This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com BRANDING OF COMMODITIES By: Sumit Gupta MBA(IB)-2002-04 IIFT, New Delhi DATE: 2nd September, 2003 This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com ABSTRACT By definition, commodities are products and services that customers perceive to be exactly the same. A market becomes a commodity market if the suppliers choose not to differentiate themselves, either through their products/services, or through their brands. Equally, any market can become a branded market if the suppliers choose to differentiate themselves. But companies that sell products such as bulk chemicals, paper, and steel or milk, salt, cement, etc. tend to emphasize operations and sales over marketing, striving to unload as much inventory as possible at the prevailing market price. Viewing themselves as commodity producers, they particularly overlook the nonfunctional features of their products—delivery speeds, aftersales service, distribution, Pricing, Customer servicing, Segmentation, Positioning and Communication. What these producers lose out on is the opportunity to increase their gross margins, create consumer demand for their specific items(s), and build valuable Brand Equity by employing the branding practices made successful by consumer packaged goods enterprises. The biggest challenge facing manufacturers today is how to differentiate their commodity so that their business rises above the commodity market place to enjoy the margins and premium associated with consumer packaged goods markets. Therefore the key to the success of marketing commodities in today’s market place is an intense focus on creating true economic value for those customers who are willing to pay for it and a brand strategy based on product, delivery or service differentiation. In this context the paper categorizes the commodity market as commodities consumed at industrial level (B2B) and commodities consumed at retail level (B2C). Branding in the context of industrial buying has been determined on the basis of research conducted by McKinsey which states that consumer’s concerns for on-time delivery, consistency of product performance, level of technical support and service, and relationship with supplier are greater determinants than price while placing order. Analysis of branding of commodities consumed at retail level (B2C) shows that manufacturers must effectively differentiate their product offering vis-à-vis competitors as it moves the buying decision away from solely price factors and therefore generates long-term profitability and sustainable advantage in a crowded marketplace. This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com INDUSTRIAL COMMODITIES: The McKinsey Quarterly 2000 reports that a systematic analysis of the preferences of the manufacturer's customers shows that for one of the biggest of them, 70 percent of the purchasing decision was based not on price but on quality and service (Exhibit 1). As Exhibit 2 indicates, about one-fifth of its customer base cared most about technical support and the ability to get hold of a sales representative quickly. A third focused on the supplier's product range and product development strengths. The remaining group—less than half—cared most about price and on-time delivery. But because these complicated algorithms are not typically used by business-to-business (B2B) suppliers, those companies divide their world by weak identifiers such as size and geography. In many B2B markets, 25, 15, or even just 10 customers account for 80 percent of sales. By taking them through a conjoint analysis and interviewing their managers in person, B2B companies can gather most of the information needed to determine exactly which customers really care only about price and which features other customers would be willing to pay more to get. In many B2B markets, 25, 15, or even just 10 customers account for 80 percent of sales. Therefore companies which serve different segments of industrial buyers can maximize their sales by slotting prospective customers into a needs-based segmentation scheme. The four steps to branding in industrial markets The four-steps of branding commodities in industrial markets are as follows: 1. Carving up the market Carving up the market i.e. knowing who will pay for differentiation, how much can be invested in the differentiation process and what benefits are of value to their customers are building blocks for a brand. Successful commodity marketers must start by recognizing that no market is truly homogeneous. It is a deliberate process to find those customers who need, appreciate and will pay for differentiation. In place of the traditional psychographic or demographic approaches, the first step here is to conduct a disciplined behavioral segmentation of the market by examining the actual purchase patterns of the customers. According to a study by STRATEGYBUSINESS a consultancy arm of Booz, Allen and Hamilton there are three This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com distinct classes of customers identified viz. Gold Standard Customers, Potentials and Incorrigibles in the commodities market. A. Gold Standard Customers These are the customers whose concerns exceed a narrow fixation with rockbottom price. They will pay a premium for offerings that deliver true value in terms of process enhancements, cost reduction or benefits to end-users. The true Gold Standard commodity customers will consider long-term, strategic partnerships with multiple levels of client interaction. They are usually a lot more demanding than other market segments and they are also willing to pay for their demands. For eg Australian Wheat Board scans the global markets looking for buyers who are seeking high-quality wheat with very