Differentiate - How to differentiate in a commodity world (part 1 of 2)

Abstract

When products proliferate in the market, some retain their status over time in the market, and some face enormous competition. Many times, enormous competition pushes a product to become a commodity. Brands want their products to stay differentiated rather than becoming a commodity. Enterprises and customers are served better when the product stays differentiated. In this thesis, we propose a framework that helps executives and brands keep their products differentiated. In this paper, we discuss "what" makes a product differentiated.

Introduction

In our day-to-day life, we use products like a pen, wireless headset, dining table, computer, car, body lotion, shoes, ready-made shirt, etc. The decision to buy a certain product depends consciously and subconsciously on a number of factors. It is a fascinating area of study how corporations influence our decision-making process in making us pick a product. Not all products are made the same, even though some seem to serve almost the same purpose. Let’s talk computer. IBM introduced personal computers in 1981. Though some competition existed, the closest personal computer at that time was from DEC. But IBM PC was very successful. A couple of years later in retrospect, the media discussed what was so best about IBM PC after it was adjudged the best PC among the competition. When someone needs a computer, they would just buy an IBM PC. IBM PC was a differentiated product in its category.?

What are some of the common characteristics that one can observe in differentiated products? Expensive, better quality, scarce availability, concerted marketing, etc. are some. Some emotional factors also help a product to be differentiated. Before we talk about the emotional effects, let’s talk about the Veblen effect.?Around the year 50 BC, the young Julius Caesar, who was just 23 years old, was captured by Sicilian pirates and demanded ransom from Rome. When the pirates asked for a (meagre) 20 talents (around 640kgs) of silver, apparently Caesar was irritated. He felt that the amount is too low in comparison to his stature and popularity. He encouraged them to ask for more. Though initially confused, the pirates asked for 50 talents of silver. This created a perception among Romans that Caesar is more popular. That perception helped his friends raise money and Caesar became more popular.?The Veblen effect is the perception among people that a costly item is more valuable and more desirable. Veblen effect may influence people to believe that high price may be an easier indicator of the product being differentiated. Differentiated products get tailwinds of the Veblen effect.

?According to Ehrenberg-Bass Institute of Marketing Science’s Report, Customers take around 13 seconds to make a purchase decision. People have many other things in their minds in their day-to-day life. Family, work, grocery shopping, savings, retirement, health, are some of the many topics that engulf an average brain. Marketers and product vendors need to be aware of this marketing guardrail that they have 13 seconds to catch attention. Hence relying on slow training (through commercials) or detailed text-based messages (in print and online media) will not cut it. Consumers need to have a pre-existing connection with the brand for those to work. Customers have a small repository of companies, brands, services in their minds.?

Humans are creatures?of habits. A differentiated product has to create that long-term emotional connection and make it easy enough to recollect. A simple app, an easy-to-remember customer service telephone, versatile integration with various voice-activated assistants (like Siri, Alexa, etc.), eye-catchy brand icons, etc. make it easy. Also, such an emotional connection happens over a period of time, long before customers are in the market to buy. Through constant word of mouth by using social media and by creating social credits, an organization needs to build recognition.

Emotionally connected to a product is not the same where people develop sentimental value to, say, an old car, a wall clock, or ancestral house. These products are part of the family that serves a connection with their past. Differentiated products appeal to the emotions of the buyer who wants to own it now and who wants to enjoy it now. The appeal of differentiated products could also be lost if companies do not innovate and do not continue to connect at the emotional level. Kodak films and Kodak cameras were differentiated and were emotionally connected with their customers. “Kodak Moments” reverberated in family circles enticing families to buy Kodak films and cameras, and wanted to capture their moments for posteriority. But did Kodak misunderstood the emotional connection of their customer to their products or the need that Kodak was serving? Customers drove away from Kodak when their zeal to share their pictures and revisit them easily when they needed was not served. If “sharing” was the “effect” and “taking” pictures was the “cause”, Kodak excelled in the “cause” that influenced the “effects”. But forgot that the same effect could be accomplished through a different cause. In other words, Digital Cameras and social media sharing platforms (Facebook, Instagram), etc. were the new “cause” to bring the same effect.?

