Commoditize

What Is Commoditization?

The term "commoditize" refers to a process in which goods or services become relatively indistinguishable from the same offerings presented by a rival company. Generally speaking, commoditized products within specific categories are so similar to one another that they are only distinguished by the price tags attached to them.

Commoditization runs the gamut across consumer goods, ranging from computer keyboards to software programs that manage complex processes like supply chain management and business accounting.

Understanding Commoditization

Although it may sound counter-intuitive, the path to commoditization typically first begins when a company introduces a revolutionary new product or substantially improves an existing product. In either case, premium pricing is justified for the items in question. For example, in 2007, Apple Inc. (AAPL) introduced the iPhone, which boasted differentiating features like a touch-screen interface, as well as multitasking capabilities that let owners surf the web while engaged on a phone call.

Before all of these features were eventually commoditized, the iPhone stood out from all other mobile phones on the market, and cell phone consumers were lining up to shell out big bucks for the chance own such innovative technology. When rival companies began copying Apple’s cutting-edge mobile phone features, the once-unique functions became mainstreamed and readily available everywhere — also known as commoditized.

Meanwhile, Apple continued to differentiate its iPhones by regularly releasing updated versions, with exciting new functions that were then unavailable from the competition. For example, in 2011, Apple introduced the iPhone 4s, which featured the voice-activated digital assistant, Siri. This never-before-seen technology distinguished the iPhones from competitive models and drew tremendous buzz from customers as well as the media.

Commoditization is good for consumers who enjoy cheaper prices for the same goods that are more expensive elsewhere, but it is a tricky prospect for businesses, who run the risk of going under if they slash prices too radically in an effort to remain competitive.

Commoditization Challenges Businesses

Products that lack distinguishing features tend to eventually decline in price and cause dwindling profit margins. Therefore, companies strive to delay commoditization, as long as possible, in order to maintain the special status of their product offerings.

One way in which a company can delay commoditization is by bundling its commoditized products or services with related offerings, to create attractive packaging that has a unique combination of offerings — even if the offerings themselves are commonplace. For example, cable companies routinely bundle highly commoditized landline phones with internet and television services. This grouping of products, combined with attractive pricing, can help a company soften the sting of the fees or costs of commoditized items.

Companies may also delay commoditization by marketing products with varying levels of after-purchase services. For example, commercial air carriers such as Delta Air Lines (DAL) and American Airlines (AAL) offer business travelers premium memberships that entitle them to access swanky private airport lounges. Premium members may also enjoy perks like gourmet snacks, personal travel assistance, and shower suites at certain locations.

Commoditization Benefits Consumers

Because the products themselves are essentially identical, commoditization simplifies the decision-making process for consumers: They can make purchases based on price alone. For example, a navel orange that costs a dollar at one store probably tastes the same as a navel orange costing only fifty cents from a vendor down the street.

As companies compete to sell commoditized goods, consumers can enjoy ancillary enticements, such as holiday-themed sales, promotions, free shipping, flexible payment options, and extended warranties.