specific characteristics. While most wheat buyers require wheat to meet only two or three specifications, demanding buyers such as the Japanese may have a list of 20 requirements. By seeking out the most demanding customers and efficiently matching them with hard-to-find supplies that meet their requirements, the Wheat Board is able to extract a significant premium in a business where most competition is based solely on price. B. Potentials A larger segment of the market, generally ranging from 30 to 45 percent, places a higher emphasis on pure price, but is occasionally willing to entertain the notion of selective relationships involving certain products or services. Customers in this segment have some degree of interest in partnering although they shy away from long-term commitments. Because they are concerned with delivered cost, it is possible on occasion to interest them in opportunities to reduce network costs, including transportation, delivery and warehousing. Once it is possible to move the dialogue beyond delivered price, the potential for differentiation exists. C. Incorrigibles No matter what one does, customers are not going to love one. These are not strategic thinkers. They are tightly focused on a single goal: making the best possible deal on the transaction at hand. These are the pure price buyers, who treat suppliers as the enemy and focus exclusively on current delivered price. They will switch suppliers with lightning speed for even the slightest price differential. Unfortunately, these incorrigibles constitute half This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com the market, or more, in some commodity businesses. They are so prevalent that no supplier can seriously think about "firing" all of them. The behavioral segmentation of the market is just the first step in understanding customer potential, albeit the most important. Marketers also need to analyze the extent to which customers truly contribute to their profitability, rather than eating up profits by failing to pay the true cost-toserve. The result of these segmentations is a short list of the customers around which real marketing can take place. 2. Differentiate Commodity differentiation must be tangible, robust and capable of withstanding intense scrutiny. The marketed offering must significantly enhance some element of the customer's value chain in ways other competitors cannot match. This requires the development of a unique, tangible source of value - technological and engineering support, special distribution and delivery or specific application of the commodity product to the end user. Once in place, that differentiated source of value is difficult for competitors to duplicate. Value is created in commodity products through improving the consistency of the offering, making it more convenient or aggressively customizing it to the customer's operation. This value can be delivered either through the product itself or through service enhancement. What results from that combination are the six "generic" ways to differentiate. A. Quality Control: Value from Product Consistency. B. Reliability: Value from consistent service C. Packaging: Value from Product Convenience. D. Taking Responsibility: Value from Convenient Service E. Matching: Value from Product Customization F. Knowledge-based Applications: Value from Customized Service Combining these six factors in a 2 by 3 matrix we can get the following strategies. Value Delivery Mode This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com Consistency Customization Through Product Through Service Quality Control: Creating Value through product consistency, Reliabilty: Creating Value through consistent service for eg: In food industry delivering product with standard specifications For eg: A chemical company gaining advantage due to 24 hour response service to any of its products Matching: Creating value through product convenience Applications: Creating value through knowledge based service For eg: A wheat company monitoring the precise content in its wheat to meet requirements of most demanding customers Value creation mode Convenience Packaging: Create Value through product convenience For eg: A milk manufacturing company introducing new packaging to increase shelf life and portability of milk For eg: A water treatment company using its information database to assemble money saving, site specific systems of chemicals and equipment for food manufacturers Responsibilty: Creating Value through Convenient service For eg: A specialty chemical company provides returnable chemical drums with a small computer and modem. By feeding directly in the production process waste disposal and constant reordering are eliminated. Source: Booz, Allen and Hamilton and examples by self -analysis This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com 3. Bundle If the supplier can bundle multiple sources offering, the challenge facing competitors becomes immense. Defining and delivering a differentiated attribute that provides real value to the customer is essential, but not necessarily sufficient. Often, a single attribute can be matched or at least neutralized by agile competitors. Differentiation tied to a specific product is the most tenuous basis for branding. Ideally, commodity branding is associated with an offering (the basic product or service enhanced by various forms of differentiation) rather than with a particular product. The goal is to bundle multiple sources of differentiation and then to fight ferociously to prevent competitors from unbundling them. 4. Deliver The extraction of a premium for a differentiated offering demands that the supplier make good on the promise of added value. Execution is critical; the supplier must have the business systems and processes required to deliver the marketed offering. When commodity buyers pay a premium for value, it can't be skin deep. The value has to be real and tangible, because they will constantly measure and reevaluate it. If the customer paid for the highest quality product or the highest level of service, then that is what the customer has to get. 4 branding guideline for B2B Markets 1. Adopting a corporate or family branding strategy: Since the companies in B2B segment are associated with large and complex number of product lines and variations, it is important to develop a logical and well-devised product hierarchy. Moreover in such situations the corporate brand eg GE or ABB should be focused to give required brand associations. 