Commodity Pricing is Like Gravity
Apparently, things aren’t so rosy at Walmart.
Heck, you knew that already. Walmart — for lots of reasons — is easy to dislike.
I won’t go into any of them here. What I will talk about is their commodity pricing model, and why it’s been so disastrous. And why you should avoid do everything in your power so that prospects never judge you on price alone.
Walmart began as a commodity. Their value proposition was low prices. They’ve never updated it and their customers expect nothing less.
Obviously, the experiment till now has been a smashing success. Walmart is the world’s largest brick and mortar store. It’s America’s largest private employer. The children of Sam Walton — the founder — are billionaires 10X over.
But this year, earnings are down. First quarter sales missed predictions. Walmart’s stock price has nose-dived.
The executive team blames the slump on a lot of things… a $9 minimum wage … a strong dollar…. “shrinkage”… declining pharma sales.
Naturally, these reasons don’t line up with reality. They’re pure spin. For example, a strong dollar would HELP Walmart, not hurt them. A strong dollar would allow them to pay LESS for imported goods from China and other Asian countries.
Lucky for them, most investors don’t challenge official explanations.
Commodity pricing usually isn’t planned
But Walmart’s leadership doesn’t have an easy way out. They can’t lower prices without cutting into working capital. They can’t raise prices without sending core customers elsewhere, like dollar stores.
Unlike Walmart, whose actively pursued commodity pricing, most companies don’t plan to become commodities. The process usually “happens” to them. They don’t like it, of course, but can’t do much about it. In most cases, the cause is undermarketing.
That’s what happened to one of my favorite sports supplement companies, VPX.
VPX, used to sell the industry’s best-tasting protein bars. They made the bars with real food and natural protein, which meant they would spoil eventually. Most competing companies ply their protein bars with chemicals, additives, and the worst kinds of sugar. Like a McDonald’s hamburger, these bars could live on a shelf “safely” for years or decades.
VPX no longer sell protein bars. They shut down production abruptly. In truth, they may not be selling ANYTHING much longer… it looks like they’re going out of business.
As you know, the supplement business is insanely competitive. To succeed, you have to establish the value of your product by solving for a specific problem. Otherwise, you risk competing on price.
VPX could have targeted different customer groups with different value propositions. Or they could have focused on one group and poured on the benefits. But they didn’t. In fact, they didn’t advertise anywhere. No celebrity endorsements. No direct mail. No groundbreaking research. They flew under the radar and relied on retail stores to sell for them.
Which is never going to happen.
Resistance is NOT futile
Retailers are not product evangelists. They’re agnostic to the brands they stock. They like to sell inventory, period. Managers and staff don’t have the time or patience to promote specific brands. If a customer chooses bar A over bar B, the store still gets paid.
Retail distribution isn’t always the right avenue for a product anyway. It’s a platform that must be cultivated. Without having a strategy in place, it’s just too easy to drown in a sea of similar products, especially when your products — like the VPX bars — cost more money.
That doesn’t mean the stealth approach to selling doesn’t work. It does. But it can only exist inside of a larger, front-end strategy. Before anything else, the value of the product has to be communicated and ACCEPTED… at least by some customers. If you don’t have that, you’ll never advance to the word-of-mouth selling phase.
VPX could have been contenders. If they had built a strong, tested value proposition, they might have OWNED a slice of the fitness market.
The commoditization process is always working against products. It’s like gravity. Your job is to RESIST it for as long you’re in business. Because once you accept it — like VPX — you’re done.
And Walmart? Look, nobody will ever confuse them with Nordstrom, but they are investing more money into customer service and the shopping “experience.” They’re hiring more store greeters, for example.
If Walmart is seeing the limits to commodity pricing, how much more should you?