Keys to Successful Innovation in Commoditized Markets
John Burns, PH.D. | Originally Published in PDMA Visions Magazine, Issue 3, 2015 • Vol. 39 • No.3
In fast-paced markets such as consumer electronics or software, new product releases are frequent. These industries often measure product change in months, if not weeks. In other industries, however, the pace of product innovation is far slower. Products undergo little or no functional change over many years or decades. Examples of these industries include ball bearings; standardized chemicals and gasses, such as epoxy or hydrogen; and industrial engineered equipment, such as pumps and compressors — among many others.
With everyone offering the same functional product, little differentiation exists between competitors. The product becomes a commodity, and winning becomes a race to the lowest price. But companies in commoditized markets can create meaningful innovation. Success requires looking beyond the product itself. Drawing upon actual experiences with companies seeking to innovate in commoditized markets, we’ll examine five areas beyond the product where companies can explore innovation opportunities, differentiate their company from the competition and win on something other than price.
PRODUCTS AND SERVICES ARE CONNECTED
Customers view products and services as part of the same total experience of working with your company. Your company might place service in a separate division with a different department head than the product division and separate financials. But your customers don’t view it this way. Improving service delivery, therefore, is often an effective area companies in commoditized markets can focus their innovation efforts. For example, a maker of pumps and turbines used in manufacturing recognized that its customers struggled to keep up with the maintenance on their equipment. The company created an easy-to-use online repair-andmaintenance scheduling tool, which it provided free of charge. By helping customers effectively manage the scheduling of maintenance, the tool provided a tangible benefit to them. It also produced a pleasant surprise for the company: Since many of its customers required help performing the maintenance and not just scheduling it, sales to carry out the scheduled maintenance on the machines increased.
MAKING YOUR PROCESSES CUSTOMER FRIENDLY
The processes your company has in place in areas such as placing orders, filling out change orders or managing billing may work for you, but do they work well for your customers? In commoditized markets with little or no perceived product differentiation, the ease of doing business with your company can mean the difference between winning and losing a deal.
Evaluating how your processes make working with you easier or more difficult can provide opportunities for innovation. A maker of electronic components for original equipment manufacturers faced this problem. The company discovered that its processes for sending invoices, assigning part numbers and creating change orders did not work well for its biggest customers. All else being equal, these customers were less likely to select this company to avoid having to deal with these process hassles. By thoroughly understanding the needs of customers in this area, the company redesigned its ordering and billing process, fully integrating it with that of the customers. This reduced the amount of hassles customers encountered doing business with the company, which increased customer confidence in making purchases, ultimately resulting in increased sales.
HOW SOON CAN YOU DELIVER?
In a global business world, the timely delivery of materials or equipment over great distances is often crucial to minimizing downtime and work stoppages. As a result, delivery provides a potential opportunity area for innovation. A global engineering company dealt with this very situation. The company makes customengineered products, such as turbines used for oil exploration, commercial shipping and manufacturing. Required turnaround times from the receipt of the proposal requesting the product to the required delivery date on location were often short, and the company frequently had to ship the products all over the world. Therefore, they developed an improved method of manufacturing a key industrial component used in their product, which enabled them to produce the product faster than the competition. This resulted in shorter delivery times. The product functionality and price remained the same, but by developing an innovative system of production, the company ensured faster delivery and established meaningful differentiation from the competition on an important buying criterion. Orders increased as a result.
CLARITY IN PRICING IS A VIRTUE
It’s not just your price that matters. It’s often your overall pricing structure or model that is important to customers making purchases in commoditized markets. An organization selling disposable products to companies involved in electronics manufacturing faced this situation. Although its overall price was the same as that of the competition, customers believed this company’s prices were higher. The reason: Sometimes shipping costs were included, other times they were not. However, it remained unclear to customers when shipping was or was not included, and when clients did not correctly apprehend if it was included, they complained. For the client, variable shipping costs related to where in the world it had to manufacture the product and ship it from; longer distances are more costly than shorter ones. Therefore, our client created an innovative way to standardize shipping costs, regardless of where the product was shipped from. This simplified the pricing structure and removed an important barrier for customers. The company saw customer complaints decrease and sales increase.
DEVELOPING UNIQUE CUSTOMER EXPERIENCES
Customers experience your company in many ways through sales, support, your website, the purchasing department and interactions with subcontractors working on your behalf. These experiences can provide areas for innovation. One company, a maker of component parts used in manufacturing operations, made strong claims about the quality of its products; it was a key part of the company’s value proposition. Many of the customers, however, had little real understanding about why its products were of a higher quality than those of the competition. After all, the company is part of a commoditized market with little functional differentiation. As a result, claims the company made about its product quality range somewhat hollow with customers. Therefore, the company instituted customer visit days, where customers could visit the plant and see firsthand the quality controls and production standards the company had in place. These unique experiences helped the company bring to life claims about the quality of its product, and it created meaningful differentiation from the competition.
INNOVATING BEYOND THE PRODUCT
Successful innovation is possible in commoditized markets, but success often requires looking beyond the product to the areas of services, processes, delivery, pricing models and the development of unique customer experiences. Companies in these markets should strive to create meaningful differentiation in their products. Success, however, will take time; by definition, change in these markets is slow. By looking beyond the product, companies in commoditized industries can identify innovation opportunities that will differentiate them from the competition and help them win on something other than price.
John Burns, Ph.D., is a principal in the Insights for Innovation practice at Applied Marketing Science (AMS), a consultancy based in Waltham, Massachusetts, that helps product developers and marketing researchers identify customer needs and innovate to solve them.