What is Commoditization and how to Address It?

Staying ahead of the competition is harder than ever before due to commoditization. Thousands of enterprises sell commoditized products, from smartphones to protein bars to apparel items. When a product becomes a commodity, it loses its distinctiveness and competitive advantage.

 

Commoditization is a process in which things which have distinctive traits become simply commodities and can be interchanged easily with other alternatives accessible in the market.

 

As products can be interchanged easily, it generates competition among the companies and consumers start differentiating products based on their price and not based on their traits or features.

 

In the beginning, when a new product with unique qualities is launched, it creates a monopoly in the market. But as the product becomes old, other products with comparable features offered by competitors which consist of similar or almost equivalent features as those of the product presented earlier.

 

As a result of which monopolistic competition in the market turns into perfect competition. The hold of the producer loses on the market. Because consumers of the product have different options accessible in the market with similar features and consumers tend to choose the product with the lowest price.

 

Commoditization is the largest difficulty for those businesses whose products don’t have unique attributes. Such products become ubiquitous as soon as they join the market, and corporations end up cutting the price of the product to the level where it can’t earn any profit.

 

What is Commoditization?

 

Commoditization refers to a process in which goods or services become largely indistinguishable from the same type of offers given by a rival organization. Generally speaking, commoditized products within categories are so identical to one another that they are only separated by the price tags connected to them. 

 

These goods and services lose most of their distinct features and end up being simple commodities in the viewpoint of the market or consumers. A fundamental result of commoditization is that the price power of the product maker or service provider is weakened.

 

While it may sound counter-intuitive, innovation is often the cause of commoditization. When a corporation introduces a breakthrough new product or improves an existing product to an excessive degree, premium pricing is appropriate for these things. This galvanizes the market and before you know it everyone is adding once innovative features and technology into their products.

 

A good example of this is the iPhone, upon release it’s touchscreen and multitasking capabilities were revolutionary, but it wasn’t long before every phone had a touchscreen and the same type of multitasking ability, the once distinctive features getting commoditised. 

 

Also Read | What is Comparative Advantage and Why is it Important?

 

Examples of Commoditized Products

 

When goods and services merely differ in their prices from numerous sources, they have been commoditized. Several examples of this occur in the technology sector and outside it. For example, only a handful of companies once made and sold laptops and other computer equipment. 

 

However, as time went on competitors entered the market, offering quite identical computers for varying costs. In reality, the only thing distinguishing one company’s laptop from another sometimes is the price with small variances in the hardware and software. Laptops, therefore, are now a commodity.

 

When internet availability in the 1990s became open to everyone, a significant number of providers sprang up on the marketplace, promising higher speeds and greater connectivity. 

 

In the days of dial-up internet, those companies that could provide connections outside of ordinary phone lines marked themselves apart. Today, however, everyone has high-speed internet available. The distinctions between suppliers now boil down to cost.

 

Commoditization in Different Industries

 

Even products needed in the industrial business, such as necessary tools, have become commoditized through a loss of novelty that new products have. This process does not have to be bad, though. In many ways, producers can benefit from this transformation and regard the commoditization of technology as a competitive advantage.

 

1. Commoditization in Food and Hotel Industry

 

Food and lodging industry is an example of an industry where commoditization is common among the food goods. Let us first use the example of packed meals like chips and other snacks.

 

When you go and hunt for snacks at the upper market, you will find at least 10 different brands offering the same snack with a minor variance in flavor. 

 

As soon as a company offers a new flavor of snack, other food companies likewise introduce the same product to share the market. However, in the hotel and restaurant industry, the difference in costs might be maintained based on the services offered by them.

 

2. Commoditization in Technology

 

The technology industry is an industry which works on innovation. However, it is an industry which is full with commoditization items. Take the example of keyboards, desktops, hard disks, earphones, power supply, etc. These products are an example of commoditized products and are only distinguished depending on their price.

 

However, other things like mobile phones, air conditioners, television, microwave, and the refrigerator can only be commoditized in a particular price range. For example, a mobile phone whose cost is $250 has superior features than a mobile phone costing $100. 

 

A similar discrepancy can be noticed in other items. However, there are still certain companies (like Apple) which have maintained their products differentiated utilizing innovation.

 

3. Commoditization in the Apparel Industry

 

The garment sector is full of commoditized products. There are thousands of brands in the apparel sector. But commoditization is easy in this industry. Therefore, apparel companies are required to maintain the prices of their product as per the industry’s norms.

 

However, in the apparel industry, there is a sort of product referred to as “Veblen goods.” These things are sold at high costs under various brands’ names or designers’ names. These products have a place in the market because of their exorbitant costs.

 

4. Commoditization in Healthcare Industry

 

Another example of an industry where commoditization is rampant in the healthcare industry. The health care sector is extensive and offers many kinds of products. Commoditization is too common in products like bandages, syringes, medical equipment, disinfectants, operation table, surgery lamps, procedure equipment, cutter, forceps, etc.

 

Even though there is commoditization in medications and drugs. Companies employ reverse engineering to learn about the composition of a certain drug and produce the identical formula to sell in the market.

 

5. Commoditization in Retail Industry

 

The retail industry is an industry where commoditization is extremely widespread. Go to any supermarket, and you will see at least 5-10 variations for one product. 

