Escaping the commodity trap in business markets

Business-to-business markets are increasingly operating as commodity markets. That is, customers perceive few differences among suppliers' offerings and hence make purchase decisions solely on the basis of price. This puts severe pressure on suppliers to cut prices, which harms profits. According to James Anderson and Gregory Carpenter, a supplier's smartest response is to differentiate its offerings in a way that customers will value. Possible strategies are to build knowledge or expertise that can be used to provide solutions for customers (perhaps via partnering arrangements), to persuade customers to focus less on the core product's price than on overall value, and to ensure that products and services are flexible. The authors also explain how suppliers can obtain an equitable return for providing such superior value. In many business markets, customers are perceiving fewer and fewer differences among competitors' offerings. The main reasons for this are the quality management movement in production and the greater availability of comparable alternatives from international sources. As a result, customers are making an increasing number of purchase decisions on the basis of price alone - the definition of a commodity market. They are pressuring suppliers to reduce their prices and provide additional price discounts. In industry after industry, suppliers are finding that although their sales revenues are growing, it is often at the expense of profitability. The present article will explain how suppliers can forestall or reverse this trend. Suppliers often conclude that they are in a commodity business simply because they think narrowly about the core product or service. The personal computer, hospital supplies or letter of credit that the customer purchases may be nearly or exactly the same across suppliers. But the market offerings that companies purchase are typically more than just the core product or service. They contain supplementary services, programmes and systems that enhance the value of the core product or service and that provide additional value to customers.