Question: How can I differentiate a commodity product?
What do product managers do for commodity products like toothpaste, pens, pencils, staplers, coffee mugs etc. where customer needs have not changed for ages. How do you differentiate in an overcrowded market?
Answer from Alain Breillatt of Picture Imperfect: Ah, the age old question — how do you survive in a market with slim to zero margins because consumers see no difference between your brand and that provided by competitors A, B, through Y and Z?
The simplistic answer is to use the cheapest raw materials possible, offshore your manufacturing, go for scale in distribution, build tight relationships with your channels, and roll up your competition until you own the market. That used to deliver some success but in the world of Wal-Mart, Costco, private labels, and gads, a bazillion on-line stores, even that is not enough.
Why? Because year after year, for any product that is the same as what you sold them last year, Wal-Mart will say, “Here’s the price you gave me last year. Here’s what I can get a competitor’s product for. Here’s what I can get a private-label version for. I want to see a better value that I can bring to my shopper this year. Or else I’m going to use that shelf space differently.”
So what do you do? Innovate! And by that I don’t mean go brainstorm what the next new pencil or pen or stapler ought to look like. What I mean is you need to reconsider the market you compete in and more closely examine the consumers you are serving.
Let’s walk through one of the examples you outlined and consider how one might differentiate within that market.
We’re talking about a writing implement that has been around for over 400 years, the basic form and construction of which hasn’t changed since originally designed back in the 1700s. This should be the ultimate manufactured commodity product! When we think of a pencil inevitably most of us think of the good old standard wooden yellow no. 2 lead pencil with a red (or maybe green) eraser held on top by a compressed aluminum or brass ferrule.
What’s the benefit of the standard pencil? Some people use pencils because they’re cheap and easy to replace if lost. A former boss of mine, a professor, would use pretty much nothing but a no. 2 pencil and by observation I would say that’s because he’s an old creature of habit who wants an erasable writing implement but who also loses them or leaves them behind everywhere he goes. Parents and teachers give children pencils because the impermanence of their marks makes them good for correcting mistakes as well as cleaning up stray scribbles on desks, clothes, and walls. Artists and architects prefer pencils for their ability to sharpen the point in the manner they like and the various textures this facilitates creating on paper. Obviously the lasting power of the wooden pencil is its ability to satisfy these needs and many others.
To put some numbers to that point, consider that in this era of modern technology where the pen followed by the typewriter followed by the word processor supposedly replaced the pencil, approximately 2.4 billion pencils of all types are still sold annually in the United States. The average cheapo private label yellow no. 2 pencil based on a quick check at the neighborhood Staples sells for 99 cents a dozen. In other words, the cheapest wooden pencil available sells for less than a dime a piece. And a pencil is a pencil, right? So how do you ensure consumers buy your brand at a premium price?
The intuitive product manager might think, let’s consider what’s wrong with the no. 2 pencil:
- You have to keep sharpening it
- You must have ready access to a sharpener
- The pencil shortens with every turn of the sharpener
- It’s a waste of natural resources because you never use the entire pencil (see #3)
- The wood shavings are messy
- The shape and diameter make it hard for young and aged hands to grasp leading to writer’s fatigue
- You keep paying for the container (the wood) when all you really need is the lead
- It doesn’t offer multiple lead diameters from very fine (.03 mm) to very fat (5.6 mm)
- You have to carry multiple pencils for various weights of lead
- The lead point is constantly exposed so the lead marks up whatever it rubs on or else it breaks easily
Given all of these problems the product manager might automatically determine that clearly there is a market for a mechanical pencil and they should start manufacturing those. Perhaps, but doing so requires completely new capabilities from the design to the manufacturing stage and if all you make is wood pencils, a shift like that represents significant capital investments to either build or acquire such specialization. And yet given the continued demand for wooden pencils, there are interesting ways to differentiate within the confines of the original product definition alone — consider special hardwoods, eco-friendly renewable forests, recycled woods, and specialty leads.
