What Is Commoditization?
The term “commoditization” refers to a product or service becoming a commodity. Commodities are goods or services that are interchangeable with other goods or services of the same type.
In other words, commoditization occurs when there is no significant difference between one product or service and another for example when one brand of toothpaste is seen as being the same as any other, or when one type of mobile phone is seen as being the same as any other.
Commoditization can make it difficult for companies to differentiate their products or services from those of their competitors, and this can lead to lower prices and margins. Hence, commoditization often leads to price wars.
Definition
Commoditization is the process by which a product or service becomes a commodity, meaning it is indistinguishable from other products or services in its market. Commodity markets are ones in which the products or services being traded are very similar, if not identical. You can notice all around you such as-
- Commoditization of Oil- When the average consumer fills up their car with gasoline, they do not think about the brand of fuel they are using.
- Commoditization of Air Travel- There was a time when people use to get excited about air travel. But now, it has become so common that people take it for granted.
- Commoditization of Food- With the advent of supermarkets and big box stores, food has become commoditized. Whether you are buying a gallon of milk or a can of soup, the product is pretty much the same no matter where you buy it.
- Commoditization of Clothing- With the rise of fast fashion, clothing has become commoditized. Brands like H&M and Zara can mass produce clothing quickly and cheaply, making it difficult for other brands to compete on price.
- Commoditization of Technology- With the proliferation of smartphones, tablets, and laptops, many types of technology have become commoditized. For example, there is not a lot of difference between an iPhone and an Android phone, or between a Dell and an HP laptop.
Description of Commoditization
When a product or service becomes conventional and interchangeable with other similar goods or services, it is said to be commoditized. When companies offer the same product or service, prices usually go down because of competition. Commoditization can also happen when a product evolves and becomes more standardized, such as when high-speed internet became available from multiple providers.
Commoditization can have both positive and negative effects. On the positive side, commoditized products are often more affordable and accessible to consumers. On the negative side, commoditization can lead to lower profits for companies selling Commoditized products, as margins are squeezed by competition.
One way companies try to combat commoditization is by focusing on the company’s strategy. For example, a company might focus on offering premium prices for its products or services, or it might focus on being the market leader in terms of product offerings. Another way to combat commoditization is by differentiation, which is when a company differentiates its core product from that of its competitors.
Commoditization can also affect government agencies and information technology. For example, government agencies may be less likely to invest in knowledge spillover if they believe that information technology will become commoditized. Commoditization can also lead to more loans being made available to companies, as lenders see Commoditized products as less risky.
The Commoditization Process
The commoditization process usually happens in three stages
- Product differentiation- In the early stages of commoditization, products are still differentiated from each other. This is because there are only a few competitors in the market and each one offers a unique product.
- Commodity creeps- As more and more competitors enter the market, product differentiation starts to disappear. This is because companies are now offering similar products and it becomes difficult for consumers to tell them apart.
- Commoditization- In the final stage of commoditization, products become indistinguishable from each other. This is because there are so many competitors in the market that all the products are pretty much the same.
Commoditization of Technology
One of the most notable examples of commoditization is the commoditization of technology. This is because technology products tend to become Commoditized very quickly.
For example, when the first smartphone was released, it was a very differentiated product. But now, there are so many different types of smartphones on the market that they have all become Commoditized.
This is because there is not a lot of difference between an iPhone and an Android phone, or between a Dell and an HP laptop.
The commoditization of technology has led to a lot of price wars between different companies. For example, Apple and Samsung have been locked in a price war for years, and this has led to lower prices for consumers.
The Commoditization of Services
Another area where Commoditization is happening is in the area of services. This is because more and more services are becoming Commoditized.
There was a time when people only traveled by horse and buggy. But then the Wright brothers invented the airplane, and suddenly travel became much faster and more accessible. However, as air travel has become more common, people have started to take it for granted.
The same thing is happening with other types of services, such as hotel rooms, cars, and even food. This is because there are so many different companies offering the same service that it has become Commoditized.
For example, when Uber first came out, it was a very differentiated service. But now, there are so many different ride-sharing companies that the service has become Commoditized.
The Commoditization of Oil
One of the most notable examples of Commoditization is oil. This is because oil is Commoditized in two ways.
First, there is Commoditization within the oil industry. This is because there are so many different types of oil, and they are all pretty much the same. For example, there is not a lot of difference between crude oil and light oil.
Second, there is Commoditization of oil between different industries. This is because oil is used in a lot of different industries, such as transportation, energy, and chemicals. As a result, the price of oil is affected by a lot of different factors.
Causes behind increased Commodities
1. Globalization of markets
This is because globalization has led to more and more companies entering new markets. As a result, there is more competition in the market, and products are Commoditized more quickly.
2. Advancement of technology
This is because technology has made it easier for companies to enter new markets. For example, the internet has made it very easy for companies to sell their products online.
3. Increase in the number of buyers
This is because the number of buyers in the market has increased. This is because of the increase in population and the rise of the middle class.
4. Government Pressures to Share Technology
This is because the government has been pressuring companies to share their technology. The Russian government requires technology companies to disclose their source codes before the companies can do business in Russia, as revealed by a 2017 Reuters investigation.
5. Copying of Intellectual Property
Intellectual property (IP) theft is a serious problem, since it may turn a unique product into something ordinary. IP theft can happen in many ways, such as when a company reverses engineers a product, or when an employee steals trade secrets.
Commoditization’s Effects
The effects of Commoditization can be both good and bad.
On the one hand, Commoditization can lead to lower prices for consumers. This is because Commoditized products are often cheaper than differentiated products.
On the other hand, Commoditization can lead to less innovation. This is because companies may be less likely to invest in R&D if they know that their products will quickly become Commoditized.
In the end, Commoditization is a natural process that happens as markets become more competitive. While it can lead to lower prices and less innovation, it can also lead to new opportunities for companies that can differentiate their products.
Pros
- Increased competition among telecom companies drives down prices and forces companies to be more efficient in their operations.
- System development can bring a competitive advantage to a company, allowing it to charge a premium price.
- Chinese companies are often able to undercut their competitors on price, due to lower labor costs.
- Government regulations can level the playing field for telecom companies, preventing any one company from having an unfair advantage.
Cons
- Continuous improvement can be expensive, and may not always be possible.
- Government regulations can also be a barrier to entry for new telecom companies.
- The financial contract between a company and its customers can limit the ability of the company to change its pricing or operations.
Conclusion!
Commoditization is a process where products or services become more alike and interchangeable. This can happen over time as new technologies and competitors enter the market. Commoditization can be good as well as bad.
It can lead to increased competition and lower prices, but it can also lead to decreased innovation and decreased customer loyalty. Commoditization is something companies need to be aware of and manage carefully.
When a product or service becomes commoditized, companies need to focus on differentiating themselves in other ways. This can be done through branding, customer service, or product innovation. Commoditization is a challenge, but it can also be an opportunity for several companies to find new ways to stand out in the market.
What do you think about commoditization? Is it a good or bad thing? Let us know in the comments!
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