Shedding the Commodity Mind-Set

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MANOZ

M A R K E T I N G

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Shedding the commodity mind-set
John E. Forsyth, Alok Gupta, Sudeep Haldar, and Michael V. Marn No product really has to be a commodity. The trick is to know what services your customers want—and to charge more.

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ompanies that sell soap, perfume, candy bars, and other consumer products are expert at “decommoditizing” them: finding and capturing the value of intangible benefits and building strong brand names that can provide a kind of differentiation in the minds of consumers. But companies that sell products such as bulk chemicals, paper, and steel to businesses tend to be unsophisticated in these matters. Burdened by corporate cultures that emphasize operations and sales over marketing, many of these companies constantly strive to churn out more and more product more and more cheaply and then to sell as much of it as possible at the market price. Viewing themselves as commodity producers, they are particularly likely to overlook the nonfunctional features of their products—delivery speeds, after-sales service, and so on.

As a result of this mentality, such companies leave large amounts of money on the table. They would be far better off if they took a page from the playbooks of marketing-oriented businesses and embraced the—to them, unlikely—notion that buyers care not only about the price of a product but also about the way it is sold to them, the services that accompany it, and the nature of their relationship with the seller. If these manufacturers were to take that approach, they would find themselves thinking about their customer base not as they have traditionally segmented it—large and small, based in France or Germany, and so forth—but as composed of businesses that want John Forsyth is a principal in McKinsey’s Stamford office; Alok Gupta is a consultant in the New York office; Sudeep Haldar is a consultant in the Chicago office; Mike Marn is a principal in the Cleveland office. Copyright © 2000 McKinsey & Company. All rights reserved.

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T H E M c K I N S E Y Q U A R T E R LY 2 0 0 0 N U M B E R 4

EXHIBIT 1

Price isn’t everything
Factors involved in purchasing decision, percent Selection of products Frequency of contact with sales representative 10 10 30 Price of product

(and are willing to pay for) quite different things. This would in turn help manufacturers focus on the segments whose business they can win and retain most profitably: the segments seeking product or service attributes that correspond to their strengths.

On-time delivery

The managers of one industrial-resin manufacturer, for example, believed that its product was simply a com18 modity. Their customers, they 18 Consistency of product thought, could just as easily use one Level of technical performance support and service supplier’s resin as another’s, so the over time manufacturer could compete only on price, which gave it limited leeway, commodity margins being low. But a systematic analysis of the preferences of the manufacturer’s customers showed that for one of the biggest of them, 70 percent of the purchasing decision was based not on price but on quality and service (Exhibit 1). When the manufacturer undertook a full “needs analysis” of its main customers by using a process called conjoint analysis along with detailed, qualitative, one-on-one interviews, it discovered three distinct segments. As Exhibit 2 indicates, about one-fifth of its customer base cared most about technical support and the ability to get hold of a sales representative quickly. A third focused on the supplier’s product range and product development strengths. The remaining group—less than half— cared most about price and on-time delivery. 14

At this point, the resin manufacturer began to change the way it served the different segments. In addition to identifying the needs of each, it focused on other identifiers, such as the kinds of customers its customers served and how its customers’ businesses...
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