, decided to try to introduce a limitation of liability clause into their contract for the upcoming service year. They wanted to limit their liability to $5 million for any mistakes they made, even though the implications or damages for the customer could be as high as $25 million.
To further set the stage, the service provider has roughly $10 billion in revenues, the customer has about $400 million in revenues and we’re even significantly smaller than that. So you can imagine that in a normal negotiating scenario, this large service provider would simply “have their way.” They would say, “take it or leave it” — there’s now a $5 million limitation of liability in the contract and if you don’t like it, too bad.
As you can probably guess from the subject matter of this article, that’s not how this story went. When this service provider tried to introduce the limitation of liability into the contract, they’re the ones who ended up hearing “take it or leave it,” not the much smaller customer. They heard things like, “you’re selling a commodity,” “none of your competitors are looking for a limitation of liability,” “the only place you can really compete is on price.” I could tell, not surprisingly, from the tone of the call and the deliberate, unanimated voices of the attorney and other negotiators for the service provider, that they knew we were right. They were literally powerless in the discussion, with no negotiating leverage. Their salesperson made some weak pleas and arguments about how they had a better team and how they could use their size on our behalf in the marketplace, but in the end, it fell on deaf ears. We knew it was just hyperbole and the reality was that they had been “fully commoditized.” We told them to remove the limitation of liability, or we were moving to a competitor.
Hopefully this example illustrates for you the extreme danger of becoming “commoditized.” You lose all power. The only real place you can compete is on price and typically, that’s a losing game. Unless you are a large trading company, doing a huge volume of business, competing in a commodity market is generally a losing game. Try to be as proactive as possible about finding ways that you can differentiate your company and very importantly, its offerings, so that they are at least perceived to be different in the marketplace. I’ll give you one example of where I’ve seen that done very well, before we wrap up this article.
Those of you who live along the Mid-Atlantic coast of the United States, or have visited there, may be familiar with a convenience store and gas station chain called Wawa. There aren’t too many businesses that are more commoditized than gas stations, but as Wawa has exemplified, it is quite possible to differentiate on the convenience store aspect of the operation. I may not even have realized how differentiated they were, if not for my kids. Every time we take a road trip from our house in the southern part of the U.S. to visit family in the Mid-Atlantic and Northeast, the first thing I hear from my kids, several hours before we get anywhere near a Wawa is: “Dad, when we get to Maryland, can we stop at Wawa for lunch?” Amazing! It’s a convenience store, not a restaurant!
So how has Wawa won the hearts of my kids? They have a great deli, with innovative electronic ordering machines where you can customize your own sandwich and get all the stuff you love on it. It’s not cheap, mind you, but that of course is of little relevance to my kids. It is also very clean inside, unlike many gas station convenience stores you may enter. That includes the bathrooms, the cleanliness of which is, of course, extremely important. The employees are also well-trained, friendly and proactive in making sure that you are finding everything you want. In short, it’s a very well-run operation, with great food, in a place where you wouldn’t expect to find it. So unlike the service provider I mentioned in the example above, Wawa has not been commoditized. I cannot simply say to my kids, “Don’t worry, we’ll just stop at some gas station and deli down the street, and it’ll be the same.” It won’t be the same; my kids know it and they’re not happy with anything other than Wawa.
What do you do that differentiates you in the marketplace? Think it through very carefully and, to the extent possible, make sure it’s not just one thing. Also, make sure you keep paying attention when you’ve been in business a while. There can be a tendency to get complacent and “rest on your laurels.” That’s when other competitors come along and recognize changes that are happening in the marketplace, take advantage of those changes and do what Wawa did in a market that had been commoditized years before.
Becoming “commoditized” and being powerless to negotiate on any aspect but price is a very bad position to find yourself in. Be proactive and do everything you can to make sure it does not happen to you and your business.
Epilogue: We recently had the follow-up call with the service provider who wanted to insert a limitation of liability (LOL) in their contract, when no competitor was doing the same. The service provider told us that they could not move from the $5m LOL. The customer simply told them that there was not much more to talk about. The service provider will need to serve out the couple of remaining months on the current contract, as they’ve already been paid for it, but will have no involvement in future intermediary services for this customer. One of the service provider’s competitors is willing to take on the business without any LOL and it looks likely that the overall cost to the customer will be less. That’s the beauty of competition for the buyer, and it’s an important lesson for all of us: Do not let yourself become commoditized! If you do, rather than standing for limitation of liability, LOL will stand for “laugh out loud” — on the part of customer when you try to introduce one-sided changes into your contract, or try to apply leverage into negotiating anything. If you’re commoditized, you will have little to no leverage — an unenviable position.
I look forward to your thoughts and questions. Please leave a comment below.
Paul Morin is the founder of CompanyFounder.com. Morin has worked with various entrepreneurial companies in senior management roles and has led the development, review and selective implementation of several hundred start-up and corporate venture business plans, financial models, and feasibility analyses. You can e-mail Morin at firstname.lastname@example.org.
Originally published: Sep 25, 2011