2. Link Non-product related associations: Although product related differentiating factors are important in the overall decision making in B2B buying, corporate credibility is also important. Hence such associations are also to be developed by the organization. 3. Leverage brand equity of customers: Secondary associations have to be commonly adopted to represent levels of service and quality. For eg various auto component manufacturers brand themselves around the auto companies and leverage the equity of automobile manufacturer to create their brand. This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com 4. Brand the product, service and company: Due to the lack of genuine differences in the commodities the brand strategy for a commodity manufacturer should be based upon thus three factors i.e. branding the product, service and company to create meaningful and sustainable points of differences. (SEE EXHIBIT 3) This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com CONSUMER GOODS In FMCG, among existing categories of commodities marketed by businesses to retail consumers are staple food like atta, salt , milk, dairy products, bottled water, tea, coffee, food grains, edible oil, frozen meat, cement, petroleum etc. Brand Value to Consumers in commodities 1. Reassurance: A brand is a stamp of authenticity and quality. It adds value by promising ‘reliability’ and helps to establish repeat purchase patterns. For eg in case of Amul, the branding has helped in establishing it as quality producer of milk and milk-related products when compared to other producers in the same category. 2. Value Expression: Consumers choose brands that reflect the individual values that they possess as individuals. They do this to communicate the desired signals in the highly social environment they inhabit. 3. Associations of past: Often a brand creates two basic associations of past consumption in mature categories like milk. One is ritual i.e. traditions of consumption of that category being passed for years and Nostalgia i.e. longstanding heritage of pasts. Difficulties in branding commodities: • Past associations: Being already consumed for pasts and availability of number of suppliers the commodities offer a great difficulty in branding. This is because consumers have strong past associations and consumption patterns which are difficult to change. • Promotion of commodity as a category: Certain commodities like milk, dairy products, meat, etc. are difficult to be promoted as individual brand. Hence, a joint effort from the producer and distributor side is necessary to motivate any increase in consumption of a category through branding. This entails joint decision making on advertisement and promotion strategies, budgeting and direct sales effort which all get delayed due to joint decision making. For eg in case of milk or egg promotion the cost has to be incurred by thousands of producers This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com through their respective boards and such a process is often time consuming and arduous. Branding Strategies In case of commodities, branding can take at two levels. First is the Category level where the entire category is promoted by a consortium of producers to jointly reap the benefits of branding. Such products are generally produced by a vast number of producers and their product is jointly marketed by a central processing authority (eg milk and eggs). The other level of branding can be at the individual level where an individual aims to gain a critical size by branding and differentiating factor (eg salt and atta). Normally such categories don’t have a central processing structure. 1.) Promotion of category a. Depth and then breadth of brand awareness: Since the associations with a product categories are well established in the mind of consumer and it is very difficult to change those brand associations it is important that those associations are not challenged by a drastic change in the association of the commodity. Thus, it is important that the brand depth (ability of consumer to recall easily) is given more importance (then breadth i.e. range of purchase and usage situations that come to mind). After the initial promotion of commodity has been successfully accepted in the marketplace the breadth should be enlarged by innovating in the product category. SEE EXHIBIT 4 b. Leveraging existing associations: Many a times commodities are associated with consumption of other commodities. Due to this join consumption the branding has to be done along with those products. For eg: in milk or tea promotion campaigns consumption is often shown with other product category consumption. This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com c. Use of Spokespersons: Often the spokespersons are used to reflect the values represented by the product category and promote the category. For eg In USA, milk promotion has been promoted by using the famous ‘MILK MOUTSACHE’ campaign using celebrities from sports, film and politics. 