The Commoditization of Contracting -- Part II

Every few years, I get crazy enough to venture out into the "black Friday" shopping frenzy. This was one of those years. Things have changed. I expect bargains. But, this year, there was a lot of stuff offered "free after mail-in rebate." Excuse me but, free? Do they expect to make money at these prices? Maybe it's the old joke, "yeah, we're losing money on this but we'll make it up in volume!"

Jokes aside, giving stuff away is commoditization to the extreme. But, this is retailing, not contracting. We don't face anything like this. Or do we? Has anyone out there ever taken a job at cost just to get the service contract? Okay, maybe you wouldn't do that, but chances are, one of your competitors has. Or, how about this one. Have any of your regular customers started demanding "line item pricing" (so they can shop your prices on the internet)?

These are only a couple of examples of the commoditization of contracting. And, if you buy my arguments from Part I of this column (August 2004) , commoditization is a growing and unstoppable trend that will affect contractors, consultants, reps and manufacturers alike.

Because commoditization promises nothing but more competition, lower prices and lower profits, it seems like a death spiral. But, in Part 1 of this column, I suggested that there are ways to deal with commoditization. In fact, I count three strategies. Here they are.

1. Embracing Commoditization
Some companies have already embraced commoditization-because they helped create it. Internet discounters are one example. Manufacturers who import and resell low-cost products from China or Korea are another. And, I can think of two types of contractors who are already part of the commoditization trend. One is the bid-market-only contractor who minimizes all costs and sells at the lowest possible price in order to get bid-market jobs. Another is the residential security firm who sells systems at or below cost and makes their profit on monitoring.

Even if you weren't part of commoditization from the start, it's possible to embrace commoditization in almost any area of our business from manufacturing to contracting. You design your business to offer value that's equal to your competition but at a lower price. The concept is simple but requires disclipined execution.

2. Fighting Commoditization
Manufacturers often choose to fight commoditization--with limited success. In the 1970s, home stereo equipment manufacturers established minimum resale prices and enforced these on their dealer networks. Although it worked for a while, the practice, called "fair trade," was eventually abolished by legislation.

Today, the catalog-house businesses have become internet discounters and systems contractors have new competition from electrical contractors. Once again, manufacturers are fighting this commoditization by limiting distribution and by using a new tactic known as the "Minimum Advertised Price" or "MAP." However, if history is any guide, the manufacturers are once again fighting a losing battle. In fact, there are already questions about the legality of MAP and I haven't seen any lack of products available on the internet.

In summary, while manufacturers may be able to delay commoditization, they can't stop it. And, if manufacturers, with their greater resources, are losing this war, contractors should stay out. Don't fight commoditization. This is a battle you can't win.

3. Avoiding Commoditization
Okay, you can't fight commoditization and most of us won't embrace it. Can we avoid being commoditized? The answer is, "yes, we can." Think of it as fighting to build and maintain a high ground while the flood rages around you. It won't be easy but it can be done.

The solution is so simple it may seem trivial (it's not). You must add value to everything you sell-both products and services. If you don't add value, you slip off the high ground and back into the flood waters. If you don't add value, you're selling commodities-and someone else will sell them cheaper. Value, by the way, is anything that benefits your customer and that your customer is willing to pay for.

So, how do we add this value? We add value when we integrate systems to simplify their operation and add functionality. We add value when we create service contracts that give the customer a guaranteed price (risk reduction) and quality service.

But, the real secret of adding value is in designing each system to meet the precise needs of the individual customer. You might say this is using customization to avoid commoditization.