Shortly after posting my recent write-up on the use of value equivalence lines (VELs) for strategic pricing, a new book by Richard D’Aveni called Beating the Commodity Trap: How to Maximize Your Competitive Position and Increase Your Pricing Power came to my attention via a review on strategy + business. I eagerly purchased the book, and managed to read it over the course of a trip to San Diego. This post highlights a few key points to the book, but suffice it to say that I highly recommend it to anyone involved in strategic pricing decisions, especially if you work in an industry facing commoditization pressures (which, at some point, is nearly every industry).
D’Aveni defines three types of commoditization situations that are most typically faced:
- Deterioration – the rise of low cost / low benefit options that appeal to a significant segment of the market (in other words, the lower left of the VEL or price-benefit line).
- Proliferation – the segmentation of the market into ever-finer niches through rapid new product introduction around your established price/benefit position.
- Escalation – the introduction of breakthrough innovations simultaneously offering ever-higher benefits at lower costs (in other words, shifting the VEL or price-benefit line downwards and to the right)
D’Aveni also defines three types of responses to these pressures:
- Escape the trap – by moving your position along the price-benefit line or shifting channels, focusing on the most immediate threats, or re-seizing the momentum (through innovative new business models, for example), you can avoid the most threatening competitor.
- Destroy the trap – through redefining price or benefits in the industry, overwhelming the competitor by out-proliferating them, or taking blocking actions (such as locking up long-term supply agreements), you can nullify the advantages that the competitor has gained.
- Turn the trap to your advantage – by proliferating around your competitor to trap them in the low end, finding white space in the price-benefit line, or building your own innovation momentum, you can in essence confine your competition to a limited portion of the market.
D’Aveni presents a several tactics appropriate to each threat / response combination (though, in some cases, only one possible tactic is discussed). The book is full of examples of companies facing and responding to these threats, many of which will be familiar (such as the proliferation of hotel brands in the 90’s, and responses to the entry of Zara as the low-end fashion retailer in Europe). There are one or two examples that may not be as familiar and this does rob them of some of their educational value.
At times, the fit of the “tactics” to the “threat / response” schema seems a bit forced, and as always it is clear that implementing such tactics in your own business can be a challenge. And the author clearly emphasizes that even recognizing you are facing a commoditization trap early enough to take action can often be difficult. The greatest strength of the book is the use of the VEL (price-benefit lines) to illustrate the examples. Just becoming more familiar with this powerful pricing and product planning tool makes the book worth the price and, at just 224 pages, it is a fast read and valuable reference source.