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Home | TIPPING TOWARDS COMMODITIATION

 Sunday, December 7, 2008

 

 

TIPPING TOWARDS COMMODITIZATION?
 
 
 

Malcolm Gladwell defines the “tipping point” in his best seller, The Tipping Point: How Little Things Can Make a Big Difference, as “the moment of critical mass, the threshold, the boiling point – the level of which the momentum for change becomes unstoppable.” He defines three agents of change leading to tipping points, one of which is “the power of context.” Specifically, Mr. Gladwell posits that human behavior is influenced by the (context of) environment. Interestingly, our customers (regardless of whether they are consumers, other businesses, surgeons, purchasers, health care practitioners, government authorities, etc.) are human (although we may debate the humanness of some – like purchasers). The current economic environment represents a most challenging context, which is exacerbated by the media’s penchant to stoke the fire of fear and anxiety with widespread stories of “doom and gloom.”

 
 
 

The current precarious economic environment is one significant factor providing a context for tipping customers away from their past relationship with brands that they perceive as not providing relevant and meaningful differentiation. In other words brand loyalty is eroding in many categories for many products, and even services, particularly against lower priced competition that they perceive have comparable and, in some cases merely generally acceptable quality. We are tipping towards commoditization where products are perceived as being generic and price sensitivity, therefore, is becoming more acute.

 
 
 
Influencing Factors
 
 
 

There are many factors contributing to reaching a tipping point that precipitates breaking the bonds between customers and their brands. While there are differences between categories and even countries there are a few factors common to all. These are:

 
 
  1. The nature of markets – The universal force of markets is for customers to commoditize products within a category. They want to see all the products as being the same. Basically, customers don’t want to have to work hard in making purchase decisions. They do not want to think through and choose among the host of variables (those things called “features”) that manufacturers fling at them. They want to make things simple. There are other things in their lives that are far more important and require their attention than choosing between one bathroom cleanser and another, or one PPI (proton pump inhibitor) and another. Customers make things simple by concluding that all the products in a given category (or class) are, well, basically the same. And, are they not? Let’s face it; we live in an “age of sameness.” Our products are basically no different than our competitors. They are made from the same stuff, designed and built in a similar fashion, delivered and made available in the same way. On a “blind” basis they are virtually indistinguishable. They do the same things and perform similarly regardless of the “bells and whistles” that adorn a given “offering.” When customers arrive at their conclusion that products are basically the same they simplify their choice based upon one variable. Sure, you know what it is – price!
 
  1. Erosion of brand marketing – Marketing in many organizations is nothing more than providing sales support and/or product expertise (particularly among those in the pharmaceutical and medical device fields). In others it has devolved from the strategic to the tactical (which includes those in the financial and consumer fields). Many companies are not practicing brand marketing, which is strategic and focused, but, instead, engage in product or project management, which is tactical and unfocused. Marketing has gone from being transformational to being transactional. It’s about doing whatever it takes to make a sale today, so as to deliver on short-term volume, market share and profit goals. Certainly these are important. But without a strategic roadmap (e.g., brand positioning strategy) to drive brand development marketers and their organizations are blurring any potential for differentiation versus competition and assisting market forces in driving commoditization of categories.
 
 

Additionally, these marketers are pouring more of their efforts into “push” (e.g., trade promotion) as opposed to “pull” (e.g., advertising, customer promotion, etc.) activities undermining the value perception of the brand. (Analyze your brand’s spending to ascertain the percentage of push dollars and sales to total spending and sales. We would be willing to wager that they have increased over the past few years and will go even higher in this economic environment.) These marketers are training customers to commoditize and, at the very least, demand pricing concessions.

 
 
 

In the quest to meet increasingly demanding financial goals manufacturers are taking price increases that are not justifiable by customer perceived added-value quality improvements or services. In practice, manufacturers are concurrently rationalizing these same products and services. Ingredients are being eliminated or replaced. Services are being cut. Some are charging for services that had at one time been part of the offering (such as airlines charging the customers for transporting their luggage). Customers, the sine qua non of business, are being kicked to the side. Marketing is no longer about serving customers but feeding an insatiable hunger for more short-term results. This is eroding the customers’ perception of relative value among their alternatives.

 
 
 

On top of this marketers are proliferating offerings without determining whether they uniquely meet genuine customer needs. Moreover, they are dishing out these offerings on the basis of what they can deliver without taking into consideration customer preferences. Just this week a chief executive of one of Detroit’s “big three” automakers admitted that they can no longer operate on a “build it and they will come” strategy (if one can call it a strategy!). Brand building is transformational. It is about building a loyal relationship that is mutually beneficial. It is not one sided. It is carefully thought out and executed. How can we possibly expect loyalty from customers who feel they are being taken advantage of, their needs ignored (“hello, does anyone hear me,” cries the customer from the wilderness), their lives are spinning out of control?

 
 
 

Branding has replaced brand development in many organizations. Branding is nothing more than dressing-up a product with a trademark, fancy logo and so-called (by their perpetrators) “proprietary” colors. It’s all fluff and no substance when it is not tied to a competitive, enduring and ownable brand positioning for a carefully chosen and faithfully served segment of the customer population.

 
 
  1. Economic contraction – We are facing a severe, worldwide slowdown in growth and growth expectations. Much of the world is experiencing a recession, which may be among one of the deepest and longest on record. A recession has been underway in the U.S. since December 2007, which would make it one-year old already. Unemployment in the U.S has increased for 11-consecutive months. In fact, November economic data suggests the economic contraction has accelerated with 533,000 jobs lost during the month. Nearly 2-million people have lost their jobs since the recession began with the steepest declines coming over the past 3-months. At the present time, this contraction is reaching frightening levels with more devastation predicted in coming months. These appalling unemployment figures are understated by those people who have stopped actively looking for work and are no longer reflected in the data. Perhaps these poor souls have given-up. Additionally, underemployment is on the rise. Underemployment is when people who want to work full time are forced to settle for part time work. Underemployment reached a record high of 12.5% in November.
 
