How do you convince a consumer to purchase a product which appears to be no better than any other - yet no cheaper?

The answer is usually simple: you lower the price.

This raises the spectre of commoditisation, bringing disaster in its wake for companies selling goods and services to consumers. Ruinous price competition ultimately leads to low or even non-existent margins.

Even worse, it leads to the destruction of brand equity. It may be the only way to sell cement or petrol, but it is no way to sell appliances, still less meals, hotel rooms or holidays.

Commoditisation has become the defining challenge of our time. Its insidious influence can be found in countless industries ranging from retailing to financial services to telecommunications to leisure. So what can companies do to avoid it? Fortunately there is much they can do. After all, Starbucks Coffee sells a commodity (coffee) at non-commodity prices with a strong brand message. Apparently there is hope.

Before offering solutions let us consider the business environment that has led us to this point.

Rising expectations

Throughout much of the world, inflation has been tamed and consumers no longer expect price increases on a regular basis. In fact they often expect prices to fall, given the impact of discount retailers and internet selling across many products and services.

People are more price sensitive than ever, often postponing purchases lest they miss a bargain. It is far harder now to convince customers of the value of relatively high prices. Of course there are exceptions. Successful luxury brands such as Orient Express Hotels have convinced affluent customers that premium prices are justified.

Consumers have also grown accustomed to the ever increasing quality of many goods and services. Improvements in the technology of manufacturing, and in service delivery have vastly enhanced the quality of almost all purchases.

As a result consumer expectations have risen sharply. No longer must a price premium be paid in order to obtain good quality. No longer are premium brands the only way to obtain a world class product. However when quality is taken for granted, price becomes an even greater selling point. This leads to the rise of discount retailers, private label products, and no-frills service providers such as low cost airlines and budget hotels trading purely on price.

Switched on consumers

Consumers today have access to vast swathes of information unimaginable just a decade ago. Through the internet they can learn about products and services, read reviews, and compare prices to a degree that enables them to effectively possess full information.

In the tourism and hospitality industry, for example, websites such as Tripadvisor and IgoUgo enable customers to share the experiences and recommendations of other travellers, view their travel photos, and search for the lowest prices.

Such developments undermine the effectiveness of traditional marketing tools. In the past, companies have used mass marketing to inform consumers about brands and their attributes, often attempting to convey impressions that are not necessarily related to the basic facts about the brand.

Traditional marketing is less likely to resonate with today's wired and inquisitive consumers, who increasingly seek confirmation from their peers. Companies must find new tools to build brand equity. These can involve building or supporting networks of consumers with like-minded interests or life styles. They can also involve inviting consumers to react to products and participate in improvements and innovations.

Avoiding commoditisation

So what can companies do to avoid commoditisation? The fundamental problem with a commodity product is its strong resemblance to the products of its competitors. Avoiding commoditisation means being different.

Leisure services can be differentiated in three ways:

• By product innovation (Starwood Hotels and Resorts iconic Heavenly Bed, Bath & Crib).
• By target consumer (InterContinental Hotels Group's Indigo aimed at customers with a "style-conscious, tech-savvy mindset", seeking affordable luxury).
• By the manner of service delivery (Lastminute.com's leveraging of e-commerce and m-commerce distribution to reinforce a brand story focused around spontaneity and life style). However, it is far harder for companies to differentiate whilst continuing to target a mass audience. Greater differentiation is likely to mean a growing trend towards niche selling, as operators learn to exploit the much discussed ‘long tail‘.

The long tail

If consumer groups are distributed in a bell shaped curve, the mass market is generally located in the middle. Today, the middle of that bell is often saturated and increasingly commoditised. However, the long tails at either end of the bell may offer significant untapped opportunities.

Within the travel market, for example, most large-scale operators live within the middle of the bell, and they compete vigorously on price with razor-thin margins. The meteoric rise of budget airlines and the emergence of web comparison meta search engines have led to an increasingly commoditised industry with many of the big players focused on the mass market of price sensitive consumers.

But on the long tail of the bell we find the educated, upper income, experience-hungry traveller who is less price sensitive, focused on quality, seeking adventure, discovery and authenticity.

Operators such as First Choice Holidays in the UK are successfully targeting this consumer by moving into lower volume, higher margin areas of business such as longhaul, eco and activity-based travel. The result is higher prices, fatter margins, and greater opportunities for engendering customer loyalty.

This long tail is where future profitable growth opportunities will lie. Consumers will continue to fragment into more narrowly defined groupings, a trend reflected and encouraged by the fragmentation of mass media. Targeting the long tail will involve building relationships with more narrowly defined consumer groups, through new forms of marketing and Client Relationship Management (CRM) activity.

The new challenge

In this environment brand equity becomes critical. In a commoditised world, consumers are increasingly indifferent to brand messages, with the notable exception of luxury goods. The rise of private brands, non-name brands, and one-price stores reflects this indifference. The growth of third party, intermediary websites selling travel and hospitality products has also helped to dilute he brand message in the tourism industry.

Brands now assume even greater importance to consumer oriented businesses than in the past. Today the challenge is not only to build brand equity. The new challenge is fourfold:

• To create differentiating factors in order to attract a target consumer.
• To use new marketing tools to engage the consumer in a dialogue.
• To use this dialogue to build a brand that conveys the differentiating factors.
• To execute the strategy in order to convince consumers of the reliability of the brand.

This is a tall order for all tourism, hospitality and leisure businesses.

Emerging market consumers

None of the challenges discussed are unique to the developed world. Yet the threat of commoditisation is less worrying in emerging markets for a variety of reasons.

Consumer markets in the emerging world are growing very rapidly, especially in China and India. It is easier to latch onto a growing market than to build market share in a stagnant one.

Emerging market consumers are relatively more brand conscious, not yet jaded by the excellent levels of service taken for granted by their counterparts in developed markets. A truly better brand is more recognisable to an emerging market consumer.

The mass market still exists in emerging economies. Mass communication remains fairly effective, and the ‘middle of the bell' still holds great potential for travel and leisure operators.

Emerging market consumers still lack the full information to which the developed world has become accustomed. This makes it easier to convince consumers about the strength of a product or brand.

Lucrative targets

Emerging markets offer disproportionate growth opportunities for global consumer oriented businesses in the years ahead, and the range of opportunities is expanding. Until recently, companies focused on relatively upmarket customers in countries like China and India. This is now changing as lower to middle income consumers are seen as legitimate and potentially lucrative targets.

This process can be seen in the hospitality industry where global chains seeking to invest in China initially concentrated on the upscale, luxury hotel end of the market. Opportunities are now beginning to open up in the mid-range and budget segments, where a growing number of Chinese business travellers are poorly served by a largely unbranded and low quality domestic hotel industry.

Part of the passion

The tourism, hospitality and leisure consumers of the future will be hard to define because they will be so varied. Their purchasing patterns will run the gamut and they will not be easy to reach through traditional mass communications. Yet there will be some common features.

They will use technology to search for knowledge prior to purchasing. They will be well informed, averse to clever gimmicks, but amenable to intelligent discourse. They will be price focused, but will be willing to pay a premium for a better product or a better and more enjoyable experience.

Future consumers will be loyal to companies who treat them with respect, and will enjoy being part of a community of like-minded individuals who are passionate about a particular experience or life style.

Tourism, hospitality and leisure operators who become part of that passion will be the winners.

Ira Kalish
Director of Global Economics and Consumer
Business, Deloitte Research USA
Tel: +1 213 688 4765
Email: ikalish@deloitte.com