Myth: a commodity price can’t be increased

Dear Friends,

here a myth: the price of a commodity can’t be increased. No! False! There is always a way to differentiate and increase prices. Like in the case of Shell, BP, Esso, Total and the likes. We will deep dive this below.

Always great to find pictures of readers with pricing books on social media as in this case. Thanks a lot for the great book endorsement of Krzysztof Mazurkiewicz who stated here: ‘back to reading The 10 Rules of Effective Pricing by especially to Rule 4: Differentiate Price. This is one of my favorite chapters, which I return to regularly. Price differentiation plays an essential role in building mass’.

Please continue sharing such great photos and feedbacks.

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Myth: the price of a commodity can’t be increased

The term commodity refers to a raw material or a primary agricultural product that can be bought and sold. In business parlance, the term is synonymous with products or services that are interchangeable with other goods of the same types, and whose only defining feature is the price.

So, if in a company the sales team resist requests from their senior managers to increase the price of their products for fear of losing volumes of sales (on the grounds that “the market determines price”) then they see what they are selling as a commodity.?

But is this objection legitimate, or is it just an excuse to keep prices at the current level?

An example taken from the automotive sector can help understand what happens when a company regards their product as a commodity.

The reason why Chrysler went bankrupt is precisely this: their top management was convinced that the only way to convince customers to buy their cars was the price difference. Hence a low price, be it in the form of a discount or cashback resulted from a flawed but engrained argument: cars are all the same; customers buy a car if it is economical; customers will be incentivised to buy our cars if there are financial advantages – discounts or cashback.

Unable to produce sufficiently distinctive cars, Chrysler could only rely on low prices to attract customers, effectively reducing their cars to nothing more than commodities. Sales became locked and subordinate to price, making the adage “the market determines price” a self-fulfilling prophecy.

Yet, it is possible to make any product – any commodity, even – distinctive in some respects.? This should the core function and the objective of marketing teams in a company.

But if YOU yourself believe that what you are selling is a commodity, why should your customers think any different?? It is not a mere question of self-perception, right or wrong as it may be. It is the root cause of price wars, loss of innovativeness, of dynamism, of creativity and ultimately of profitability.

When we were students we learnt that it is always hard to sell something that is already available for free. But if this is true, how can we explain why we pay for water?

Three quarters of the earth surface is covered by water, and yet the world market for bottled water is worth 283 billion euros.

Water from the kitchen tap costs 1 cent per liter. If I buy it bottled, I pay 25 times as much. If the bottle is branded – say Perrier, for example – I will pay €4. If I order it in a Michelin-starred restaurant, and it happens to be branded Ferrarelle Gucci, I could be charged as much as €30. I wonder if this is the reason why Evian reads like na?ve backwards.

Is it possible that the myths, the narratives constructed around a product, have the power to manipulate customers’ perceptions and have such a portentous effect on price?

Innovation is the main key to get out of the blind alley that is commodification. But there are other aspects that merit attention.

A possible option would be to concentrate on the ancillary elements of the deal – for instance attractive payment plans, practical aspects linked to the sale (terms of delivery, prompt availability), after-sale support, warranties, official certifications.

Market leaders with higher-than-average profits do not rate any of their products as commodities. They believe that any product can be differentiated.

Fuel is another example. While clearly a commodity – fuel is fuel, it is initially undifferentiated and sold as such to various retailers – it is differentiated in exemplary ways.

Lab tests have confirmed that, in terms of quality, fuel is the same wherever you buy it – be it branded or unbranded stations – because it often comes from the same distributors.? Then 壳牌 introduced V-Power, Esso Synergy, bp Ultimate and TotalEnergies Excellium. The names allude to additional desirable qualities that are unlikely to be real and are questionable, particularly considering that we should be aiming towards cleaner forms of energy.

Let’s examine the case of Shell’s V-Power, a high-octane fuel that promised motorists the performance levels of Formula 1 cars. As Shell was the sponsor of Ferrari, the promise gained some traction with motorists. Notwithstanding the higher-than-average price at the pump, the marketing campaigns magnifying the impact on car performance, paralleled by a reduction in fuel consumption, succeeded in promoting V-Power, whose sales grew steadily.

In 2023, 22 years after it was launched on the market, V-Power and the other high-octane fuels represent 25% of the sales of petrol. V-Power helped Shell increase its market share at the expense of competitors: with a price at the pump up to 20 cents higher per litre than conventional petrol, and with minimal incremental costs, V-Power is extremely profitable.

The question to ask if one wanted to appraise the advantages of buying V-Power as opposed to normal fuel should have been: does it really improve performance and reduce fuel consumption? The verdict came as the result of several tests conducted on a range of car models – including Porsche, BMW, Audi and VW: using the more expensive petrol brought no significant advantage. Car manufacturers themselves state that their engines are optimised for the traditional fuel, and that no additive is needed to improve their health or performance. Surprisingly, a study from the university of Nuremberg demonstrated that premium fuel can result in underperformance, meaning that normal fuel is not only cheaper but also better for our cars.

The lesson from the case of Shell and V-Power is that no matter how irrelevant a differentiation is, it creates value for customers and increases their willingness to pay more money.

Customers are irrational, and differentiation is grounded in perceptions.

If a customer perceives a product as differentiated, then the product becomes differentiated. It is the customer’s point of view that makes the differentiation real and relevant, even if technically this is minimal.

The case above demonstrates that a. differentiation is always possible, even in cases where products are pure commodities, and b. differentiation makes profits grow. Company managers must stop being afraid of undifferentiated commodities, and must learn the words to ‘narrate’ their products. After all, as Ludwig Wittgenstein said, it is language that creates the world.

What is your view on this myth? Any other cases to quote?

Interested in learning more about pricing myths? You will find pricing insights in the book The 10 Rules of Highly Effective Pricing.

Kevin Mitchell, President, Professional Pricing Society, stated about the book: 'Zatta’s book will give you and your team a great foundation for the strategies and tactics needed to increase your pricing acumen and your company’s performance.?Make sure to take advantage of his insights to learn what to do, and perhaps even more importantly, what not to do when planning your strategies and tactics'.

Get your copy of ‘The 10 Rules of Highly Effective Pricing’ here.

Get your copy of ‘The Pricing Model Revolution’ here.

You are most welcome to share your views, feedbacks and own pricing experiences. Thanks a lot for your interest and support!

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