Dare to be different: commoditization looms around every corner. Differentiate now—or wind up just another label on a supermarket shelf - Management - various industry approaches to developing and retaining customer satisifaction in an era of global competition

Chief Executive, The, May, 2003 by John R. Brandt

Most CEOs would give almost anything for a glamorous, all-cash business with a near-guaranteed percentage of profits. But for Gary Loveman, president and CEO of Harrah's Entertainment, the thrill of the gaming industry vanished almost from the beginning. "When I started, this business was commoditized--you have a big box and gaming tables. Your challenge is to differentiate yourself from the other big boxes," he says.

The traditional ways that casinos have distinguished themselves, through investing in facilities, entertainment and food--think pyramids, Venetian canals and Eiffel Towers--were proving less effective as competition increased. So Loveman chose to avoid commoditization through counterintuitive means: Harrah's now uses information technology to identify its best customers and then lavishes perks on them--with the expressed intent of letting its other regular customers see the difference.

"We treat our better customers better," Loveman says of the $4.1-billion, Las Vegas-based company's Gold, Platinum and Diamond levels of service. "We are completely unabashed about it." Customers, he says, have to earn their way up.

Unusual as Loveman's response may be, his predicament is not. Advances in information technology, combined with global competition, mean that sooner or later every CEO faces the threat of commoditization: Suddenly you're surrounded by competitors offering the same products or services at lower prices and correspondingly lower margins. In many markets, real prices--those adjusted for inflation--have declined steadily over the last 20 years. Calculators that sold for hundreds of dollars in the 1970s are giveaways at trade shows today; computing power that once cost millions can now be had for under $600, if not for free. In fact, the apparent increase in customer satisfaction in many industries is a direct result of falling prices.

"Everything is headed toward commoditization if you don't fight it," says Fred Reichheld, founder of Bain & Co.'s Loyalty Practice and author of Loyalty Rules! Defending your company against it, he says, takes a "creative redefinition of markets."

The challenge for leaders is clear: Continuously innovate value in your products and services--or face margin erosion and potential extinction. CEOs have responded by coming up with several creative strategies for fending off the threat. Some have broadened or changed the definition of their customers, while others have reinvented their products and rethought the notion of customer value.

Redefining the customer

The first key to avoiding commoditization is to review just whom your company is serving. Gaining this understanding of customers allows companies to prevent a "downward migration" in spending habits that can lead to products becoming perceived as commodities and to customer defections. A recent study of 1,200 households across 16 industries found that companies have a large opportunity for "migration management"--and that it can stop as many as 30 percent of potential defections.

At Diebold, the automated teller machine maker, chairman and CEO Walden O'Dell says he's interested not only "in what our customers want," but "what our customers customers want." As a result, the $1.9-billion company in North Canton, Ohio, focuses its product development not so much on brighter screens or ease of installation as on embedding advanced end-user capabilities into ATMs. These include on-demand banking statements, automatic bill payment and instant crediting of deposits --with or without a deposit envelope. Such options enable Diebold's customers, primarily financial institutions and retailers, to offer more services to their customers after hours.

"They might be buying A or B," O'Dell says of Diebold's customers. "But what they're really looking for are ways to serve their customers." He says Diebold strives to help its customers improve their profits, their market share and their customer focus.

In this regard, O'Dell is not alone, In a recent study of 110 senior executives from Fortune 1000 companies by Booz Allen Hamilton and the Kellogg School at Northwestern University, almost four out of five said they plan to shift from selling products and services to developing value-added solutions in partnership with customers. "Companies that focus on 'relationship-centric' activities, while emphasizing growth opportunities and adapting to a changing marketplace, are more likely to be top performers than those companies that focus on decreasing working capital, supply-chain efficiency and spinning off non-core businesses," the study concluded.

For RE/MAX, the Denver, Colo.-based real estate franchise network, a redefinition of customers away from industry norms has been crucial. Co-founder and chairman David Liniger says that the firm's success has resulted from the simple idea that RE/MAX customers were the real estate agents themselves, not the buyers and sellers of real estate. More specifically, RE/MAX targets high-performing agents who represent just 20 percent of the entire pool of real estate agents, yet account for some 80 percent of all sales. "We decided we would be a niche marketer, focusing on how the top producers can get better," Linig explains.