Have you ever heard of the term decommoditize? Probably not. Interestingly enough though, it is a strategy used by some of the most successful companies in the world to maximize their profit margins. However, to first understand what it means to decommoditize something, we must know what a commodity is. So,
Me: “What is a commodity?”
Alexa: “In economics, a commodity is an economic good or service that has full or substantial fungibility, that is, the market treats instances of the good as equivalent and has no regards to who produced them.”
Perhaps Alexa needs a translator. A commodity is a product or service that is interchangeable with other products or services of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.
Great, now that that’s out of the way, let’s begin. Commodities are essential and used in everyday life. They include metals like gold, copper, and iron. They include energy sources like gasoline and ethanol. Commodities even include agricultural products like wheat, corn, cereal, chocolate, and coffee.
Commodities are known for having a very high “elastic” demand. Elastic demand describes when a good’s price has a significant effect on the quantity consumers want to buy. If the price goes down just a little, they’ll buy a lot more. If prices rise just a tad, they’ll practically stop buying altogether.
While you were reading the names of the different commodities, did some well-known companies come to mind? When you read cereal, did you think of Kellog’s? When you saw chocolate, did you think of Nestlé? Why is this? It doesn’t make any sense. If each type of commodity is interchangeable, why do we care where we get them? Why would we care if our chocolate is from Nestlé? Or our cereal from Kellog’s?
If we considered these things strictly as commodities, we would not care about a brand name. We would just buy the cheapest option and get on with our day. However, you and I don’t do that. We look for a brand name. We look for products that have been decommoditized. To dive deeper into this idea, I will discuss a company, a company I have much respect for, Grey Goose.
How To Successfully Decommoditize Vodka
Grey Goose is just a vodka company. Now, I can already hear the cries: “Grey Goose isn’t just vodka! Its taste is subtle; its water comes from natural springs in France…” Spare me. There have been numerous blind taste tests that verify that Grey Goose scores no higher on taste than a middle-tier vodka like Titos or Smirnoff.
I am not trying to say anything bad about Grey Goose. In fact, it’s one of my favorite vodkas. When in college, at my fraternity date nights, it was my drink of choice. I hoped that ordering Grey Goose would keep me from looking like the most broke kid at the party. When in reality, I could barely afford to buy a venti macchiato from Starbucks.
But if it is true that Grey Goose tastes no better than less expensive vodkas, why do we keep buying it? To understand this, we have to jump into the history of Grey Goose and see how it started.
Grey Goose Origin Story
Sidney Frank created Grey Goose in the summer of 1997. His idea was to develop a luxury vodka for the American market. So, to be distinctive, he chose to produce the vodka using natural spring water from France filtered through Champagne limestone. He then would use locally grown French wheat. Once the vodka was produced, he put the drink into a distinctive smoked glass bottle featuring French geese in flight and delivered its product in wooden crates similar to wine. Sounds fancy, right?
EXACTLY. It just sounds fancy. Notice anything about Grey Goose’s ingredients? It uses a standard commodity for making vodka, wheat. The other main component is water. Whether you get it from the Himalayas, Netherlands, or Canda, water is water. You can go to a grocery store and purchase an Essentia or Fiji for a higher price than Poland Spring or Aquafina, but the price is barely different. So, how is it that Grey Goose, using ordinary commodities, found a way to price their vodka 30-40% higher than its competitors and still be a successful company?
Grey Goose Marketing Strategy: To Decommoditize Is Everything
As I’ve hinted at throughout the post, Grey Goose was able to charge these higher prices because they decommoditized their product. But, how were they able to do this? They were able to do this by using a technique I mentioned in last week’s post: Commitment and consistency. If you recall from “The Biggest Mistake Founders Make When Starting Their Business,” I wrote about the power of commitment and consistency as one of the six weapons of influence Robert Cialdini mentions in his book Influence.
The idea of consistency leads humans to act thoughtlessly. As you can imagine, anything that can put the human brain on autopilot is a potent marketing tool. Sidney Frank used the concept of consistency in two spheres when building his Grey Goose brand.
- Consistency in Design
- Consistency in Price
First, he designed a bottle that was consistent with American expectations of how an upscale bottle should look. He may not have been able to differentiate on the taste of vodka, but he was sure going to distinguish his product visually. Hence, the avant-garde, frosted bottle finish and high-end packaging that sets Grey Goose apart.
Second, he priced his bottle higher than the competition, giving it the patina of a high-end product. Since many people associate price with quality, he was able to persuade people to believe that his product indeed was a better tasting vodka.
The next thing that happened, he had no control over, but it’s worth noting. Once someone buys a beautiful, expensive bottle of Grey Goose, they don’t just expect it to be good; they NEED it to be good. People will think, “If it isn’t great, why the heck didn’t I buy Svedka and get on with my night?”
What’s the difference between expecting something to be good and needing it to be good? Take watching a basketball game. When you watch a basketball game on TV, you expect it to be good. If it isn’t, whatever, you change the channel. However, when you pay money for a basketball game and sit in the arena, you need it to be good. Basketball tickets aren’t cheap, and you better get your money’s worth… so you do. So, even if the game isn’t great, you’ll look for things to enjoy so that you can tell yourself that your time and money weren’t a complete waste.
To differentiate in the commodity business, you have to decommoditize your product. This often entails telling the right story. The story, not your ingredients, is what separates your product from the rest. Don’t look to be a low-cost provider in the commodity business. Commodity prices are the same all over, so competing on price is a losing strategy. Grey Goose, created a story, and that story is what turned them into a billion-dollar company. Let’s learn from Grey Goose and take pride in our story and decommoditize wherever we can.