Once a product becomes commoditized there are only a few ways for companies that sell that product to create competitive advantage. One way is through distribution, but generally distribution tactics are fairly easy to mimic and this advantage quickly disappears. Once all traditional means of generating competitive advantage have been exhausted, there are only two ways left to create an advantage, one being through marketing, and the other being through design.
Lets back up a bit and define what a commodity is, at least for the purpose of my rant here.
Webster’s says that it is “Something useful that can be turned to commercial or other advantage” which is part of the definition I want to create, but not the entire definition. Lower down on that webpage, Webster’s also says that a commidity is “A generic, largely unprocessed, good that can be processed and resold.”
I would prefer to discount everything after the word “generic.” I think the generic nature of something is largely what we mean when we say something is “commoditized.”
Traditionally when we speak of commodities we are referring to corn, orange juice, pork bellies (are they really trading the stomachs of pigs?), soybeans, etc. However, today we speak of commodities as being anything that is generic and which does not differ much from one company to another. Just as corn of a certain type from one farmer does not differ much from the corn of the same type from another farmer, so we could say that a Toyota Corolla does not differ much from a Honda Civic, or web hosting services from Verio are not that different from the web hosting offered by Interland.
Although the Corolla and the Civic are not as identical as one piece of corn to another by any stretch, they are similar enough for “all intents and purposes” as far as many, if not most, buyers are concerned. Is one safer than the other? Not enough to make a difference. Is one more comfortable than another? Not really. Reliability? About the same. Resale value? Good. For both of them. In fact, most cars are all about the same with minor differences. They’re a commodity.
The trouble with selling a commodity is profit margins. If VW can make a car for $10,000 and sell it for $15,000, then that’s great. But when Buick comes along and offers a similar car for $12,000, then people are going to buy that car instead. If you can buy what is essentially the same car for $3,000 less, that’s a pretty compelling reason to switch what car you want.
However, any 16-year-old reading this would be saying “That’s stupid, VWs and Buicks couldn’t be more different.” That’s right, but it’s not because of what’s under the hood, or because of the safety features. It’s because they look different, and looks sell cars.
If you’re the kind of parent who buys their kid a new car when they turn 16 (I know I’m not going to, but some people do), just try to buy them a Buick LeSabre. Chances are, they wouldn’t even take it. But offer them a VW Jetta or a Honda Civic and they’ll be pretty happy. Why? Partly because the cars have been marketed in different ways, but mainly because they look different.
This is something that has fascinated me since I was a child. I always liked certain cars because they looked cool. And when I became more aware of the business world I realized the cars that I thought looked cool always sold the best. So what I couldn’t understand was why the US carmakers continued to churn out ugly cars instead of making them look cool.
Then the US carmakers started trying to make cars that looked cool and I realized they had never made cars that looked good because they just didn’t know what people liked. Meanwhile, VW and Audi were producing cars that just plain looked better. The funny thing is that VWs are, in reality, not as reliable or as inexpensive to repair as many other cars out there, but man, they just look so nice. And so they sell a lot of them.
Where US automakers have led is with trucks. But with the Nissan Titan coming out, they’re getting some competition from the foreign guys on that front as well.
What gets to me is that companies really don’t seem to understand how much the look of something affects how it sells. PC makers don’t seem to understand that a large part of the appeal of a Mac is not how it runs, how stable it is, or how cheap it is (they’re definitely not cheap). I’m a PC user and have never used a Mac, but I’m tempted to for almost no other reason but that they just look so darn cool on the outside.
Ok, I could go on but I’m getting tired of this rant. I’ll probably continue later.
This article is very interesting and relates to all this.