Can You Differentiate Yourself in a Commodity Market?
Business builders often justify entering a market with logic along the lines of, “This market is worth $10 billion and growing. If we only get 1% of that, we should be a $100 million business.” The problem with this logic, of course, is that your business I not entitled to 1% of the market simply because it exists.
Even if you are an “early mover” in an attractive market, there are bound to be competitors offering the same product or service. If a competitor has an advantaged offer in a specific customer segment, why would you believe that those customers would be evenly distributed across many product offerings? Wouldn’t they largely gravitate toward the product with an advantaged offering? Very likely, yes.
Jacob Hammer is a fellow strategist who is exploring a business opportunity in the coffee capsule market. The business is considering launching a line of single-serve coffee capsules that are compatible with Nestle’s Nespresso machines and would compete with Nestle’s own branded capsules. Nestle has built a multibillion-dollar brand with Nespresso, and the capsules are a high-margin product, which creates a scenario ripe for “me too” competitors.
“The new business is not in a position to rely on a competitive advantage situated in supply chain integration, i.e. owning the factory, distribution channels or coffee farm and is currently relying on more colorful packaging to gain sales over competitors,” Jacob explained to us in an email. “The CEO’s argument is that the sheer size of the market is going to be $8 billion annually, so $800,000 per month should be no problem to achieve. Is this a situation where we can win? Won’t the marketing costs incurred to generate the required volume essentially destroy any margin that was available anyway?”
We thought this was a great insight by Jacob. The fact that the market exists provides no assurance or entitlement to an $8 million-$10 million business. The company would have to invest to achieve that growth, and the competition may destroy the margins that are currently in the market.
That said, there are plenty of ways to gain share and grow in a commodity business. After all, Nespresso created a luxury product in a competitive market by creating a better coffee experience. We brainstormed a number of ways a business could create a competitive advantage that provides them entitlement share in some segment of a highly competitive market:
· Provide better customer service
· Provide more attractive delivery or distribution
· Create unique or more convenient distribution by making the product available in a place that is not currently served
· Provide a better overall customer relationship by bundling with other products/services
· Offer attractive pricing - usually enabled through lower manufacturing or distribution costs
· Innovate with the pricing model - think a monthly Spotify subscription vs. pay per song music downloads on iTunes
· Create better branding or advertising that appeals to a specific customer segment
· Improve ease of use
This list just scratches the surface in any given market. The important point is that you must develop a competitive advantage in something that proves value to the customer. If Jacob and his client can’t identify how it will be better or best at something, their business won’t be entitled to a meaningful share of the market.
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KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.