I hear the word commodity used in a way to disparage one's business prospects. To feel commoditized means to feel that what separates your business from another business in the same industry is price or yielding on features that are essentially giving in on price. Reducing your unit profitability is a condition we're going to call commoditization. I think it's useful to have a specific definition of what it is because, once you break it into its parts and see that commoditization is actually a set of things, then you can develop ideas to attack one or more of those things.

So, what is a commodity? I have a list of six things that describe a commodity. If two of the six things are true about your business, consider this a wake-up call.

1. Replicating your product or service could be done at a very small scale. That is a problem because that means there's nothing really surrounding you that acts as protection. Somebody could come in and keep the lights on in their home office with five clients. We don't like small scale. We'd like there to be something formidable you do, such as owning relationships, owning infrastructure or owning an innovative capacity.

2. The product or service is super easy to buy. If there's no risk to trying another provider, that is a driver of commoditization. There’s no risk to the client because it's just so easy to choose one over the other.

3. There's very little risk to experimentation. For example, if I buy from you today and someone else tomorrow, and then I just keep being moving around, that's bad. We need there to be some amount of apprehension from the client in trying a new provider.

4. You are selling something that is a high share of your buyer's cost. When you sell me something that is a high share of my cost, I become informed because getting the cost of you down is valuable to me. Information is the enemy of differentiation, so don't provoke me to study your business. Being a high share of cost is a risk factor.

5. There is no return to innovation. When there is absolutely no product evolution, that business is a low bar. Too many people are in it, and no one leaves it. So the absence of required innovation is a driver of commoditization.

6. There's no network effect, which means the benefit to your clients does not grow when more clients use the product or service.

Use these six signs of a commodity to self-diagnose. Once you complete this exercise, decide what you should do about it. Figure out if you can invest in relationships, infrastructure or innovative capacity. Study innovative businesses and try to emulate the activities and the features. Find somebody good, call them and ask them how they do it. It's amazing how much you can learn by doing this.

Investing in relationships, infrastructure or innovative capacity will deliver all the attributes that your market demands. Your clients want a set of attributes, and they want more of some attributes than others. And you want risk, oddly enough. You want to take risks because the avoidance of risk is the avoidance of anything that protects you ultimately from competing on price and competing on features in a wealth-destroying way.

The impact of regulation

In many countries where MDRT members do business, growing regulation creates a significant pressure to help create commoditization.

When I went back to get a Ph.D. to teach strategy and explain to students how successful firms win, I needed to build my own understanding with real-life examples. I wanted to learn how good companies set priorities against big problems. I began cold-calling senior-level people at companies in 1996 and asking them a series of questions, such as:

∙ What share of your revenues goes to marketing?
∙ Which share of your revenues goes to failed hires?
∙ How much does it cost your company when you hire and don't hire the right people?

I started to ask about regulations because when I went through these questions, some of the business leaders would say, “Don't forget regulations now.” Oh, OK. What share of your revenues goes to complying with regulations? At that time, it was about 5% of revenues. Last year, I got answers along the lines of 15%. I got one firm telling me 21% of their revenues goes to regulatory compliance. Sincere and thorough compliance.

Regulations are one of the reasons the U.S. economy is so screwed up. The way firms get regulatory compliance costs to be a lower share of revenues is to consolidate, to roll up the business. If you're compliant with regulations, you are now forced to sell a product similar to your competitors. However, even though all businesses are regulated, you can still sell integrity.

I think the real challenges against a backdrop of some companies just feeling commoditized is actually the fact that lots of industries are becoming very concentrated, meaning just grow so that regulatory compliance can fall from 20% of your revenues to 13% or 14%. It's a huge problem. To the point about regulations commoditizing the financial services profession, I know this, there's not total sincerity in complying with the regulations. Integrity can be a really, really important product attribute.

Sonia Marciano is a clinical full professor of management and organizations at New York University Stern School of Business. She teaches growth-focused business strategy, and business and marketing strategy at open enrollment programs for NYU Stern Executive Education.