Going one step further, let us argue that the effect has become the cause now. “Sharing of the pictures” is the new “cause” but the end “effect” is to show how handsome/happy/pretty/cool one is by not just sharing pictures but by enhancing how they look. Smart/professional photography, high-quality cameras, software applications that enhance the look of the picture, and filters that create weird, funny, pretty, and great pictures are some of the effects. People use Instagram filters to show their tongue hanging, grow horns and even lips stretched. Tiktok helps customers enhance their videos with “flashing stars” in the video and also provides pre-recorded and cool-sounding audio that could be combined with a customer video to enhance the effect. This serves the core human desire of highlighting the self, showing self in bright light to eventually feel superior.?

Differentiated products make you look better, feel better, and think that you are better than others. When you purchase a Rolls Royce you are not buying a vehicle that takes you from point A to point B.?You feel unique and you feel better than others. Rolex watches are first a lifestyle statement and then a watch.?

My research into differentiated products vs commoditized products started 10 years ago when we started enquiring why some products are better than others, though both seem to have the same set of functions. Commoditized products are developed by some great companies indeed and the products stand for good quality. But when a product does not have differentiated feature(s), consumers do not make a distinction between the one and its competition. The result could be a price war. And consumers’ loyalty to the product would consequently be guided by price. And a price war never ends well for enterprises.

Framework

What makes a product a commodity? And what makes it a differentiated one? Below is the result of my research into the factors that make a product a differentiated product as opposed to a commodity. We have organized the factors into two different buckets, Hygiene factors and Defining factors.?Every product that wants to gain customers’ attention needs to satisfy the Hygiene factors. But the presence of hygiene factors does not automatically push it into a differentiated category. As a matter of fact, many commodity products may satisfy some or all of the hygiene factors. What separates a differentiated product from a commodity is when they (the former) additionally satisfy the defining factors too. But if the defining factors are really defining, can products skip hygiene factors and focus on just the defining factors? In my research, we did not find evidence to support the possibility. There is no shortcut to get to defining factors by skipping hygiene factors. A differentiated product has to start its journey with hygiene factors and enter the territory of defining factors. A differentiated product complies with both the lists with ease and aplomb.??

What are hygiene factors? Six factors are on the list - Price, Quality, Scarcity, Functionality, Marketing, and Loyalty.?The seven defining factors are Trust, Remarkability, Simplicity, Word of mouth, Grab the opportunity, Social credits, Authenticity.

Let us first discuss Hygiene factors.?

Hygiene factors are the essential first step in the journey for a product to be differentiated. Hygiene factors are widely discussed in management literature. Due to the extensive availability of the literature, we do not want to dwell too long on these topics. Nevertheless, we would touch upon these topics due to the essential nature of Hygiene factors in the journey to be differentiated.?

HYGIENE FACTORS

Price?

Differentiated products are typically expensive. Due to special features or the unique nature of development or manufacture, differentiated products tend to be expensive. But not every differentiated product is expensive. Use of Facebook and YouTube is free. Rolls Royce cars are very expensive. Stock trading on the Fidelity Investment platform is free (so is the case with the competition). Nike shoes are competitively priced (to Adidas, Puma, etc.). Coke is not more expensive than its competition. What is the distinguishing factor? Despite being expensive, differentiated products do not wage price wars. Though some discounts and smart and timely marketing may indeed reduce price, differentiated products generally do not get into a price war.??

?Quality

The undeniable expectation of a product is its quality. An important principle of product design is to have an extreme focus on quality. The definition of quality has been contentious for many decades. The most versatile and easy definition “fit for purpose” also does not serve the purpose. In the past, we observed that customers would put up with less than stellar quality if the product was otherwise desirable. A case in point is Microsoft Windows 2000. We remember Windows2000 was released with 63,000 known defects. Despite its bad quality, it gained a market share of more than 90%. The spokesperson of Microsoft even defended the number of bugs by saying “...software is known to have bugs..”. But of late, customers demand better quality. A product cannot get a special mention and cannot take off in sales if the product quality is questionable, irrespective of how innovative the product is or how creatively the product solves the problem. FitBit Force, Tata Nano car, Ford Edsel, DeLorean DMC-12, HoverBoards, Facebook phone Home, are some examples of products that were designed for a special purpose or were serving a new market. They could have turned out to be great ones but did not?because of bad quality. They did not serve the customers with ease, did not have high quality, and fared badly in comparison to the competition.????