 

By the way, this is not just a U.S. problem. It is a worldwide problem. Leaders throughout the world are feeling the squeeze and cooperating to diminish, and in some cases attempt to forestall, the impact of a recession. All are operating in fear of a prolonged recession and, worse yet, falling into a depression (which is defined as “a severe economic downturn that lasts for several years”). Even the economy of China has slowed significantly (although they enjoy levels the rest of the world would relish) leading its leaders to take action to stimulate growth and development.

 
 
 

We’ll leave the economists to sort out the causes, which we are certain that they will be able to pinpoint with distance some years into the future. But it is clear to us that this recession is the product of the confluence of multiple factors (might we say, “the perfect storm?”) among which were greed (financial, corporate and customer – hey, we can’t continue to buy what we cannot afford), cheap and loose credit leading to wild speculation and hyper-inflated demand across a spectrum of goods and services (e.g., commodities, housing, durables, services, pharmaceuticals, medical devices, financial instruments, consumables, et al) to artificially bid-up or prop-up prices which contributed to inflation (although economists may not define it as such) compounded by false optimism and overextension (to the point where we have put future generations in debt) followed by default and contraction of purchasing, and the collapse of markets and businesses. Customer purchasing which drives growth has run out of steam. Moreover, the oil we need to lubricate the economy (and we are not talking about that stuff that comes out of the ground and had been selling for more than $150 per barrel either) and keep it functioning, namely credit, has dried-up. With the collapse of businesses comes the rise in unemployment, a loss in confidence, a reduction in demand, further cutbacks creating a vicious cycle that runs counter to prosperity creating a tornado effect that indiscriminately and dispassionately wipes out relationships of mere convenience and habit (which, in the good times, many mistake for brand loyalty) leading customers to be more choiceful.

 
 
 

This could be the critical factor that tips the balance leading to commoditization. Marketers need to determine if this represents a “sea change” or an aberration that once corrected will restore business as usual.

 
 
  1. Triumph of needs versus wants – Faced with economic contraction and fear for their financial stability customers are being more circumspect in their purchasing. They want to be able to protect themselves from financial ruin and losing their futures. Businesses are no different. They want to ensure their survival. As a result purchasing is being delayed. We are all coming down the ladder of Maslow’s “hierarchy of needs.”
 
 

It’s getting to be about “needs” versus “wants.” With customers bloated with debt and businesses finding it difficult to secure credit everyone is cutting back whether it be purchases or building inventories. It is no longer about what we “want” as customers but we truly “need.” We are putting off the “wants” to ensure we can afford and continue to fulfill our basic “needs.”

 
 
 

GAQ (Generally Acceptable Quality), a standard in emerging economies, is taking root even in developed economies. Customers are climbing or being driven down Maslow’s ladder. They are choosing to shop Kohl’s and Target versus Neiman Marcus or Saks. They are choosing store versus manufacturer FMCG (fast moving consumer goods) brands. Thanks to improved quality of store brands (as evidenced by a Consumer Reports comparison of 65 products across 6 categories where testers found many of the store brands were equal in quality to the name, manufacturer brands) coupled with price discounts of about 25%, store brands have increased market share to 20 – 22% of supermarket business. This is up dramatically from market shares just prior to the economic downturn, which were in the high teens. Formularies are driving prescriptions from brands to generics, or new Rx to OTC choices. Hospitals and surgeons are choosing to hold onto their medical equipment longer (i.e., delay new purchases – “do we really need it now?” or “can we make do with what we have a little longer?”) or elect for GAQ when purchasing new equipment. Elective surgery is being delayed in many cases. It’s less about “wants” than it is about “needs.”

 
 
 

Many experts are predicting that gift giving for this holiday season will be less indulgent in terms of quantity and/or quality. Many consumers are asking family and friends, “What do you need?” versus “What do you want?” We are returning to more fundamental values such as family and health.

 
 
  1. Policy and Legislation – Payers are forcing the purchasing decision upon their customers obliterating the degree of choices. And, governments are taking, or expected to be taking, action too. For example, in the U.S. pharmaceutical industry big changes may be underway with the emergence of the Obama presidency and Democratic Party leadership. Expected new initiatives include proposals that allow for the substitution of cheaper copies of expensive drugs derived from biotechnology, importing brand name pharmaceuticals manufactured abroad into the U.S., and the government’s Medicare program to negotiate directly with pharmaceutical companies for drug prices.
 
 

Policy and legislation will tear at the fabric of brand choice.

 
 
 

Are brands dead? Not hardly. Clearly life will be more difficult during the duration of this economic crisis. But out of crisis comes change to those organizations that are willing to and capable of adapting. It is not brand management that is dead. It is the way it has been practiced. It’s time to adopt “Big M” marketing. It’s time to strategically develop brands of substance if we are to create brand loyalty. We will tackle the Boats & Helicopters regarding ways to do this in future DISPATCHES articles in 2009.

 

 

Richard Czerniawski & Mike Maloney


Richard Czerniawski


430 Abbotsford Road

Kenilworth, Illinois 60043

tel 847.256.8820 fax 847.256.8847


reply to Richard:

rdczerniawski@cs.com or

richardcz@bdn-intl.com

 

 

Mike Maloney


1506 West 13th

Austin, Texas 78703

tel 512.236.0971 fax 512.236.0972


reply to Mike:

mikewmaloney@cs.com or

mikemaloney@bdn-intl.com

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