Explore strategies to protect your margins amid commoditization.
Commoditization is inherently good. What’s that? You thought it was all about margin erosion, which is obviously bad? If that’s what you think, then think again. Commoditization is a sure sign that there’s a significant want or need for a particular product or service. Take that sign as an indication of opportunity and rise to the challenges that come with it.
Any time a product or service becomes a commodity—and there is adequate supply in the marketplace—margin will erode. Don’t fight it (you’ll lose). Instead, learn to leverage it. It’s a lot easier to sell people things they want rather than trying to convince them to buy something else. So how do you protect the margin? Here are a few strategies you can apply based on your situation.
Buying Better is the First Step to Combating Margin Erosion
If you’ve got consistent sales and cash flow, then take advantage of every deal possible when purchasing. Use your sales data and analytics. Plan your purchases and buy in bulk. Prepay, pay early, or take any other deal you’re offered. If you know you’re going to sell, then don’t be afraid to buy.
Improve Your Processes
When a service is the commodity, buying better isn’t really an option— but doing better is. Look at what you’re doing and how you’re doing it. Find ways to optimize all your processes and focus on training, documentation, and tools. Your team will work smarter and faster, ultimately helping you keep more profit in your pocket.
The Key to Winning the Commoditization Battle is Innovation
Innovation allows you to go beyond what everyone else is doing, stand out, and create opportunities for better profit. Innovation relative to commoditization is all about leveraging the commodity.
What does that mean? Accept the commodity for what it is. Take the reduced margin, but wisely use the commodity to carry along other, more profitable products or services. Confused? Here’s an example: Create product bundles that incorporate the commodity product. The want or need for the commodity will help pull the other higher-profit products in the bundle through to keep your overall margin where you’d prefer it to be.
If you’re in a situation where your service has become a commodity, then you can apply the same tactic. Bundling complementary services together allows you the same opportunity to pull through your more profitable services to offset the margin erosion you face. While these ideas are simple, they’re also highly effective in keeping profit in your pocket.
True innovation—trying something new—is one of the best (but hardest) ways to fight commoditization. True innovation is a risk that takes courage and effort. It’s hard to do something new. If it wasn’t, then everyone would do it. When risks pay off, the rewards are bountiful. If you really want to get past commodities, then innovation is a must. You never know: You may just create the next great commodity, and everyone else will be trying to figure out how to keep up with you!
Tim Hennen is CEO of Digital Labor Solutions and NSCA secretary.