Break Out of the Commodity Trap

By Neil Baron, Dave Burrows, Bill Cohn November 21, 2014

Pragmatic Marketer Volume 11 Issue 3

Acme Corporation* was a highly successful technology company in the financial services sector that specialized in processing credit card transactions for organizations doing business online or by phone. With more than 250 employees, Acme grew by 30 percent each year, the result of innovative technology and a focus on providing exemplary customer service. Despite continued success, the leadership team had significant concerns about the company’s future.

Facing increased competition and a rapidly changing technology environment, Acme felt margin pressure in its core markets. Increasingly, price determined deals. The dreaded “C” word—commodity—was used to describe Acme’s core offerings.

To its credit, Acme management recognized the need to change while things were still going well. To maintain growth and margins, management decided to differentiate Acme by offering a portfolio of value-added services (VAS). The VAS offerings enabled Acme to engage with customers at a more strategic level and deliver unique business value.

Acme successfully pivoted, despite external and internal challenges. The end result was a lucrative acquisition by a multi-billion dollar company. Acme’s journey—from struggling with commoditization to providing a robust suite of value-added offerings—contains several lessons for companies eager to differentiate themselves. The antidote to commoditization is to increase the value delivered to customers, and prove that value through exhaustive reporting and performance measurement.

But if a business isn’t in crisis, people will resist change:

  • Salespeople may push back on changing how they relate to their customers, particularly when they’re still successful selling the old way. They must now sell solutions, which requires new tools and a deeper level of engagement.

  • Marketing needs to shift its focus to communicate value instead of features, and must start by understanding customer needs at both holistic and granular levels.

  • Engineering must identify process inefficiencies and opportunities to deliver untapped value, instead of focusing on technology advancements.

  • Other functional groups will resist changes to their well-hewn processes.

Most companies lack the experience and expertise to lead this effort, and there’s no roadmap. However, the following six-step approach helped Acme in its quest to focus on selling value.


1. Establish a Team to Focus on Customer Value

Acme took the critical step of investing in a customer success organization and creating the role of customer success manager. The customer success manager role included:

  • Pre-sales: to support sales’ efforts to discover and present opportunities to sell value

  • Post-sales: to ensure that customers realize the value they expected when they purchased VAS

To convey and reinforce the value it delivered, Acme scheduled semi-annual business reviews with each customer. In these in-depth sessions, Acme presented a thorough, quantitative impact analysis—using the customer’s own data—of the VAS the customer had adopted, and a prospective look at other services that may not have been considered. These analyses also yielded success stories for marketing, and provided feedback to the product team about potential enhancements and new VAS. They created a virtuous cycle. The business reviews helped Acme uncover new ways to add value by:

  • Increasing customer revenue
  • Decreasing customer costs (e.g. by finding and correcting inefficiencies)
  • Mitigating customer risks

2. Uncover Your Hidden Value

Most organizations already provide differentiated value to their customers. However, because they are so focused on promoting their technology, they can’t recognize the value they actually deliver.

For example, Neil worked with a successful chemical company that developed a new way of removing toxic materials used in certain manufacturing equipment. The chemical company focused on promoting the technology and specifics of the cleaning agent’s molecular structure. After all, why wouldn’t everyone want to use xenon difluoride in their equipment? 

Unfortunately, by focusing on how the toxic materials were removed, the new technology’s true value was hidden from the chemical company and its customers. A fresh pair of eyes helped the company realize that the real value was in reducing toxic waste, limiting employee health risk and improving equipment performance, not in the use of xenon difluoride. Once the company uncovered and articulated this hidden value, product sales took off.


3. Refine Your Value Propositions

Most companies have a false sense of security about how effectively their value propositions resonate with customers. In a fascinating research study, Bain & Company surveyed hundreds of seasoned executives. A resounding 80 percent answered “yes” when asked “Do you deliver a superior value proposition to your customers?” When they asked customers for their opinion, only 8 percent agreed.

This survey is a few years old, but things haven’t changed. A company’s value proposition often isn’t what executives think it is.

Companies must objectively challenge assumptions about their value proposition and place customer interests first. Using a value proposition refinement process can help achieve organizational consensus and create a more powerful value proposition. In Acme’s case, they used Baron Strategic Partners’ value proposition refinement process. The process began with internal and external assessments of the company’s value proposition and included several cross- functional working sessions to refine that value proposition.


4. Validate Your Value Proposition

It’s vital to test the refined value proposition with your target market. Companies frequently assume they know what their customers value. And yet we are amazed at what we learn from in-depth customer interviews.

For example, the CEO of a contract manufacturer was convinced that its value proposition was simply “we make things at lower cost” and that his company won because of its low prices. When Neil spoke with a couple of customers to validate the CEO’s assumption, he discovered that customers loved the contract manufacturer for another reason: its expertise enabled customers to enter new geographic markets faster and bring new products to market quicker. Low prices weren’t even a consideration! By misunderstanding why customers bought its services, this company focused on providing the lowest prices, and left a lot of money on the table with suboptimal pricing.


