Talking about: De-commoditisation
A commodity is a basic good or service produced to satisfy wants or needs. It is difficult to generate value when businesses deal in commodities, as there is limited ability to exert pricing pressure.
So have you ever wondered how companies attempt to de-commoditise their product or service?
Coca-Cola isn’t just a soft drink, “It’s The Real Thing”.
Apple doesn’t build computers, it “Thinks Different”.
Lego doesn’t sell building blocks, it “Sells Imagination”.
Companies that can de-commoditise their business and build a well-recognised brand have the potential to generate goodwill and, it follow, value.
Take the car market for example. In many respects, a car is a commoditised product. There are numerous companies that provide customers with the ability to get from Point A to Point B on four wheels, efficiently and quickly.
Car makers attempt to build a brand so that customers will perceive their product as being distinct and therefore, the superior choice. Just consider the marketing campaign for the Volkswagen Golf, which is based on the tagline, “Why drive something like a Golf, when you can drive a Golf?”.
For all intents and purposes, there are no material differences between a Golf and other small- to mid-sized cars – apart from possibly build quality. But framing a Golf with its own identity de-commoditises the product and separates it from the rest of the market. This allows Volkswagen to exert some pricing power.
Of course, a catchy slogan doesn’t necessarily translate to enduring value. But if consumers consider a brand to be distinct from a commoditised product or service, goodwill can be created, making it easier for companies to compete on more than just price.
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Andrew Legget
:
Good post Ben. I find the qualitative side of things a very interesting area.
I have at the cornerstone of my investment philosophy a concept called “the castle”. What it does is provide me with a framework to think about company quality and also in a way visualise it.
It covers three areas, the first is competitive advantage. The second is what I call brand equity and the third is finances and economics.
My thoughts are that the existence of a competitive advantage and a strong brand are two different things. The brand in a way leverages the effectiveness of the competitive advantage. However if the brand is promising something not backed by the value chain then the brand will be worth little.
In a way, car companies and airlines are some of the biggest brands in the world but I would argue are lousy investments due to the other two categories of the castle.
Eventually, the holy grail will be the emotional attachment to your product by your customers similar to coca cola when it most becomes a sense of identity. You are a coke drinker so there for you will not drink any other soft drink.
Coke and apple does this well and it shows in the real world. However, and this is my final point I’d like to raise. I still think coke and apple products fit into what I call the “want” category where as cars now fit into the “need” category.
People in my experience will pay premiums for what they want but not for what they need. This is why generic supermarket products are popular but you won’t see them in the confectionary aisle.
All of this leads to my prediction that people will stay reasonably happy driving cheaper vehicles that are like a golf. Some products can de-commoditise and some can’t.