The level of product commoditization is second only to barriers to entry as a strategic determinant of profit in distribution, according to Al Bates of Profit Planning Group in the article Pillars of Financial Success. Interestingly, companies in the same industry often have different views about the extent to which they sell commodities. Bates writes: “Part of this is reality, but a large part is perception.”
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Distributors offer a wide variety of products, and have many opportunities to avoid direct competition. Even if the most basic SKUs are commodities, Bates says, there are extended product offerings to wrap around them.
Why does it matter? How you view your product – commodity or not – determines the company’s mindset on the role of pricing. With true commodities, Bates says, most feel there is nothing that can be done with pricing to improve gross margin. They are subject only to the market. The problem is that your competitor may not view it that way.
Bates writes that companies have control over what they offer the customer, and part of that control comes from creating the right assortment and deciding what to emphasize in sales. It’s also important to distinguish between true commodities and those products that are not. Limit pure commodities to no more than 10 percent of dollar sales.
Read more about de-commoditization and four other factors key to profitability in the MDM article Pillars of Financial Success.