Food and beverage manufacturers want differentiated functional ingredients for their products. However, in the largely low-margin world of food processing, they have historically been unwilling to pay much for these ingredients. Now, with unprecedented commodity-price increases — primarily due to high oil prices and the ludicrous shift of agricultural commodities into subsidy-driven corn for fuel — manufacturers are successfully absorbing multiple price increases. Yet thus far, manufacturers are still chasing their target margins: only when commodity prices come down will profits be restored. But in a climate of increasingly expensive commodity inputs, many functional ingredients may benefit from this comparison.
Unless you happen to be the low-cost producer — in which case you may welcome a price war to scare off current and potential competitors — other forms of differentiation are crucial to support adequate economic rewards. Perhaps you have some protective intellectual property or some other exclusivity on the supply side that translates to pricing power.
Separating wheat from chaff
As strategic marketers, our preference is a more consumer-driven approach by which, beginning with the benefits, we can then work to manage consumer preference with all of the marketing tools at our disposal.
In the absence of protective IP or an advantaged supply chain — and sometimes even with these advantages — other differentiated benefits are crucial to the establishment and maintenance of pricing power with ingredients. From a consumer and a manufacturer's perspective there are antes (minimum product qualities or attributes to be in the game) and drivers (the things that truly bring distinction from the competitive set).
While the boundaries between antes and drivers vary by ingredient, attributes along this spectrum include things such as bio-availability, taste neutrality, micro-encapsulation or emulsion technology for seamless formulation, and price and performance metrics.
On the product side, in the case of functional foods, the necessary attributes increasingly assume convenience, efficacious dosing of ingredient bundles and, most of all, good taste.
Another approach to differentiation is a branded ingredient. By being branded or identified beyond its commodity state, an ingredient changes persona. It can possess a distinctive character. It plays a role in the end product that is now consciously present to the processor and the end user. When done well, a branded ingredient is akin to intellectual property: even without monopolistic advantages, branding can be a differentiator that materially drives preference and supports premium pricing.
A brand is an idea that lives in the mind of the customer. And that idea comes in the form of a promise; explicitly or implicitly, that promise represents a benefit to the consumer. Buyers buy products because they prefer one promise over another. Therefore, at its essence, a well-designed brand represents a promise of a benefit that is distinct from competition and relevant to the consumer.
But like good science and IP to support differentiation, strategic marketing and successfully branding ingredients is easier said than done. In order to become aligned with good strategic partners and host brands it is critical to start with consumer insight, correct targeting and messaging, and adequate time and money to invest.
While building a brand is a nontrivial undertaking, brands matter because they are the basis for differentiation from price-driven commodity cousins. Brands add perceptual and economic equity. Brands should provide clarity and alignment to all internal and external touch points. And finally, the brand equities become the foundation for building economically advantaged growth platforms.
John Grubb is a managing partner for the Sterling-Rice Group in Boulder, Colorado.