If you have attended the Simplified Strategic Planning seminar or read the book, you are probably already familiar with the concepts of specialty and commodity customers. Simply put, specialty customers are those who perceive premium value in a product or service and are willing to pay for that value, while commodity customers choose based on price. While many make the mistake of assuming the terms specialty and commodity refer to the product or service, they are actually indicators of customer behavior. Almost all markets show some of each type of behavior, and this creates strategic opportunity for companies seeking to build competitive advantages.
A good depiction of the split between specialty and commodity behaviors in a market is what I call the “fried egg diagram”. In this diagram, the yolk – the center part of the egg – is the part of the market exhibiting specialty behavior and the white is the part showing commodity behavior. In most situations, I expect a market to show a fairly typical split between these – between 20 and 30 percent specialty, with the rest being commodity.
There are markets with exceptional splits between specialty and commodity behaviors. For example, very basic food items like bananas and flour tend to be purchased on price alone by most customers. Even more extreme, carload quantities of raw materials like wheat or coal are traded as commodities on exchanges, where price is the critical feature and uniformity is expected. Such markets are almost all commodity and exhibit a very small center of specialty behavior.
The opposite is also true. High end luxury product types may exhibit very little market for the cheaper version because customers assume there is a correlation between price and quality. Additionally, a service like health care is likely to have extraordinarily little commodity demand because quality is almost always a preference in a critical personal service.
It is important to understand the nature of specialty and commodity behavior in your markets. If you are the smaller player in the market, it is likely the specialty customer will be better suited to your success, since economies of scale create significant advantages for your larger competitor. If you are the larger competitor, some commodification of your market may improve your share, since you have the advantage with customers exhibiting that behavior.
Another feature of the specialty/commodity split is that it is only a binary split in smaller markets. If you have 10 potential customers in your market, you probably know which ones show more specialty or commodity behaviors. There are less likely to be customers who straddle the fence between the two, because they are seeking to match their suppliers with their strategy. Most cases of customers in small markets who seem to straddle the specialty/commodity divide involve situations where there is disproportionate power in the hands of just a few customers. Powerful customers will demand both specialty treatment (high quality and service) and commodity prices, because they can.
In situations where customers are less powerful, such as most consumer markets, you may find larger numbers of “in-between” customers. In large markets where this occurs, you will almost always see the market split into three or more ranges, such as “high end”, “mid-range” and “budget”. As an example, there is some delineation of these categories in the automobile market, because there are millions of purchasing decisions every year. You are unlikely to see a customer trying to choose between a Kia and a Lamborghini simply because there are plenty of competing vehicles clustered around the different types of customers.
In looking at the fried egg diagram, these large markets with less powerful customers exhibit a more fuzzy boundary between specialty and commodity. Dramatic feature differences or price differences may lure the “in-between” customers to cross the line between these two behaviors, while some customers simply bounce back and forth based on their situation.
When seeking to understand your markets, rather than denying the existence of specialty or commodity customers, you may wish to take a little time to create and think about a fried egg diagram. It often helps clarify strategy, and will almost certainly shed some light on your competitive position in the market.
If you would like to apply this and other competitive strategy tools in your strategic planning, check out our program on Simplified Strategic Planning, which is available online and as an in-house training program for your executive team.