2.) Individual Brand Promotion a. Finding Meaningful differences: Some of the former commodity categories have been successfully converted to product categories by use of adequate branding on the basis of existence of meaningful product differences. In these categories customers was convinced that that the product had appreciable quality differences. For eg the most famous case in this proposition was the ‘Intel Inside’ campaign where highest level of performance in terms of power and safety were conveyed through the campaign. Intel with their “Intel Inside” strategy, branded their microprocessor through computer manufacturers directly to the end-user, turning their microprocessors into a significant selling point for every computer maker who purchased their products. While greatly increasing the value of their microprocessors, Intel’s branding strategy built brand equity valued in 2000 at $34.67 billion on sales of $33.7 billion. b. Image or other non-product related considerations: In case where the product difference are virtually non-existent it is imperative to differentiate the commodity on non-product related measures eg Perrier was able to generate a premium brand image in a generally ubiquitous mineral water segment. c. Secondary Associations: Often the brands in the commodities are branded using secondary association so that the brand attributes from such associations are transferred to the product. Examples being: This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com i. Companies: The Company in such cases tries to transfer the brand associated with them to increase the credibility of the brand. For eg Tata Salt uses the name of Tata to generate credibility and trust associated with the brand and this is transferred to the product in a category where these qualities create a point of difference from other generic brands. ii. Country of origin: Because of specialty of resources or extra-ordinary skills lying in a country certain favorable characteristics are often associated with a product category and a country. For e.g.: Indian and Pakistani Basmati rice, Malaysian Palm-oils are often promoted on the basis of strong country of origin links. iii. Co-branding: Use of other strong brands in the joint consumption stage is often used in case of commodities. iv. Characters: Often through cartoons, comic strips or figures, products are promoted to display certain qualities. Foe eg This strategy is used by Gujarat Ambuja in the cement category where the company mascot of strong man holding a building reflects strength and this association is transferred to brand. v. Events: Sponsorship of events is used extensively by certain product to develop stronger points of association with the category they are associated. For eg Britannia linked itself with Lagaan and Indian Cricket team to deliver the message of the favorite Indian sport and fitness associated with its Tiger brand. This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com CONCLUSION Branding of commodities offers additional value both to the consumers and the producers. Branding leads to commodity differentiation and hence enables consumer preference. This translates into greater choice and quality for the consumers. To the producers branding provides the opportunity to increase gross margins by increasing the value perception of their product. The most successful brands will always be those that deliver not only the tangible functional value but also the intangible value that is the implied guarantee of a branded product. The promise of the brand will always be seen as the most valuable benefit because when confronted with two choices of apparently equal benefit, the consumer will always choose the one that feels right. Trusted brands are not established overnight but are built up as a result of long-term investment in delivering on the brand promise. If a manufacturer can manage this, branding provides an escape from commoditization as it moves the buying decision away from solely price factors and therefore can generate a strong return on investment and longterm sustainable advantage. This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com APPENDIX 1.) Source: Mckinsey Quarterly.com 2.) Source: Mckinsey Quarterly.com This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com 3.) Exibit 3 Brand Product: Differences in product Brand Company: Differences in delivery Brand Service: Difference in service BRANDING OF INDUSTRIAL PRODUCTS 4.) BRAND AWARENESS DEPTH BREADTH CONSUMER BASED BRAND EQUITY MODEL This document is created using PDFmail (Copyright RTE Software) http://www.pdfmail.com REFRENCES: • How to brand sand, Hill, Sam I., McGrath, Jack, and Dayal Sandeep, www.strategy-business.com, Strategy-Management-Competition, Second Quarter, 1998 • Segmenting Customers in Mature Industrial Markets: An Application, Rangan, V. Kasturi, Harvard Business School, Case Study 9-594-089, 1994 • The Effect of Marketing Orientation on Business Profitability, Narver, John C., and Slater, Stanley F., Journal of Marketing, October 1990 • Branding electrons, Jaap B. kalkman and B. PetersThe McKinsey Quarterly, 2002 Number 1 • Branding in B2B markets, John Frosyth, Alok Gupta, Suddep Haldar and Michael Marn, The McKinsey Quarterly, 2000 Number 4 • • ‘And man branded the sand’, www.etstrategicmarketing.com Case study: The California Milk processing board: Branding a commodity, Case Book, International Brand Management, IIFT • Case Study: Intel: Branding an ingredient, Case Book, International Brand Management, IIFT • “Can Anything be branded?”, Kevin Lane Keller, Strategic Brand management, pg-13-15 • “Special Applications”, Kevin Lane Keller, Strategic Brand management, pg737-740 • Branding Industrial Products, Kevin Lane Keller and Frederick E. Webster Jr. • www.intel.com • www.blonet.com
