Commoditization refers to the process of making something into a commodity. More broadly, commodification is taking something that previously was not available in the market and making it so, for instance the commoditization of the food chain has brought many more foods to the market, but has left small producers behind in favor large, low-cost producers.Commoditization moreover often removes the individual, unique characteristics, and brand identity of the product so that it becomes interchangeable with other products of the same type. Making commodities interchangeable allows competition with a basis of price only and not on different characteristics.When a financial contract such as a mortgage becomes commoditized, the contract becomes more liquid because it can be bought and sold readily. This liquidity promotes trading in that market because the agreements do not have to be assessed individually and treated uniquely.
Introduction
Commoditization means the process of making something into a commodity. It refers to a good or service becoming indistinguishable from similar products.
Any item should satisfy the following three conditions to consider is as a commodity:
- It must be standardized, for agricultural and industrial commodities, in a “”raw”” state
- It must be usable upon delivery
- Its price must vary to justify creating a market
Most of the people think that commoditization applies to agricultural products and other raw materials only, but commoditization can be applied to financial instruments.
For example, when issuing loans in the past, the terms and conditions of every loan were specialized as per the borrower and his property. But over time, the government authorities commoditized mortgages by offering to buy almost any mortgage that met a set of conforming standards. These agencies encourage banks to streamline and standardize the types of mortgages they offer to consumers.
When the terms of the bond or loan do not vary in a financial contract, it will undergo commoditization, Imagine an example of a mortgage, where the loan can be unique to the borrower, but a commodity to an investor who buys mortgages as investments.
Once commoditization happens, the company’s ability to command premium prices for its products disappears, and commodity-based pricing usually leads to much lower profit margins. It’s important to know what is a good commoditization so that the investor can recognize when it happens to a company in which he invested.
Commoditization makes an asset easier to trade. It also encourages a more liquid market. Sometimes this can add volatility to the price of the commoditized entity, but in other cases, it can promote economic activity. In the case of the mortgage industry, commoditization provides more cash from selling conforming mortgages to government agencies and government-sponsored entities. The banks can use the cash to issue more loans, theoretically encouraging economic growth.
How to address commoditization
Addressing commoditization can help generate more consumer interest in your products by differentiating them from other products of a similar class. Here are some ways to address commoditization:
1. Create a product niche-Narrowing your products into a more targeted niche within the market can help reduce commoditization and attract new buyers. Niches target specific groups, features or customer preferences. The more niche a product is, the more loyal its customer base can be, especially if there are few competitors within that niche. Consider creating a more specific niche to retain your product’s unique status in the industry. For example, if you sell bookkeeping software, you could market it as bookkeeping software specifically for small retail businesses.
2. Introduce a creative pricing structure- Creative pricing can be an effective way to make your products more unique because prices typically distinguish commoditized products from each other. A creative pricing structure often makes it more challenging for a consumer to compare your prices directly with the competition, potentially increasing the chances that they choose your product. Consider bundling different products and services for a more complex pricing structure or offer multiple services as a package. For example, instead of simply offering classes, you might offer a complete course for a fixed amount.
3. Customize your advertising to pain points-Marketing is a great tool that brands can use to combat commoditization because it helps shape the customer’s view of the products and brand. Creating more appealing advertising that focuses on direct customer pain points may help customers feel more confident that your product is the best choice among its competitors. For example, you might try focusing on how your bookkeeping software solves common financial problems for small retail businesses. Marketing directly to customer pain points can inspire action and create satisfaction for the customer.
4. Leverage the market- Markets and buyer trends often change with financial shifts, quality standards and product demands. If there are advantages your brand can leverage in the market, it’s important to identify them so you can make your products unique. Determine what advantages currently exist in your market, such as high demand for specific products or features. You can then create products or customize existing ones to include those features to give you leverage over competitors. For example, if there’s a high demand for inventory management features in bookkeeping software, you might add an inventory feature to your software to leverage the market.
5. Listen to feedback- Consider listening to customer feedback about your products, services, pricing and features. Customer feedback can help a business grow and learn what customers find unique in its products or services. If you notice a pattern, you can address that pattern to make your brand more unique. A brand that listens to its customers might earn a higher status in the market because of its dedication to customer service. Consider asking customers for feedback through email, post-purchase surveys or in-person or phone conversations.
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.
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.
FAQs
What is a commoditized business?
A commoditized business refers to an industry or market where the products or services offered by different businesses are considered similar or identical. In such markets, goods are often standardized, and there is little differentiation in terms of quality, features, or branding.
What are common examples of commoditized businesses?
Examples include:
- Basic food staples like rice or wheat
- Certain raw materials like steel or copper
- Generic pharmaceuticals
- Commodity hardware components
How does competition work in a commoditized market?
In commoditized markets, competition is often based on price, efficiency, and distribution. Companies may have limited opportunities for differentiation, so cost leadership becomes a significant competitive advantage.
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