A template for choosing products to sell

Some products face relatively less competition and generate better profit margins.

Models and analogies help us think about our businesses and the markets we serve. Often these models build on previous work.

For example, in 1998, Joseph Pine and James Gilmore – the founders of a consulting firm called Strategic Horizons – described an experience economy. For Pine and Gilmore, experiences represented a fourth product category.

Product steps

If we use the term “product” in the broad sense to describe what a company sells regardless of its tangibility, we can imagine several stages or layers. According to Pine and Gilmore, these stages represent a progression of economic value in which products become increasingly differentiated and premium.

Pine and Gilmore describe five stages of the economic value of product offerings: (1) commodities, (2) manufactured goods, (3) services, (4) experiences, and (5) transformations.

1. Goods. Commodities are the essential raw materials and agricultural products that we all use. In theory, products are interchangeable and differentiated only by price.

This is true even for an expensive commodity like gold. Whether it comes from a mine in Uzbekistan or the United States, gold is gold.

Thus, a company could face significant competition and have relatively low profit margins if its product offering is a commodity,

2. Manufactured goods. Raw materials can be combined to create manufactured goods that are relatively more valuable than the underlying raw materials.

To make this point, Pine and Gilmore described the difference between baking a birthday cake and buying cake mix.

“As a remnant of the agrarian economy, mothers made birthday cakes from scratch, mixing agricultural products (flour, sugar, butter and eggs) that together cost pennies. As the industrial, commodity-based economy progressed, mothers would pay Betty Crocker a dollar or two for premixed ingredients.

Manufactured goods can become commoditized, but in general, manufactured goods face relatively less competition than a commodity and can enjoy better profit margins.

3. Services. The next product layer is a service, combining manufactured goods and human capital. Services can be customized or scalable.

A service should face relatively less competition than a manufactured good or commodity while generating better profit margins.

4. Experiences. A product is an experience when its value is enhanced by its consumption.

A bag of coffee beans is a commodity. Instant coffee is a manufactured product. Coffee at Starbucks is a service. A tasting with a coffee expert who describes the harvesting, roasting and brewing in spectacular detail is an experience.

Product offerings that are experiences should have relatively high profit margins and low competition.

5. Conversions. In February 2022, Pine and Gilmore – along with Lance Bettencourt of Texas Christian University and David W. Norton of Stone Mantel, a consulting firm – added a fifth product stage to their model, describing it as transforming or saving of the “new you”, in an article for the Harvard Business Review.

“Companies should recognize the economic opportunity presented by the transformative enterprise, in which they partner with consumers to improve some fundamental aspect of their lives – to achieve a ‘new you,'” the authors wrote.

Noom could be an example of this kind of company. The company offers a combination of services and experiences that ultimately lead to a customer’s transformation – happier and healthier.

Compared to each product stage that precedes it, a transformation should generate relatively better profit margins and competitive conditions.

Screenshot of the Noom homepage

Noom is an application, a community, a personal development structure and a company. He trades on the transformational results he produces for his benefactor clients.

Application

Established companies and start-ups can apply the economic values ​​model across five types of products.

In each case, a company can identify its products against the model, understand some of the challenges inherent in that position, and add information for decision-making.

A business wishing to sell a commodity must understand that it could face significant competition and relatively low profit margins. The company could certainly succeed, provided it understands the competitive and pricing environment in which it operates.

Commodification

Also remember that Pine, Gilmore, Bettencourt and Norton are describing a concept, not a rule.

Trivialization is possible at any stage.

Consider, for example, the semiconductor industry. Companies that make memory chips for computers, smartphones and other devices have agreed on a set of industry standards. All DRAM chips have identical inputs and outputs and similar performance. So, although these memory chips are extremely complicated to manufacture, their price is comparable to that of goods.

Companies might want to avoid practices that commoditize their existing products and those higher in the value chain.

Differentiate

Finally, it should be mentioned that differentiation is possible at any stage. It may be a function of quality and purity or the result of combining products at different stages.

Don’t ignore an opportunity because it’s at an early stage, instead use Pine and Gilmore’s model to help you check the probability of success.

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