How can a company liberate itself from the death spiral of product commoditization?
Competing on price is generally a losing proposition-and a stressful method to run a business. But when a market matures and customers start focusing on price, what is a business to do?
The answer, as counterintuitive as it may seem, would be to generate a better customer experience.
It's a proposition some executives reject outright. After all, a much better customer experience costs more to provide, right? How on earth could that be a beneficial strategy for a business that's facing commoditization pressures?
Go From Commodity to Necessity
There are two ways that a great customer experience can improve price competitiveness, and the first involves simply removing yourself from the price comparison arena.
Consider those companies that have flourished selling services or products that were previously regarded as commodities: Starbucks and occasional, Nike and sneakers, Apple and laptops. They all broke free from the commodity quicksand by creating an event their target audience was willing to pay more for.
They achieved that, partly, by grounding their customer experience of a purpose-driven brand that resonated with their target audience.
Nike, for instance, didn't purport to simply sell sneakers; it aimed to bring “inspiration and innovation to every athlete on the planet.” Starbucks didn't focus on selling coffee; it sought to create a comfortable “third place” (between work and residential) where individuals could relax and decompress. Apple's fixation never was around the technology but rather on the design of an easy, effortless consumer experience.
But these companies also walk the talk by engineering customer experiences that credibly reinforce their brand promise (for instance, the carefully curated sights, sounds and aromas in a Starbucks cafe or even the seamless integration across Apple devices).
The result is these companies create something of considerable value for their customers. Something which stops being an investment and instead becomes a necessity. Something which individuals are simply prepared to pay more for.
That makes their offerings more price competitive-but not since they are matching lower-priced competitors. Rather, despite the higher price point, people view these firms as delivering value, in light of the rational and emotional satisfaction they derive from the companies' products.
The lesson: Hook customers with both mind and also the heart, and price commoditization quickly can become a thing of history.
Gain Greater Pricing Latitude
Creating a highly appealing brand experience certainly can help remove a company in the morass of price-based competition. But the the truth is that price does matter. While people may pay more for a great customer experience, you will find limits to how much more.
And so, even for those companies that flourish in differentiating their customer experience, it remains important to create a competitive cost structure that affords some flexibility in pricing without crimping margins.
At first blush, these may appear like contradictory goals: a much better customer experience along with a more competitive cost structure. But the surprising truth is these two business objectives are in fact quite compatible.
A great customer experience can actually cost less to provide, because of a simple principle that lots of businesses fail to appreciate: Broken or even just unfulfilling customer experiences inevitably create more work and expense for a corporation.
That's because subpar customer interactions often trigger additional customer contacts which are simply unnecessary. Some examples:
- An individual receives a reason of advantages (EOB) from his health insurer for any recent medical procedure. The EOB is tough to read, let alone interpret. What does the insured do? He calls the insurance company for clarification.
- A cable TV subscriber purchases an add-on service, however the sales representative fails to fully explain the associated charges. When the subscriber's next cable bill arrives, she's unpleasantly surprised and believes a mistake has been made. She calls the cable company to complain.
- A mutual fund investor requests a big change to his account. The service representative helping him fails to set expectations for a return call. 2 days later, having not been told by anyone, exactly what does the investor do? He calls the mutual fund company to follow on the request.
- A student researching a computer laptop purchase on the manufacturer's website can't comprehend the distinction between two closely related models. To be sure that he orders the right one for his needs, exactly what does he do? He calls the maker.
- An insurance policyholder receives a contractual amendment to her policy that does not clearly explain, in clear language, the explanation for that change and its impact on her coverage. Exactly what does the insured do? She calls her insurance agent for help.
In all of these examples, less-than-ideal customer experiences generate additional calls to centralized service centers or field sales representatives. However the tragedy is the fact that a much better experience upstream would eliminate the need for a number of these customer contacts.
Every incoming call, email, tweet or letter drives real expense-in service, training along with other support resources. Plus, because many of these contacts come from frustrated customers, they often involve escalated case handling and sophisticated problem resolution, which, by embroiling senior staff, managers and executives within the mess, drive the associated expense up considerably.
Studies suggest that at most companies, as much as a third of customer contacts are unnecessary-generated only since the customer had a failed or unfulfilling prior interaction (having a sales rep, a call center, a merchant account statement, etc.).
In organizations with large customer bases, this easily can result in hundreds of thousands of expense-inducing (but totally avoidable) transactions.
By inflating a company's operating expenses, these unnecessary customer contacts make it more difficult to price aggressively without compromising margins.
If, however, you deliver a customer experience that preempts such contacts, you help control (otherwise reduce) operating expenses, thereby providing greater latitude to achieve competitive pricing.
Putting the process to Work
If your products category is devolving into a commodity (a prospect that doesn't require much imagination on the part of insurance executives), break from the pack and improve your pricing leverage with these two tactics:
- Pinpoint what's really valuable for your customers.
Starbucks accessed consumers' desire to have a “third place” between home and work-a place for conversation along with a communal feeling. By shaping the customer experience accordingly (and recognizing the business was much more than only a purveyor of coffee), Starbucks set itself apart in a crowded, commoditized market.
Insurers should similarly consider what really matters to their clientele after which engineer an item and service experience that capitalizes on those insights. Commercial policyholders, for example, care much more about growing their business than insuring it. Help them on counts, and they'll be considered a lot less likely to treat you as a commodity supplier.
- Figure out why customers contact you.
Apple has long were built with a skill for understanding how technology can frustrate instead of delight customers. The organization used that insight to create elegantly designed devices that are intuitive and effortless to make use of. (Or, to invoke the oft-repeated mantra of Apple co-founder Steve Jobs, “It just works.”)
Make your customer experience just like effortless by drilling into the top ten reasons customers contact you to begin with. Whether your organization handles a thousand customer interactions a year or millions, don't assume they're all “sensible” interactions. You will probably have some subset that are triggered by customer confusion, ambiguity or annoyance-and could be preempted with upstream experience improvements, for example simpler coverage options, plain language policy documents or proactive claim status notifications.
By eliminating only a portion of these unnecessary, avoidable interactions, you'll not only make customers happier, your family will enjoy your whole operation more efficient. That, consequently, means a far more competitive cost structure that can support more competitive pricing.
Whether it's coffee, sneakers, laptops or insurance, every product category eventually matures, and also the ugly march toward commoditization begins. In these situations, the neatest companies notice that the bottom line is not to compete on price but on value.
They focus on continuously refining their brand experience-revealing and addressing unmet customer needs, identifying and preempting unnecessary customer contacts.
As an effect, they like reduced price sensitivity among their customers, coupled with a more competitive cost structure. And that's an ideal recipe for achievement inside a crowded, commoditized market.
