We Are All Commodities

One definition of commodity, according to Merriam-Webster is “a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price.” While it is true—brand names (and underlying brand promises) help differentiate products (and services)—under this definition, most businesses today could be considered commodities. Here’s why:

The recession trained consumers and businesses to expect to pay less. This trend might subside a little, but being a tightwad will be in style for some time.

The number of industries that are subject to global competition, particularly from nations where labor is available at a lower cost, has grown.

The Internet and other technologies are causing more and more disruption in an increasing number of industries.

So what is a business owner to do? First, make sure you understand the trends in your industry. To what extent are your competitors lowering prices? Are there substitutes to the products or services that you provide? Are overseas competitors getting into your space? Are some of your competitors able to offer lower prices or expand their market by leveraging the Internet? Once you have answers to these questions, here are a few things you can do to protect and improve your margins.

If you can’t beat them…
Are your competitors leveraging overseas suppliers or labor pools? If so, don’t assume that their quality can’t compete with yours. Asian countries are producing loads of college graduates. And while many business owners are complaining about Gen Y employees here in the US, Asian college grads are HUNGRY.

Build your brand…
Believe it or not, your company has a brand. It is what comes to mind when someone hears or sees your company name. It is VERY important. Among other things, good branding can shorten your sales cycle. It also can generate better margins. (Think about why people pay more for Tylenol versus acetaminophen.)

Offer something else that your competitors don’t…
Take your understanding of the status of your industry and innovate. Go back to your clients and prospects and find ones that will spend 60–120 minutes with you. Get a real understanding of their needs that are not being met and find a way to deliver.

We’re all looking forward to the opportunities that might lie ahead this year, but it doesn’t look like we’ll recover from the commodities conundrum soon. In the meantime, it will take more and more creativity to improve margins.