Differentiating Commodities

Pricing power comes from differential value. If you offer more value, you can charge more. Value is perceived by the customer, however, so while you can suggest the value of your offering, the customer ultimately decides.

Often, attributes that some customers value highly are irrelevant to other customers. For example, automakers sell more four-wheel-drive sedans in places where snow is a regular occurrence compared to Florida and Arizona.

Small businesses can often differentiate themselves from much larger competitors by serving a market or geographic niche much better than the larger firm. Product companies can differentiate themselves based on their service. Some companies might offer faster delivery time, while another offers more comprehensive engineering services, while another bundles in maintenance. Notice that the differentiators are not necessarily mutually exclusive, but companies that value certain differentiators will choose the vendor that offers the best fit.

In a crowded, competitive market place where every vendor says they are “better” and every customer says they care about low price, providing “difference cues” helps to remind people of how you are different. Apple, known both for great design and hefty price premiums, provided a great difference cue when they launched their iPod. MP3 players were relatively new to the market. They were like the Walkmen of yore and the portable CD players that had recently become popular– useful to listen to your music on the go, but clunky. On subways, in gyms and buses and offices, people wore black or grey headphones to listen to their music. So Apple made their headphones white with white wires. It was different from everything else on the market. (Someone will probably name a counterexample, but I can’t think of one off the top of my head.) It also advertised the product. The player itself might be hidden in a bag or a pocket, but the headphones were visible. It’s a subtle point, but back when rational people (I like to include myself) thought that a $400 music player was a really dumb idea, the difference cue enhanced the iPod’s value as a status symbol. Not only did you have a really cool music player, but everyone knew it.

Coincidentally, Sony had done something similar a decade earlier when they introduced their “Sports” line of Walkmen, which were built to withstand sweat, rain, and even water. Sony made the players and the headsets bright yellow to accenturate the difference from the regular “non-ruggedized” portable cassette players on the market, which helped justify the $50-100 prices.

So what did Bose do when they wanted to introduce earbud headphones? Bose had traditionally sold large, over-the-ear headphones, which gave them the ability to print “Bose” prominently. With the smaller earbuds, they needed a different approach. They didn’t want to just have a black buds– that would be so pre-iPod. They didn’t want to just use white, because that wouldn’t differentiate them from the (lousy-sounding) headphones that come with the iPod. So they created a twisted white and black pattern on the wires. I don’t know if I like the asthetics, but you can immediately tell that they are different.

There are ways to differentiate just about everything. Here’s a 1 slide animated PowerPoint with a great example of differentiating a “commodity.” (Click on the image to open or save the file.)

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