Differentiating in a commoditized market

Is it possible? Absolutely. Is it easy? Well ...

The FABRICATOR July 2014
July 24, 2014
By: Dick Kallage

There are four principles to understand about differentiation and the buying factors that go beyond price: They always exist; they have economic value; they vary by customer; and they change with time, because yesterday’s differentiators can be tomorrow’s commodity.

Using a chart showing common differentiators, you can segment each further as needed, and then grade each in importance to your top customers and the available market in general.

In the last two columns I addressed the creeping commoditization in metalworking in general and custom metal fabrication in particular. I postulated that continuous improvements in machine technologies and capabilities have and will continue to blur differences among competitors in every market segment—differences that had previously been defined by production skills and capabilities.

To many buyers, custom fabricators really are starting to look the same, so too often the only remaining differentiator seems to be price. This is the primary characteristic of a commoditized environment, where the only winners are the lowest-cost producers. As described last month, competing as the low-cost producer is not easy or fail-safe. I’ve always believed that for most companies the strategy is extremely risky. It’s really difficult to remain a lowest-cost producer for long.

The opposite of commoditized is differentiated. In practice, this means that a sufficient number of customers buy from you based on factors not related to the invoice price. The challenge then becomes discovering those factors. Are they sufficient to create a profitable volume and sturdy enough to ward off lower-price competitors?

Have you ever noticed that companies in virtually every market, but especially those that are generally viewed as truly commoditized, run advertisements that start by talking about their difference from the others—what makes them special—and why buying from them is the best economical choice? Experience the Acme difference!

In custom metal fabrication, you see this from suppliers of production supplies or hardware, and they generally do an effective job of selling even when they’re not the lowest price. That’s because price is only one part of the total cost of acquisition and ownership. These suppliers understand that. Many have actual measures of the real cost and can estimate it for any given prospective customer. The price of a screw or bolt is not the same as the total cost to the customer of that screw or bolt.

All prospective customers need a physical product, obviously, but the vast majority need more than that, often much more. They need low-risk fulfillment, on-time delivery, assured quality, flexibility to changes, strong support, and many other services. The needs and the value of those needs vary by customer and prospect, but they exist and they do have value. Understanding those needs is the key to successful differentiation and, not least, sustainable profitability.

Exploiting Differentiation

There are four principles to understand about differentiation and the buying factors that go beyond price:

  1. They always exist.
  2. They have economic value.
  3. They vary by customer.
  4. They change with time. Yesterday’s differentiators can be tomorrow’s commodity.

So what do we do about all of this? Well, first we have to work it. This is where most job shops and other companies fail or have difficulties. Most simply don’t know exactly why customers buy from them. They may believe the tales fed to them by the buyer or, worse, their own tales.

It would seem that working on differentiators should be top priority for all companies, especially those in highly competitive environments. Sadly, in my experience, it’s not. When I do “days in the lives” studies of what managers spend their time on, analyzing differentiators comes in close to the bottom. Sometimes it’s nonexistent. When they do spend time on differentiators, they complain rather than exploit.

The companies that do spend the time are almost universally successful because they know their value to their customers and have a finely tuned ear to what the customer is really saying, besides the given “I want a lower price.”

Revelations and Discovery

How can you discover the factors that go beyond price? It’s surprisingly easy, though at times confusing and contradictory. Virtually every company owner I know proudly tells the true story of a customer that left because of price but came back hat in hand because of some failure by the low-price guy. Big surprise, that unmet need wasn’t related to price.

We often chalk this up to the expensive education of a buyer, but this story has valuable information. The buyer has just placed a value on a need that you meet, but the low-price competitor didn’t. We have found a piece of the puzzle. The key is not to lose it, and also to realize it’s just one piece.

Another method of discovery is simply to listen. After winning the business, what do you hear most from the customer contacts, especially the buyer? Is it your delivery, quality, your responses to inquiries? Maybe it’s how you handle change requests to quantity and/or delivery, or perhaps it’s how you handle expedites. What does the customer actually measure?

Answers to these questions all have kernels of what the customer truly values. Two of the most revealing are quality issues, even when the product nominally meets spec; and expedites, even when you are nominally on time. They reveal demands and desires within the company that are not specified in the quote package. They reveal real value that can be differentiated.

I know, I know. Many demands, complaints, or issues coming from your customers can drive you stark raving mad. You’d swear that these customers are being run by a bunch of 5-year-olds who just say “I want” and toss tantrums when they don’t get it. But before you send customers to their room, I suggest you analyze the causes of their behavior. In reality, they’re revealing unmet needs. Meeting them, or at least trying your best to meet them, is a differentiator, and it has economic value.

There are many other methods that, when used together, complement each other to help build the mosaic of true differentiation. A powerful one is a voice of the customer study. You can find a column on this topic in the Improvement Insights archives at www.thefabricator.com.

The Nuts and Bolts of Differentiating

The table shown on the previous page spells out most of the ways that job shops, and most companies for that matter, can differentiate and command prices that are not the lowest du jour. Work this table with your top customers and your available market. Work it hard.

The “cost” category is, of course, of vital interest to the low-cost producer. The others are for the rest of us, the ones that want to make superior profits on a sustained basis. You can segment each further as needed to make it relevant to your organization, and then grade (assign a relative value to the customer) each in importance to your top customers and the available market in general. You can do this by working the items described in the “Revelations and Discovery” section. It’s a good start. The key is finding what’s really important. For example, all customers want everything on time, but some suffer greatly when this demand isn’t met, and for others it’s just an annoyance.

The next trick is to map what you do versus what the customers truly value. If you have major holes or if what you offer has little value beyond price, you must act quickly, or prepare to get mired in the price game.

I’ll conclude this topic with five rules of thumb:

  1. Differentiate or die.
  2. The differentiations must be real and valued as determined by the customers.
  3. They must be understood by everyone in your organization.
  4. They must be nourished and constantly bolstered.
  5. Finally, they must be renewed regularly.

Differentiators usually have a life cycle.

The acid test of differentiation success is your profit margin. And here’s a word of encouragement: You can do this. If a company can differentiate the lowly screw, it’s possible to differentiate anything.

Dick Kallage was a management consultant to the metal fabricating industry. Kallage was the author of The FABRICATOR's "Improvement Insights" column from May 2012 to March 2016.

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The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.

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