It’s important to frame this thought in the triangle of consumer values – sometimes called the Value Mix. Consumers evaluate the benefits they gain from a product across three variables as described below.
This is an important framework to consider since with a commodity product, the functional requirements (wood, graphite, eraser, shape, size) are fairly universally met across available competitive offerings and therefore manufacturers are forced to compete on either economic (a race to the bottom for lowest price) or psychological (appealing to a consumer’s particular desires for esteem or recognition). Ignoring price, this leaves us with a psychological approach that might be supported by functional attributes.
Let’s think about the three groups of consumers discussed above and consider how a pencil manufacturer might effectively target each one of them in a manner that would drive a price premium and brand differentiator.
Educators who work in K-12 are a perfect segment for targeting given that pencils and school seem to go together like peanut butter and jam. Consider that in primary education (Grades K-4) and secondary education (Grades 5-12) respectively, women comprise 89% and 63% of the teachers respectively. If women are a primary target, then perhaps aligning your pencil with a cause that they are passionate about makes sense.
For example, selling a pencil that is pink or covered with painted pink ribbons and marketed with a campaign that states a percentage of the revenues for these pencils are contributed to supporting breast cancer research, might be appealing to this group. Dixon Ticonderoga sells just such a pencil and they retail at $4.29 a dozen. That’s a 430% increase just by painting a pencil a different color and aligning your product with a cause.
Young children are going through the process of learning to write and doing so requires significant development of the fine motor skills in their hands. Teachers and parents look for ways to help the child improve those skills and one approach is to increase the diameter of the pencil, thereby making it easier to grasp during the earlier stages of the learning experience.
One way to accomplish this is with one of those rubber triangular sleeves that covers ¼ of the pencil. But an approach that plays to the pencil manufacturer’s existing capabilities is to simply increase the diameter of the wood encasing the pencil and the stick of graphite inside accordingly. Take it one step further and market the pencils as “My First Pencil” and suddenly you have a product that retails for $5.29 a dozen. Now considering that this pencil is 13/32” in diameter versus the typical ¼” diameter pencil, there is an increase in material costs but only by a factor of 2 while your retail price has jumped by a factor of 5.3! That means you’re still making ~300% more in profits on a simple wooden pencil.
When you think of this consumer group you realize that functionality is critical to them since the pencil is a key tool of trade and therefore an important part of their work product. But you also realize that their work is all about aesthetics so image has a strong impact as well in what they choose.
Two possible approaches here that both play on the same psychological dimension should be considered. Take a typical pencil, die the wood black, paint it a glossy black, add raised dots create a grip, get rid of the eraser, and suddenly you have a sleek black arrow that looks elegant on the desk or in the hands of the user. It reflects their style and sense of design. And it also sells for $24 a dozen as the Faber Castell “Black”. Even if the materials (graphite, wood, dye, paint) are 400% more expensive, you’ve realized a 2000% increase in profits where the pencil goes from less than a dime a piece to $2.00 a piece.
And if you think that is something, try creating “The Perfect Pencil” which is the combination of fine cedar pencil with SV-bonded anti-break lead in B grade and sporting a soft non-smudging eraser with an aluminum extender (for when the pencil shortens) with built-in sharpener with a high-quality sharpening blade and a sprung pocket clip. The price on this bad boy? Between $75 and $250 for the pencil (depending on where you buy it) gift set which includes the extender and three pencils. And then you can purchase pencil refills at 5 for $50. That’s $10 a pencil. Making it a 10,000% increase just connected to the prestige of a niche focused product. Now granted you won’t find many who are willing to pony up that kind of cash for the Porsche of pencils, but that’s what segmentation is all about.
Hopefully that helps you consider that there are always a variety of options available to the product manager even if they’re dealing with a commodity product. Dixon Ticonderoga and Faber Castell — as the two largest pencil manufacturers — have taken a targeted segmentation approach to their market that allows them to spread widely across their market and then benefit from deep opportunities where they are found.