Winning in a Commodity Industry

Competing in a commodity industry can be a tough battle. Margins are often quite thin and it’s very difficult to differentiate the product/service from competitors. Loyalty is minimal and competing on price is a commonalty.

There 2 ways a business can strive in selling a commodity product; 1) having a sustainable cost advantage and or 2) having effective marketing. This post will focus on the latter.

So how does a company achieve effective marketing? It starts with the 4 P’s of marketing:

Product - Considering a commodity product/service is undifferntiable, a company does not have much room to maneuver here.

Price - Again, as a commodity product/service prices are largely determined by external forces of supply/demand.

Promotion – This is awareness of the company and it’s brand, including advertising, public relations and experiential marketing . The goal of promotion is to make your customers remember your company/brand product for when it’s time to make a buying decision.

Place - This is where or how a company’s product/service can be purchased, including it’s distribution channels, availability and accessibility. The goal of place is to make your product or service very convenient for your consumer to access and purchase.

So of the 4 P’s, there are 2 that are within a company’s control when selling a commodity product/service. In order to win, a company needs to focus on Promotion and Place. This means their marketing must make it easy for consumers to remember their product and convenient to access and purchase.

Examples

Let’s look at two commodity industries where select companies, through effective marketing, have been able to consistently grow; consumer packaged staple goods and retail banking.

In the first mentioned industry conglomerates such as Proctor & Gamble, Colgate Palmolive, Johnson and Johnson have been consistently growing and outselling local retail brands. This is mainly due to the “Promotion” part of the 4 Ps, as these companies pump sizeable amount of money into advertising and promotions. The exact figure for Proctor and Gamble in 2013 was $9.7B (source), which is an astounding 23.24% of Gross Margin and 66.89% of Operating Income. Compare this with Apple, a company that sells non-staple consumer goods, who spent $1.1B (source) into advertising and promotions in 2013, 1.71% of Gross Margin and 2.24% of Operating Income. That’s almost 10 times less than P&G even though Apple is twice as large as P&G in terms of market capitalization.

Evidenced by these companies’ growth and success, consumers simply choose P&G, Colgate and J&J brands over the local retail brand, even though there is no major difference between the two brands. This is simply an example of effective promotion, advertising and promoting their brand so consumers will remember and recognize the company. When it comes to making the purchase decision, without doing any extra thinking or research, consumers simply select the company and product they recognize or remember.

In the Canadian retail banking industry, the Big 5 Banks have experienced tremendous growth over the past decade. A large factor is due to the “Place” part of the 4 Ps, as in recent years the Big 6 Banks in Canada have been making strides in making themselves more available and convenient for consumers. Being open after 5, having weekend hours, online banking, comprehensive service offerings and mobile banking apps are all examples of the Big 5 making marketing efforts to make their services more available and convenient for consumers.

The fees and interests rates are almost identical between Schedule II banks (foreign banks with Canadian subsidiaries), other financial institutions and the Big 5 Banks. However, consumers will select the Big 5 Banks as they are open late and on weekends, or have comprehensive services under one roof, simply more convenient for them.

Although many would argue that the Big 5 Banks success is solely due to stringent regulations, one shouldn’t discredit their marketing and consumer efforts. Customer satisfaction is quite high among the Big 5 Banks (source), compared to other regulated industries in Canada such as telecom (source). Consumers generally seem quite satisfied with the Big 5 Banks, despite regulation limiting their options.

Outselling competitors with a commodity product or service requires a level of effective marketing. Of the 4 Ps of marketing, the 2 that are actually within a company’s control here are Promotion and Place. So the goal of a commodity business’ marketing strategy is to make their product/service easy to remember or well recognized and convenient and widely available for consumers.

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