5. Align Your Organization to Deliver the Value Proposition

Many organizations work in silos. And while each department does what it believes is most important for the company, departments rarely agree on what that is. Deliverables are thrown over the wall from development to marketing to sales. According to innovation guru Clay Christensen, this “over the wall” process fails more than 90 percent of the time. Revenues disappoint and the vice president of sales gets blamed.

Placing customer needs first addresses the failings of this approach. Each functional group must be involved in developing the value proposition. Once groups achieve consensus, it’s critical that each one understand its role in delivering the value proposition.

After we emerged from this process at Acme, the head of engineering stated: “From now on I’ll prioritize our development projects based on the value they each deliver to our target customers. The projects that deliver more value will get a higher priority.”


6. Sell Value Not Price

The primary reason salespeople fail is their inability to articulate a strong value proposition, according to several recent studies. That makes it critical to establish a value proposition that the sales team understands.

Too often marketing creates sales tools and training based on what it thinks the sales team needs. The net result is that 75 percent of all sales tools go unused and most training gets poor grades, according to Forrester Research.

Acme recognized that selling value required a new approach. It began by documenting steps in the customer buying process. It then mapped the sales steps required to move customers through the buying process. With a strong value proposition and the buying process map as its foundation, the company created a sales enablement playbook. The sales reps loved it. According to Acme’s vice president of enterprise sales, the playbook cut in half the time it took for sales reps to become comfortable selling VAS. 

After providing sales with the tools to be successful, Acme turned to motivation. Because salespeople are competitive by nature, Acme celebrated the initial successes at selling VAS, and subsequent successes for each deal closed at a higher price point. When salespeople who may have been dubious about selling VAS saw the success of their peers, they changed their own approach to book more business and get higher commissions. Over time, the entire team recognized that selling VAS made their jobs easier.

When Acme began its journey from emphasizing commodity technology to selling value, it was uncertain how things would turn out. However, with the support from top management and the right outside expertise, Acme followed these six steps and continually sought out value-selling best practices. Results exceeded expectations. VAS now account for more than 25 percent of the company’s revenues. And because of VAS, Acme had many suitors, eventually selling for 2.5 times more than comparable companies received.

Key Takeaways

Engaging customers at a more strategic level is never easy, but keeping these lessons in mind will help.  

Change is harder than you think. Expect pushback from parts of the organization that are afraid of change.

There is no roadmap for doing this. Although we outline steps that are key to this successful migration, there’s no cookie cutter recipe to follow. Tailor your approach for your specific situation. Consider your organization’s readiness to change, the market pressures you face and internal politics.

Question assumptions about your value proposition. You can kill your value-selling effort if you assume you already know what your customers value. As the Bain & Company study highlighted, many executives incorrectly believe their companies provide superior value to customers.

Leverage outside expertise. If you need help, find an outside firm with the track record, framework and expertise to help guide you through this effort.

Establish the right metrics. Companies may view their value-selling effort as the company savior and set unrealistic expectations. Change takes time. While we applaud setting stretch goals, companies that set unreachable targets risk demoralizing their teams.

You are never done. This effort must be viewed as a continuous process. Market and customer needs change over time. New competitive threats appear. Companies make a big mistake when they complete the process and don’t revisit it once or twice a year.

Categories: Market Analysis Strategy Working with Sales
Neil Baron

Neil Baron

Neil Baron is managing director at Baron Strategic Partners

Dave Burrows

Dave Burrows

Dave Burrows is co-founder and chief product officer for Pazien, a startup whose products demystify and simplify payments for merchants. Prior to Pazien, Dave was a co-founder of Litle & Co. and served as VP, Product Management. He was a member of the team that successfully sold the business for $361M to Vantiv, Inc. Prior to his product management career, Dave was a first lieutenant in the U.S. Air Force where he served as the information systems and technology program manager. Dave received
an M.B.A. from Western New England College and a Bachelor of Mechanical Engineering degree from the Georgia Institute of Technology. Contact Dave at dave@pazien.com.

Bill Cohn

Bill Cohn

Bill Cohn is director of product management for Vantiv Inc.’s (VNTV) e-commerce business unit (formerly Litle & Co.). Bill has more than 20 years of product management and marketing experience working for telecommunications, software and business information product and service companies including Copyright Clearance Center, Genuity, Digital Broadband Communications, FTP Software and Boston Technology. Bill received an M.B.A. in Marketing from Columbia University and graduated from Amherst College with a B.A. in American Studies. Contact Bill at cohnbill@gmail.com.

Looking for the latest in product and data science? Get our articles, webinars and podcasts.