A commodity trap doesn’t have to be a death sentence for your company — if you don’t let it.

When you first went into business, your product was unique, and you knew you had something special. However, as time has gone on, sales and profits have declined, and you can’t help but feel like your product is quickly becoming a commodity. You’re not there yet — but you’re close.

You can still fight the commodity trap. Richard D’Aveni, the author of “Beating the Commodity Trap,” says “a commodity trap happens when a company sees its competitive position being eroded so that it can no longer command a premium price in its market.” He notes that commodity traps can destroy entire markets, disrupt whole industries, and drive previously successful firms out of business.

What causes a commodity trap?

A commodity trap is usually the result of multiple issues rather than just one primary problem. Many times, it’s the failure of one or more managers who don’t see it coming a mile away. They don’t plan ahead or watch market trends develop. They put out inferior products and don’t prioritize constant innovation.

Managers get complacent and want to enjoy the success, but while they’re doing that, competitors who want it more are pushing to get ahead. You should always be innovating and staying one step ahead of the industry.


lead-managerlead-managerManage leads effectively and stay ahead of your competitors. Schedule a free demo of our lead management software to help you maximize your customer engagement for success!


What comes to mind when you think about Intel? Do you immediately picture a well-known, profitable technology company? They’ve faced plenty of commoditization threats, but stayed on top of the competition and tried to stay ahead. When Asian companies began taking over the memory chip industry, Intel knew it couldn’t compete on price, so it decided to shift its focus to making microprocessor chips for personal computers instead. When newly competitive imitators in microprocessors came knocking, it moved to making chips for consumer electronics and other special applications.

Disney offers another example. When it entered the Chinese market, it was tough to market DVDs because of the rampant DVD piracy. So, the company re-thought consumer problems and reframed its products accordingly. In 2008 Disney launched its first English learning center at the Shanghai Disney theme park — and it was a huge success. Native English-speaking trainers taught kids ages two through ten, and parents willingly pay top dollar to educate their children.

Harvard Business School professor John Quelch notes that “…intense global competition, outsourcing, and offshoring are all squeezing margins, increasing customer price sensitivity and making it harder to sustain inter-brand differentiation. The product life cycle suggests that, as product categories mature, they become more susceptible to the forces of commoditization. The difference today is that the speed from launch to maturity is faster than ever before.”

Richard D’Aveni says that in studying more than 30 industries, he believes there are three common patterns that create commodity traps:

1. Deterioration

When competitive firms show up with low-cost or low-benefit offerings that attract the mass market.

2. Proliferation

Companies develop new combinations of price paired with several unique benefits that attack part of an incumbent’s market.

3. Escalation

New businesses offer more benefits for the same or lower price, which squeezes everyone’s margins.

Commoditization may seem almost inevitable, but it doesn’t have to be. You can do everything possible to sidestep commodity traps and stay ahead.

How to avoid a commodity trap

Fight the urge to slash your prices to compete with low-priced competitors. Remember that your product has value and it’s worth the price you’ve set — you just need to find a new way to get it out there without panicking.

According to Professor Quelch, there are three steps to fight the commodity trap:

1. Innovate

Create an entirely new product that better meets consumer needs. If that’s not possible, think of ways to upgrade an existing product. Pushing ahead will force your competitors to invest in matching or exceeding the new specifications if they want to keep up with you.

2. Bundle

You may have a commoditized product on your hands, but if you sell it with differentiated ancillary services, this could be just what your buyers need to justify paying a premium for the convenience. You could, for example, provide an after sales service.

3. Segment

Mature markets can divide profitably into many segments. Quelch says “marketers can focus on providing applications expertise for less price-sensitive customer segments for whom the product is still important.”

Another way to avoid a commodity trap is to learn from other companies. You’re not the first one this has happened to, and you certainly won’t be the last. Investigate business case studies that show you what these companies were up against, and how they came out on top.

 

If you see a commodity trap coming, don’t just stand there and let it hit you. Get to work, fight for your company, and you’ll come out ahead of the competition every time.


lead-managerlead-managerManage leads effectively and stay ahead of your competitors. Schedule a free demo of our lead management software to help you maximize your customer engagement for success!


Have you ever fought off a commodity trap? Tell us about it in the comments below!