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BRANDING OF COMMODITIES

By:
Sumit Gupta
MBA(IB)-2002-04
IIFT, New Delhi

DATE: 2nd September, 2003


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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, after-
sales 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.
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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 STRATEGY-
BUSINESS a consultancy arm of Booz, Allen and Hamilton there are three
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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 rock-
bottom 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
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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-to-
serve. 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


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Through Product Through Service


Consistency Quality Control: Creating Reliabilty: Creating
Value through product Value through
consistency, consistent service

for eg: In food industry For eg: A chemical


delivering product with company gaining
standard specifications advantage due to 24
hour response service to
any of its products
Customization Matching: Creating value Applications: Creating
through product value through
convenience knowledge based
service
For eg: A wheat company
Value monitoring the precise For eg: A water
creation content in its wheat to treatment company
mode meet requirements of using its information
most demanding database to assemble
customers money saving, site
specific systems of
chemicals and
equipment for food
manufacturers
Convenience Packaging: Create Value Responsibilty:
through product Creating Value through
convenience Convenient service

For eg: A milk For eg: A specialty


manufacturing company chemical company
introducing new packaging provides returnable
to increase shelf life and chemical drums with a
portability of milk 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
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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.
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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)
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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. long-
standing 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
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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.
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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:
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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.
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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 long-
term sustainable advantage.
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APPENDIX

1.)

Source: Mckinsey Quarterly.com


2.)

Source: Mckinsey Quarterly.com


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3.) Exibit 3

Brand Brand
Product: Company:
Differences Differences
in product in delivery

Brand
Service:
Difference
in service

BRANDING OF INDUSTRIAL PRODUCTS


4.)

BRAND AWARENESS

DEPTH BREADTH

CONSUMER BASED BRAND


EQUITY MODEL
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REFRENCES:

• How to brand sand, Hill, Sam I., McGrath, Jack, and Dayal Sandeep,
www.strategy-business.com, Strategy-Management-Competition, Second
Quarter, 1998
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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
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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, pg-
737-740
• Branding Industrial Products, Kevin Lane Keller and Frederick E. Webster Jr.
• www.intel.com
• www.blonet.com