Brands, commodities and branded commodities

Brands, commodities and branded commodities

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If you’re a marketer, commodity status is a bad thing for your brands. It indicates that your product or service is undifferentiated, that it rises and falls with the market and that it carries no inherent value beyond that. That’s fine when things are going well, and supply cannot keep pace with demand – it’s not so good when the dynamics are reversed. I explain how and why perceived brand value degrades to commodity status here.

The reason why companies build brands of course is that they’re looking to rise above the market’s natural asking price. They want what they sell to have a value beyond what the market would otherwise set for the materials used. They want their value equation to be about more than just cost plus margin. The price of a smartphone for example bears little resemblance to, and is seemingly unaffected by, changes in the costs of the parts. Price sensitivities for brands are between competitors and are much more likely to be based on emotive drivers such as desirability, popularity and recency.

Pricing for consistency

Traders love commodities for the opposite reason. They want them to be as predictable and tangible as possible. When they are that consistent they can establish a set price for them. The price of gold is dependent on one gold bar being the same as another. Equally true for measures of sugar, beef, milk, cocoa … Such materials are particularly susceptible not just to market changes (such as shifting prices for the raw materials) but also wider market pressures. For example, the highly competitive nature of the supermarket sector has seen the cost of commodities like milk fall dramatically. In Britain, it’s fallen 30 percent since the start of last year thanks to huge pressure on suppliers from the big supermarket chains. Milk has become the loss leader: “Milk is a staple of everyone’s shopping basket; advertising cheap milk gets shoppers into your stores, where they’ll hopefully buy other things that aren’t so heavily discounted.”

So when marketers talk about brands having commoditised, it is that transition – from something that is desired above others to something that is traded and valued the same as everything else – that they are specifically referring to.

Branded commodities

The brands that I think are the most challenging are the branded commodities. These are the brands that aren’t really brands. They are branded but, unlike the brands described above, they can still find themselves held hostage to changes in national and global trading prices. Utilities are a classic example of this. On the one hand, they are distinct enough to be identified, but, from a pricing point of view, they struggle to break out of the supply/demand paradigm. Unless they can find ways to introduce a scarcity factor into what they charge, these brands will always find themselves pricing to factors beyond their direct control, rising the rollercoaster from quarter to quarter.

Branded commodities look like brands but their value is decided by trading prices

Hotels and airlines have achieved such a breakout by turning perfectly ordinary things like beds and seats into things that represent more than their function. Food and beverage companies have pursued a similar strategy – elevating the status of what’s on offer through intangibles such as craft and packaging.

The search for irrational value

If you’re an electricity company, though, or even a bank, how do you introduce irrational value into what you do? It’s so much harder. How do you charge more for a mortgage? And if you are a brand that’s commodity based, such as a milk company with a portfolio of milk and dairy products, how do you ride the good times when the tide is in, and rise above the pressure to conform when things turn down? Lewis Road Creamery has done it in New Zealand – and there are clear lessons in their success.

I don’t have an easy answer – but I do have a clear warning. If you have a branded commodity and things are riding high, chances are it’s not your brand that’s doing the heavy lifting. As the minerals industry discovered in Australia, it’s the market talking. Enjoy that whilst it lasts, but recognise that whenever you sell more of the same, it’s only valuable whilst there are perceptions that there is not enough of it.

Sustained prosperity for branded commodities does not lie in just building up your brand awareness, because that simply makes consumers more aware of something they see as the same as everything else. It may influence preference but it doesn’t fundamentally alter worth. The future, if you’re serious about building a brand that functions beyond the dynamics of commodities, lies in finding the value proposition that others haven’t seen: “What do our consumers really want that they don’t feel is readily available from us or from any of our competitors? Why would they pay more to have it? How much more would they pay? And how often?”

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