I frequently hear my clients say, “Our market is becoming commoditized.�? They see the products in their market becoming similar, more competitors jumping in, prices falling, and profits eroding.
These patterns can feel inevitable. Markets apply tremendous competitive pressure that leads to consistent product improvements, efficient delivery of the products to the market, and an increase in the number of competitors.
The result is better AND less expensive products. That’s great for consumers… not so great for the companies making the products. The company must work hard to keep up with the competition while fighting over less and less profit margin. Eventually, some competitors stop producing the product or merge with each other as they are squeezed out of the market.
Apple, the Reigning Champion
Commodity markets are tough to compete in. Know what’s perhaps even harder? Competing with a paid product in the face of free alternatives!
The connection between growth strategy for commodity markets and “free-dom�? fighters hit me again recently with the launch of Apple Music. I thought to myself, “Somehow this will turn into a moneymaker for Apple, but how?�?
By entering music streaming, Apple has entered another young but maturing market that already shows signs of commoditization. In fact, this may be their biggest challenge yet.
The biggest competitors are legal (Spotify, Pandora, Rdio, etc.) and offer free services (did I mention they are FREE?). How can Apple expect consumers to sign up for a monthly subscription when they can get something similar for free? Early signs show they just might do it.
Free-dom Fighters
Apple’s not the only one who has taken on this challenge. Others have also offered a product or service for a charge, despite free alternatives. Let’s look for clues on how they do it….
Email: Google and Microsoft both offer free email services, so why pay these services?
TV: Network television and numerous online streaming services are available for free, so why pay for cable, dish, or subscription streaming services?
Books: Libraries are everywhere, and most popular books can be borrowed (even electronically) and read for free, so why buy books?
Office productivity software: The free OpenOffice software has emulated the Microsoft Office experience for some time, so why pay for the latest versions of Word and Excel?
Telephone service: With ubiquitous wifi access, we can make calls for free using Skype, Google, or other free services, so why do we keep paying for voice as part of our mobile phone plans?
Water: The bottled water industry has exploded when public drinking fountains are everywhere and the water from your tap is next to free.
So what’s going on here? How are these market leaders dominating in the face of not just cheaper, but FREE alternatives? What can we learn from them and apply to commoditizing markets?
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A marketer’s view of the world
When two products appear similar, yet one’s free and the other costly, my marketing brain suggests that the reason some consumers choose the costly alternative versus the free alternative is because it’s perceived as different in a valuable way. The core offer from both alternatives may be identical, but the costly alternative is delivering something of value beyond the free alternative.
An economist’s view of the world
The balance of supply and demand tells us that when quality improves you can charge more for your product or service. However, this only lasts as long as it takes for someone else to copy your improvements. Someone will find a way to offer the same quality at a lower cost (or free).
When a firm generates a profit beyond the adjusted cost of capital, my economics brain suggests there are factors at play that are keeping the market from equilibrium. We can apply these “equilibrium disruptors�? as possible growth strategies, regardless of whether your competition is a free or costly alternative and whether your product category is mature or new. If you can keep others out of your market you can maintain higher prices much longer.
Four Strategies to Keep Your Market All To Yourself
1. Be where your customers are
Your ideal customer is someone who isn’t aware, doesn’t have easy access, or is just not interested in the extra work required to take advantage of a free alternative.
Geography still matters. Living in Sydney, I realized you didn’t have to travel far from the beach to see people pay admission to swim laps at a pool rather than take advantage swimming for free at the beach.
Virtual distance matters as well. Our online browsing, shopping, and app usage largely determines the virtual ground we cover each day. Paid alternatives we meet along our journey can have serious appeal over free alternatives we can only find if we venture off the beaten path.
Apple is counting on many of its millions of iTunes users to stumble into its music streaming service because it’s just right where they already are. Convenient.
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2. Provide a distinctive benefit
We can avoid being spooked by free competing offers when we recognize that our customer base is much larger or has little overlap with the group most attracted by the free alternative.
Bottled water didn’t explode until it was mass-produced and mass marketed in individual serving sizes. Bottled water offers the distinctive benefit of convenience.
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3. Build brand identity on higher-level benefits
People pay for security. You can insulate yourself from free alternatives if you make your brand the “safe�? choice.
This is largely the value proposition for paid email services. Similarly, voice coverage on a mobile phone plan is perhaps sold on the premise of reliability.
In addition to security and reliability, there are many other benefits upon which to build a brand: safety, familiarity, prestige, luxury, etc.
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4. Make switching costs as high as possible
Regardless of whether it’s based in fact, the thought of the pain from switching from one product or service to another can sometimes dissuade even the most cost conscious consumer.
Google, Amazon, and Apple are experts at this. Here are a few strategies you can apply to raise the perception of switching costs and keep your customers in the face of new competition:
- Capture as much user information as possible inside the product so that the product has intrinsic value (the data) in addition to its core function.
- Re-purpose user-provided information to add additional value to the experience such as recommendations for other products.
- Provide ample opportunities to connect and collaborate with other users so that the value of the product or service grows as the network grows.
- Connect your product or service to other products or services (in or out of your ecosystem) so that switching requires rebuilding each connection.
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An organization can thrive in a commodity market using similar strategies to those products that compete against free alternatives. Successful companies find ways to grow in the face of market forces. They do so by understanding what factors are most valued by customers and then developing strategies to win and keep the customer choice. What can you learn from them?
