Brand Commoditisation


By

Jaspreet Kaur
Lavika Gupta
Students
Alliance Business School
Bangalore
 


During 196572 the average return on equity of the world's 12 biggest auto manufacturers was about 10%; during 19932000 it was about 4.7%. What changes in the structure of the world auto industry have caused profitability to decline? One reason that led to this change was commoditization.

Commoditization or comodification is the transformation of a brand into a commodity, which is a product without qualitative differentiation. Brand commoditization, is a situation when a brand becomes a commodity, i.e., a brand becomes an undifferentiated product and needs a serious brand rethink. Terms like brand identification become irrelevant. This situation is advantageous to consumers as the price of the product goes down as a part of traditional strategy to sustain in a saturated market, but it has an adverse affect on the organizations.

ESSENCE of a brand

A brand is not just a label over a product; rather it corresponds to the identification of a product. It makes a product exclusive and differentiates it in the market. A brand has an impact on the psychology of consumers and gives them a feeling of relatedness to it. The consumers trust the brands and expect value out of it. As such, brand generates customer loyalty and ensures assured market share.

A brand is a name that influences the buyers. A brand starts to exist when it has acquired power to influence the market. Even though this acquisition takes time the creation of a successful brand is a very important for any organization. Brand is an intangible asset and can help the company to increase sales, to attract talent and to create a unique identity for itself. For any company to gain market share and leadership, the brand must be:

  • Able to conjure up a big idea
  • Experienced by people at contact points
  • Activated by deeds and behaviors
  • Communicated
  • Distributed

Since a brand is a name with the power to influence the market, its power increases as more people know it, are convinced by it, and trust it. Customers do not switch over to different brands, once companies are able to position their products as supreme brands, thereby assuring a company's survival in the market. Thus, it is a necessity for companies to differentiate their products as brands.

COMMODITISATION:CONSEQUENCE OF IMMENSE MARKET COMPETITION

In today's competitive world, organizations compete on price as a result of the commoditization of the industry. "Commoditization" is the term economists use to describe a combination of effects seen when price cutting becomes the dominant competitive force in a market or industry. This indicates that brand commoditization is an unfavorable state in a product's life stage and it needs to be overcome.

The main reason why a brand gets commoditized is because of the price cutting wars. Companies come out with a new product and try to establish a premium brand and the pricing is done so as to get better margins but then the competitors imitate the product and introduce a similar product in the market at a lower price in order to capture the market share. A premium brand starts discounting when it realizes that its competitors are selling the same product with similar features at a lower price. This makes the unique new product into just another commodity. This price war which is caused mainly due to short sighted business tactics creates a high level of perceived uniformity among prospective buyers and consumers - the idea that substituting one brand for another does not make much difference. For example, the bottled water brands like Bisleri, Aquafina etc are now commoditized that is customers won't mind substituting one brand over another in case of unavailability.

In most of the industries companies aren't able to sustain their unique product in the long run as they cannot prevent the competitors from imitating their product. Even the services can become a commodity, when a "usual business" approach seeps in - with many providing adequate service and few providing extraordinary service.

BEATING BRAND COMMODITISATION 

I. Disruptive Innovation

It is a way by which the companies can disrupt a market that is becoming commoditized. A brand that introduces an innovative product/service in the existing category leads the innovative product or service to break the traditional market. Hence brand prevents itself from becoming a commoditized brand in the market.

II. Relationship with the distribution channels

Companies having good relationship with its distribution channel will be in a better position to promote their brands. Companies like Hindustan Unilever, P&G, and ITC have relied on the retailers and distributors to promote their brands. Organizations can compete with their competitors for the shelf space in retail stores so that their products can appeal more to the customers. For example in category like soaps or shampoos the FMCG companies compete for the visual shelf space in the retail stores.

III. Differentiation

Thus, we see that brand commoditization is a serious area of concern and it needs to be overcome if a brand is to survive in future. Differentiation helps position a product as a brand in the psyche of the customers, which leads to customer satisfaction and thereby, customer loyalty. Once the customers are loyal to a brand, it becomes difficult for a competitor to creep in and grab its market share. The brand regains its status and is expected to thrive well. The potential impact of commoditization in markets gives us the importance of developing a vision about the market and how it will change in the future. Strategies should be developed in order to counter commoditization of brands so that profits don't shift in the value chain or moving into a different product category.

DIFFERENTIATING A COMMODITISED BRAND

The key to differentiation lies in market development or product development or a mix of these two strategies. The question that arises is how to go about implementing any of these strategies? One possible way could be to review the needs of the consumers. Now when the brand has been transformed into a commodity, it has a number of, more or less similar variants in the market.

The customers do not see much difference between brands in a commoditized market. In such a market scenario, what a company can do is to go for a need-based strategy, so as to know what the customer exactly wants. Once a brand manager knows this, he can well differentiate this product into a brand by redesigning the product, developing new products, or targeting entirely new segments as per the market requirement.

 There are ways to beat commoditization but the root would be "value". The marketers must be able to define the value of a product from the view point of the customers and must be able to deliver the product at a value for which the customer will be willing to pay a premium price for that brand. Important strategy based on this is the "value-driven segmentation" where identifying customer's value requirements and meeting them with similar requirements into each segment is becoming more complicated due to present complexity in the markets

Here is a classical example of Du Pont Performance coatings (DPC), which faced and overcame the problem of commoditization. DPC is an organization that had been the market leader in coating technologies for 80years.At the turn of the millennium, it found itself in a mature market. The problem faced by DPC was commoditization. The management decided to go for reviewing the actual customer needs and then modify the existing products or develop new products so as to meet the requirements of the customers . The strategy DPC came up with, after studying the new market needs and identifying new market segments, was to rationalize some poor-performing product brands and developing some new ones, which meant focusing on lesser, but stronger product brands. The strategy taken up by DPC to overcome commoditization is a mix of market segmentation and product development.

Here is one of the latest Brand Channel's feature story that describes how VOSS (Norwegian super premium water) has managed to overcome commoditization through two main features (and very important ones, too): First they designed a beautiful bottle that goes perfectly with what the brand is trying to convey. Through the package they are communicating, perhaps, more than what they would be able to achieve through regular brand messaging and advertising. Following their path of creative (brilliant) thinking, they went on to manage, their distribution channels, focusing solely on high-end restaurants, hotels, bars and other social gathering arenas. Through these two main points, they were able to position VOSS in the category that was (until recently) becoming a commodity one. The strategy taken up here again is market development by identifying an exclusive segment to be served and product development by adding certain features to the existing product. So, here again there is a mix of the two key strategies to overcome brand commoditization.

SELECTING THE BEST STRATEGY

Now how to justify taking up one of these strategies over the other? The answer lies in a company's core competencies. Suppose that a company has a strong logistics and distribution channel, the best way for it would be to go for market development, wherein it attains accessibility to every targeted segment.On the other hand, if a company's strength lies in research and development that is it has the ability to innovate; it must opt for product development. This methodology goes well for companies in IT industry.

The ultimate aim of both of the above mentioned strategies is to differentiate the product as a brand in the minds of the customer, by creating a so-called brand experience. Customers' perception of the product has to be tapped and accordingly the products have to be positioned in their minds, so that they consider it worth paying, relatively higher price for a particular product.
 


Jaspreet Kaur
Lavika Gupta
Students
Alliance Business School
Bangalore
 

Source: E-mail September 9, 2008

 

        

 

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