Scarcity

A shortage in the supply of products adds to its glamour.?Products become more desirable if only a few of them exist or exist for a limited time. Limited edition cars, diamonds, gold, mint-condition old toys, limited-time sales, etc. are some examples. Fear of missing out (FOMO) is a concept that has been studied well. FOMO triggers people to buy more. They (i.e. products) are scarce and customers need to rush to get them. The initial release of FaceBook was limited to school and college students. The initial version of Tesla’s Model S had a waiting period. Invitation Only sale of houses and apartments create an artificial shortage and jack up the prices. Alibaba’s Singles Day sales and prime Day sale by Amazon also makes customer spend more money.

Scarcity does not mean less in number or not available for everyone. Differentiated products are available for everyone. But because of the sheer cost and sometimes the way it is marketed some people and markets may feel that they are automatically excluded. Think iPhones, Ferrari cars, Birkin bags in Hermes store, Burberry, and Este Lauder. But in reality, a differentiated product that is scarce means that the product is not available in every possible store does not go on sale during every possible market event, and is not advertised in any intrusive manner. Let’s discuss it one by one. You would not find an iPhone in every store and fewer pre-owned Mercedes cars are available in every used car lot. Rayban eyeglasses are sold only in parent branded stores and few known branded stores. Louis Vuitton, Trader Joes, Hermes, Chanel never go on sale.?Brands like Ikea and Restoration Hardware never have nosy salespersons. Sometimes it is rather difficult to find a salesperson even if you look for one. Here is a counter-intuitive argument. Rude salespeople actually help sales in luxury brands.

Sometimes scarcity means literally fewer supplies of the product. When Starbucks introduced “Unicorn Frappuccino”, customers loved it but Starbucks could not keep up with the supply. Pappy van Winkle bourbon is very popular and expensive but releases only 7000-8000 cases per year. Almost all the versions of the iPhone released till now had scarcity built into its sale. Customers have to pre-order and they will get the phone after a delay. Another method of scarcity often seen is a limited-time-only sale. Groupon coupons sale always has an expiry date and time.

Functionality

Product functionality should serve the perceived purpose of the product. More functionality is not necessarily better. But at the same time there are some functionalities of the brand that, though, the buyer is not actually “using” but may enjoy having them. Let’s discuss a rare functionality that is commonly not expected by a car-buyer but when provided to the customer, adds to the charm. Let's discuss how the car sounds when you close its door. Some manufacturers spend a lot of research energy in focusing on the smooth elegant sound of the door-closing that gives an impression of a luxury car to the future owner. These appealing sounds create a favorable impression during the car buying process. BMW has a sound (engineering) department that focuses on the sounds of the car, including the turn-indicators, door opening, door slamming, engine revving, engine reversing, braking, etc. Hardcore fans of Harley Davidson like the engine sound of the bike. The company filed for a sound patent to retain the exclusive appeal of the sound of Harley (but later dropped the patent application).

Marketing

Marketing is a centuries-old profession and activity (Check here, here, and here). From wall paintings about store wares in ancient Rome and Egypt to modern location-based mobile-app ads, marketing is a primary way to sell. Highlighting a product for a customer to help enhance the sales numbers has been the primary objective of marketing. Many ideas of marketing?have become staple diets in human life. Ads in newspapers, TVs, movies, radio, inserting flyers in newspapers, billboards, offering discounts, coupons, promotions, freemiums, etc. are popular. Marketing mascots have become another staple in marketing. Jeff Bezos famously said, “you need marketing if you have a lousy product”. Amazon did not believe in marketing when they started. But they adapted to the concept when AWS was growing. “The iPod Silhouettes” commercial made the already successful iPod, a super successful product.?

Remember the Old Spice campaign of “The man your man could smell like ' . This ad was amusing. Though this ad was created with Men as the target audience, later it was replayed for women, as women made the purchasing decision for men’s hygiene products. The advertising memories worked in other products too. The famous Onida brand TV ad in India in the 1980s featured a devil in a human dress (and human looks). Though many thought it to be a negative ad, it created a huge stickiness in the minds of the consumers about the product.?

Loyalty

Loyalty is a kind of brand stickiness of customers where they stick to the brand or product for a long time and may do so over generations. Sometimes inertia from trying new products may help with loyalty. Nevertheless, loyalty is predominantly a conscious decision of customers to continue to buy the brand they have been buying for years. There are times and reasons when customer loyalty changes. Loyalty reduces when the product is a commodity. A competitor with almost the same features and a better price will get the business. Also, a price race is detrimental to the corporation. Though sellers are attempting to improve the loyalty to their products using social media, marketing, incentives, etc., the outcome is still not impactful.

Note: This is part 1 of a two-part paper. Click here for part 2.