What is to 'Commoditize'

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 allow 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 comparison 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. Product Differentiation

    A marketing process that showcases the differences between products. ...
  2. Versioning

    Versioning is when a company produces multiple models of the ...
  3. Basis Differential

    Basis Differential is the difference between the spot price of ...
  4. Market Leader

    A company with the largest market share in an industry that can ...
  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

    An Inside Look at Apple's New iPhone

    Bloomberg has obtained images of the new iPhone, which is expected to be released next month.
  2. Investing

    Apple iPhone 8: Leak ‘Confirms’ a Price of $999

    The New York Times is reporting the premium model of the new Apple smartphone will start at nearly $1,000.
  3. Insights

    Analysts Predict Apple iPhone 7 Opening Weekend Sales (AAPL)

    Apple said in a statement last week that it would not release opening weekend sales numbers for the iPhone 7. But analysts are making predictions nonetheless.
  4. Investing

    Why Apple Can Be a Value Stock But Not a Defensive Stock (AAPL)

    Examine Apple's 2016 price decline to identify its potential as a value stock. Contrast Apple's characteristics with defensive stocks.
  5. Investing

    How Verizon and AT&T Will Crush T-Mobile

    T-Mobile cannot compete against wireless juggernauts Verizon and AT&T unless it makes major changes.
  6. Investing

    Apple Confirms iPhone 8 Issue, Says Fix Is Coming

    Apple confirmed an issue for some users when making calls and said a software fix is coming.
  7. Investing

    Can Apple Stay on Top Forever?

    Most Apple investors feel good about the company's future. Here's what they're missing.
  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.
  1. What's the best-selling iPhone model of all time?

    The best-selling iPhone model remains the iPhone 6 and the larger iPhone 6+, though they're now two generations old. Read Answer >>
  2. Who are Apple's main competitors in tech?

    Explore Apple's competitive position in the many industries in which it operates. Learn about the different products and ... Read Answer >>
  3. What is the difference between a capital good and a consumer good?

    Learn to differentiate between capital goods and consumer goods, and see why capital goods require savings and investment ... 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 Distinguished Financial Services Sector from the Banks?

    Learn about the difference between the banking industry and the financial services sector and how to distinguish financial ... Read Answer >>
  6. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center