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.

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