 

You will get products of premium brands and identical products of unknown names at significantly reduced prices. In the retail industry, reverse engineering is often employed to learn about the components of products.

 

Local enterprises employ this strategy to create identical products and sell them in the market at significantly reduced prices. In this approach, they share the market share of enterprises which have created the product.

 

6. Commoditization in Service

 

Commoditization in service is pretty straightforward to apply since there are numerous service providers for one service. Take the example of eateries. 

 

Most of the time restaurants establish their unique identity by serving unique food dishes like KFC started selling fried chicken, but soon many other restaurants copied the idea and started selling the fried chicken even though the recipe is still a secret and the idea is used by many fast-food chains.

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Effects of Commoditization on Customers

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Also Read | What are Factors of Production?

 

Drivers and Signals of Commoditization

 

Commoditization happens when the market believes products to be substitutable. Two common variables drive this substitutability. The first is the emergence of a standard design or technology in the marketplace. Initially, various technologies compete to become the market standard. As the market evolves, companies converge on one standard, bringing greater parity among products.

 

For example, when Gillette debuted its multiblade Mach3 system into the men’s shaving industry, its offering was clearly distinguishable from single-blade competitors. However, competitors adapted to the new multiblade standard: Gillette’s sales growth flattened, and prices were pressured to maintain market dominance.

 

The second is an increase in pricing and product feature openness. When buyers can more easily compare items, they are more ready to switch from one to another. Similarly, when organisations can observe competitors’ offerings in real time, they are quicker to respond to developments by others, thus decreasing the life span of any move toward distinction or cost advantage. 

 

This was the situation with the airline and auto insurance industries in the early years of this century, when online marketplaces permitted greater transparency and heightened commoditization pressures. 

 

As perceptions of substitutability rise owing to one or both of these causes, commoditization is followed by the following set of common warning signs:

 

1. Increasing Price Sensitivity: As switching costs decline, customers better grasp product qualities and concentrate a greater focus on pricing, earning increased negotiating power.

 

2. Increasing Price Competition: Companies begin to slash prices to entice customers. This produces a downward spiral on prices throughout the market, squeezing margins across the board.

 

3. Industry Consolidation: As companies battle to survive, larger companies purchase smaller enterprises to obtain benefits in scale, reach, and capacity.

 

Taken together, these changes modify the way value is dispersed in an industry. As prices decline, the total profit pool shrinks. At the same time, there is a shift in how value is divided among producers, distributors, and consumers. 

 

The share of value captured by existing systems of differentiation reduces. Value instead shifts to organizations that offer the lowest-cost production, the best monetization of market inefficiencies, or both.

 

To succeed under these changing conditions, organizations need to make a number of crucial strategic choices informed by a clear picture of how value is shifting in their industry.

 

How to address Commoditization?

 

Addressing commoditization can assist build more consumer interest in your items by separating them from other products of a similar class. Here are several strategies to address commoditization:

 

1. Create a Product Niche

 

Narrowing your products into a more specific niche within the market might assist reduce commoditization and attract new clients. Niches target certain demographics, attributes or customer preferences. 

 

The more unique a product is, the more loyal its customer base might be, especially if there are few competitors within that sector. Consider building a more precise specialty to keep your product's distinct status in the industry. For example, if you provide bookkeeping software, you may pitch it as bookkeeping software designed for small retail enterprises.

 

2. Introduce an innovative pricing structure

 

Creative pricing can be an effective strategy to make your items more unique because prices often distinguish commoditized products from each other. An innovative pricing structure typically makes it more complicated for a buyer to compare your rates directly with the competitors, potentially boosting the possibilities that they choose your product. 

 

Consider bundling several items and services for a more complex pricing structure or provide multiple services as a package. For example, instead of simply offering lessons, you may provide an entire course for a specific cost.

 

3. Customize your advertisements to pain points

 

Marketing is a wonderful strategy that brands can employ to counteract commoditization because it helps form the customer's view of the products and brand. Creating more appealing advertising that focuses on actual customer pain areas may make clients feel more sure that your product is the best pick among its competitors. 

 

For example, you may try focusing on how your bookkeeping software solves common financial challenges for small retail firms. Marketing directly to client pain areas can motivate action and promote satisfaction for the customer.

 

4. Leverage the Market

 

Markets and customer trends often vary with financial upheavals, quality standards and product needs. If there are benefits your brand can use in the market, it's crucial to identify them so you can make your items unique. Determine what advantages currently exist in your market, such as significant demand for specific items or features. 

 

You can then create products or tweak current ones to add those features to give you power over competition. For example, if there's a significant need for tools of inventory management in bookkeeping software, you might add an inventory function to your software to utilize the market.

 

5. Listen to feedback

 

Consider listening to customer comments regarding your products, services, price and features. Customer feedback can help a business thrive and learn what customers find distinctive in its products or services. If you find a pattern, you can address that pattern to make your brand more unique. 

 

A brand that listens to its customers could acquire a greater status in the market because of its attention to customer service. Consider asking clients for feedback through email, post-purchase questionnaires or in-person or phone chats.

 

These ant-commoditization tactics and strategies often feel like they’ll just stifle your firm, yet the contrary is true. By reducing your specialization, boosting your strategic focus or bundling your rates, you’ll paradoxically lure more of your target customers to you to gain cash rewards in the process.