Products & services serve as commodities in reset economy

Televisions have always tended to be brand-sensitive products, mainly because of their prestige factor. Most people display their televisions in their living rooms and they certainly wouldn’t want their guests to get the impression that they can’t afford a good TV. Till recently, five well-known global brands — Sony, Samsung, Toshiba, Panasonic, Sharp ruled the American TV market.

Now there’s a new brand that few outside the USA would have heard of Vizio, a privately held consumer electronics company headquartered in Irvine, California, has broken through to the very top of the competitive American television market, capturing 11.5% market share. This places it right next to Sony, which has 12% market share. In LCD televisions, the fastest growing segment, Vizio claims to be Number One.

The rules of marketing have changed during the recession and Ranjay Gulati of Harvard Business School presents Vizio as a case in point. In what GE’s CEO Jeff Emmelt calls the ‘reset economy,’ consumers are not interested in top-of-the line products, even in prestige categories like televisions they are happy to buy products that are ‘good enough.’

Vizio doesn’t have much of a research and development (R&D) function and its products don’t incorporate the latest advances in electronics, but they are 30% cheaper than Sony. The idea that products in themselves provide competitive advantage is on its way out. While leaders like Sony keep coming out with enhanced models, the low-cost producers hit the market with products that are simply good enough and that are what consumers are moving to.

The occasion here is Assocham’s master class in management and the CEOs gathered on the tenth floor of Piramal Towers, Mumbai, are wholly in agreement with what Gulati has to say. India has always been a value-for-money market and the CEOs here, who are mostly from multinational subsidiaries, know how hard it can be to compete with a cheaper product. A former chairman of Unilever, narrates the story of his battle with competitor Nirma, saying, “For most companies, the profits do come from mass market, commodity products rather than from value-added products.” The recession has served to commoditise a whole range of products and services, though their producers don’t realize it yet. The big ticket law firms are beginning to feel it. Their clients are no longer willing to pay the premium an A-plus firm expects. They would rather go to A-minus firms, quite often founded by ex-partners of A-plus firms, who charge 30% less. It’s the same in every other service. Even tech and pharma companies, who are supposed to have an edge because of R&D, they are becoming commoditised.

As product and services become commodities, features that were once considered selling points become hygiene factors. But too many companies continue to flog product characteristics long after everyone offers them and customers have started taking the characteristics for granted. In the USA, telecom service providers still advertise coverage, believing it’s a motivating factor. On the other hand, in some industries, hygiene factors have returned to being motivators after the meltdown — the financial stability of banks, for example.

So what are companies to do in the reset economy? They focus on being customer centric, a rather elusive concept that’s best understood through examples. There’s Harley Davidson, which doesn’t see itself as a motorcycle brand but as lifestyle brand, making money through customized accessories and organizing get-togethers and vacations for its customers. Or the co-creation model of the iphone, where 90% of the inputs are produced by others and Apple keeps the 50% of the revenues.

Lesser known examples are ‘bagged salads’ — chopped ingredients that just need dressing, priced at $5 a bag which have become one of the fastest selling products in American supermarkets. If the consumer were to buy the ingredients separately, it would cost $2. But they’re willing to pay more than double that for the convenience of chopped, ready to eat vegetables. This shows how profitable it can be if you can tap into a consumer needs.

Another example is of a company making machinery lubricating oil, a commodity product if there ever was any. The company decided to talk to customers and find out what really matters to them, since it was obviously not cheap lubricating oil. The two important parameters on the factory shop floor, they found, are machine down-time and machine life-span.

Based on this insight, the company set about developing lubricating oil that improves machine life span. Cost didn’t matter since the benefits to the customer were such that the company could charge premium prices. It proved to be a very profitable investment.