How to Avoid Commoditization Through Differentiation
By Mike Press
We concluded that although price pressure should be intense since purchasing power was concentrated among the top 5 customers in our market, that same concentration to just a few accounts offered almost unlimited opportunity to create special business rules and processes that provided value to each customer. Further, we realized that we had invested in an underlying support infrastructure that allowed us to treat each large customer as a different “segment”, customizing their service offering. The outcome of these meetings was an augmented product definition per account.
Results
The augmented product definition exercise provided the foundation for an extensive value pricing analysis. From the value pricing analysis we developed a profit model that gave us the confidence as a team to decide which customers we wanted to work with, why, and what services (cost basis) were required to command a premium price at each account. Management is convinced that the augmented product definition and value pricing analysis work has allowed the Company to make more money on a given amount of manufacturing capacity.
Lessons Learned
We learned that training on a common framework and vocabulary is critical to team resolution of the commoditization problem. In fact, were we to undertake this effort now, we would involve more and more senior managers in the education process. At one point over the months that we were defining augmented product and doing our pricing analysis, the Company actually ran out of capacity. It became very important to pick high profit customers in this situation, and we found ourselves in the less-than-ideal situation of having to educate certain mangers about augmented product and pricing implications “on the fly.”
