Coffee on the Nairobi Coffee Exchange

Posted on May 27, 2008 | Filed Under Value | Leave a Comment

While many, including K&R’s own GM of Business Development, might argue that coffee could not possibly be a commodity (bought primarily on price), at the wholesale level it is.  Recent news from the Nairobi Coffee Exchange (NCE) provides some simple examples from coffee sales that can be transferred to information technology sales.  In short, when does “commodity” not necessarily mean “inexpensive” – or even “the same”?

What happened on the NCE?

A recent Business Daily Africa article noted that weekly auction prices for coffee were up six weeks in a row, to a 12-year high.  This is interesting, and the price rise is attributed in the article first to the fact that coffee is not considered discretionary by consumers.  Like commuting costs, coffee costs are “mandatory”, and sales do not contract in response to price increases.  One of the things about non-discretionary purchases is that if your offerings fit this description, someone will get the sale.  For sellers, that’s a real plus.

Lesson 1: Your first task as a IT seller is to convince the buyer that your offering is mandatory, not discretionary.  Well-known external, regulatory-based examples of this include HIPPA compliance and Basel II (Sarbanes-Oxley) compliance.  Another “mandatory” class of fixes came around Y2K.  Internally-driven goals (from annual reports, for example), can become mandatory because they are public.  So first, do what you can to make it mandatory for the buyer to have a solution.  That solves half of the problem – the business will close. But who will win it?  If the solution is a true commodity, your odds of winning are strongly related to your price.

Back to the NCE. The second pressure on prices was a perceived lack of future supply on the New York Futures market.  A mandatory item, limited supply, higher prices.  That’s interesting, but a single seller can’t usually control this (or they would be a monopoly).  As a seller, how do you prevent your offering from being a “commodity” if you can’t control supply?

On the NCE, coffee is sold by grade.  The top grade, AA, was selling for between $168 and $353 per 50-kilogram bag.  That’s a wide price range for a commodity.  If even a similarly-graded commodity (raw coffee beans) can change in price by over 100%, how do they do it?  And how can a technology seller learn from that?

In the IT space, an offering is a commodity if buyers feel that they can choose the same thing from several (or many) suppliers.  While it is true that this will generally make the negotiation appear to be about price, we’ll offer a different perspective.  The true negotiation is about how good a job the sellers do in dispelling the buyer’s belief that “the same thing” is available from several sources.   If the seller fails at this task, then the final negotiation will be largely pre-determined, over price, and in the buyer’s favor.

On the NCE, the answer lies in “non-graded” aspects of the beans.  Depending on the bean, additional descriptors can be added: “fair trade”, “shade grown”, “sustainable”, or “organic”.  The local diner may not care about these descriptions.  The local coffee roaster will, as will their “more discriminating” clientele.  Using these characteristics, which add uniqueness, will turn a commodity at $168/bag into a commodity at $353/bag.

Lesson 2: Understand your buyer and the buyer’s true interests.  Using this knowledge, you will almost always be able to describe your solution in ways that are unique, which will in turn move you toward “high priced commodity” status.  This in turn will result in more revenue and more money for you. (TD)

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