What is to 'Commoditize'

The term "commoditize" refers to a process in which goods or services become relatively indistinguishable from competing offerings over time. Generally speaking, commoditized products within specific categories are so similar to one another that the only distinguishing feature is pricing. Commoditization runs the gamut across consumer goods, ranging from computer keyboards to software programs managing complex processes such as supply chain management and business accounting.

BREAKING DOWN 'Commoditize'

The path to commoditization often starts with products and services offering differentiating features that allow for premium pricing. For example, when Apple Inc. introduced the iPhone in 2007, the differentiating features included a touch-screen interface and multi-tasking features that allowed owners to surf the web while on a phone call. While all of these features were later commoditized, the iPhone clearly differentiated itself from every other mobile phone on the market at the time, and sold at premium prices.

While existing features were being copied and commoditized, however, Apple continued to differentiate its iPhones with regular releases of updated versions. For example, Apple’s introduction of the iPhone 4s in 2011 included the introduction of Siri, the voice-activated digital assistant. In addition to separating iPhones from competing models, the new voice recognition feature generated buzz with consumers and widespread media coverage for the 4s.

The Challenge for Businesses

Due to declining prices and narrow profit margins from products with no distinguishable features, one of the primary challenges for businesses is delaying commoditization. Apple’s constant innovations with each new iteration of the iPhone is one such example of delaying commoditization.

Bundling commoditized products or services with related offerings can also provide identifiable differences. For example, cable companies commonly bundle highly commoditized landline phones with internet and television services.

Companies may also be able to delay commoditization by marketing products with varying levels of after-purchase services, specifically to price-insensitive market segments. For example, several airlines, including Delta Air Lines and American Airlines, target business travelers for premium memberships to access their airport lounges. Available services include snacks, personal travel assistance, and shower suites at specific locations.

The Benefit to Consumers

Commoditized products benefit consumers with increased access and lower prices. With truly commoditized products, consumers can draw comparisons and shop based on price only, with the assurance that the product with the lowest cost is the equivalent of higher-priced versions. As companies compete to sell commoditized goods, consumers also benefit by being able to choose among the different offerings that are put forth to differentiate products from competitors. Examples of these offers include holiday-themed sales, promotions, free shipping, flexible payment options, and the extension of standard warranties.

  1. Differential

    A differential is the value or amount of adjustment of the delivery ...
  2. Basis Differential

    Basis Differential is the difference between the spot price of ...
  3. Bundling

    Bundling is a marketing strategy that joins products or services ...
  4. Apple Pay (AAPL, GOOG)

    Apple Pay is a payment system that allows users to pay for products ...
  5. Pricing Power

    Pricing power refers to how much a change in price by a company ...
  6. Average Selling Price (ASP)

    Average selling price is the price at which a certain class of ...
Related Articles
  1. Investing

    What The iPhone Means For Apple Stock

    Apple's reliance on the iPhone as a profit-driver is far more extensive than most people are aware of.
  2. Financial Advisor

    Has Apple Finally Hit the Wall With the iPhone? (MSI, MSFT)

    We look at how the iPhone has sold over its brief existence and what that means for the future of the smartphone market.
  3. Small Business

    2 Key Tactics Retailers Use To Increase Sales

    Many companies use versioning and bundling to increase sales. These strategies can offer value to consumers, but they also mean higher costs.
  4. Investing

    The Economics of an iPhone (AAPL)

    Explore the economics of the iPhone 8 and why Apple's leading handheld device is one of the most influential products in the United States.
  5. Investing

    What to Expect From Apple's Tuesday Event

    Apple is expected to discuss the new iPhone, Apple Watch, Homepod and plenty of other exciting developments during its September 12 event.
  6. Investing

    Will iPhone Sales Decline in 2016? (AAPL)

    Learn about a report that says lack of innovation and economic weakness may lead to a dramatic slowdown in sales of Apple's newest iPhone model.
  7. Insights

    The Apple iPhone Turns 10 Today

    Apple says over a billion iPhones have been sold worldwide since its launch in 2007. Here are three charts to mark its anniversary.
  8. Investing

    iPhone 8 Supercycle Will Release Pent-Up Demand: Credit Suisse

    Credit Suisse urges investors to buy Apple stock in advance of the iPhone 8 release.
  9. Investing

    Apple Q3 Earnings Coming Up: Revenue Expected Down

    The Cupertino-based tech giant is expected to report its second straight quarter of declining revenue, thanks to weakening iPhone demand in China.
  10. Investing

    Apple iPhone 8 Won’t Stop Market Share Loss: IDC

    Analyst IDC says a sales boost from the iPhone 8 isn't enough to reverse long-term trends.
  1. What is the difference between product differentiation and price discrimination?

    Learn about product differentiation and price discrimination, how the two strategies are used in marketing and economics, ... Read Answer >>
  2. What are the similarities between product differentiation and product positioning?

    Learn how two marketing strategies, product differentiation and product positioning, are similar and work together to effectively ... Read Answer >>
  3. Who Are Apple's Main Competitors in Tech?

    Explore Apple's competitive position in the many industries in which it operates, and learn about the different products ... Read Answer >>
  4. Is Apple Pay safe and free?

    Learn more about Apple Pay, one of Apple's newest and most metamorphic programs that is changing the way consumers purchase ... Read Answer >>
  5. What is the difference between a capital good and a consumer good?

    Learn to differentiate between capital goods and consumer goods, determined by how those goods are used, and see why capital ... Read Answer >>
Trading Center