With the efflux of time and due to various reasons, many products and brands are in danger of being commoditized.
Commoditization makes it more difficult than it has ever been to maintain a lead over one’s rivals. Commoditized goods, even in categories such as mobile phones, drinks, and soaps, are sold by thousands of businesses throughout the globe. As the level of commoditization goes up, brands lose their uniqueness in the market.
The process of commoditization takes place when the market considers different brands to be interchangeable.
- Surprisingly, innovation is often the root cause of commoditization. Premium pricing is suitable for items like this when a company launches a revolutionary new product or enhances an old product to an extreme degree, since this demonstrates the company’s commitment to the market. This invigorates the market, and before you know it, everyone is incorporating once cutting-edge features and technology into their various product lines.
- Another factor is the development of an industry-wide standard for a particular design or technology. At first, several different technologies competed with one another to become the industry standard. As the market changes, companies tend to agree on a single standard, which leads to more product parity in the long run.
- Aggregation. People who scrape data, compile it, and immediately commoditize it, whether for hotels, flights, or something else entirely.So, I think that all of these things are pushing and speeding up the process of making something a commodity.
- Another trend is a greater degree of transparency about price and product features. When purchasers can compare things more straightforwardly, they are more willing to move from one to another. In a similar vein, when businesses can monitor the products of their rivals in real-time, they can react more quickly to innovations made by others, shortening the amount of time it takes for any effort toward differentiation or cost advantage to become obsolete.
- Increasing Price Sensitivity – As the costs associated with switching products or services decrease, consumers have a better understanding of product attributes and place a larger emphasis on price, giving them more leverage in negotiations. An increase in pricing competition causes businesses to lower their prices to attract more buyers. This results in a slow decline in pricing across the market, which in turn causes margins to be compressed across the board.
- As a result of the ease with which items may be exchanged, rivalry is generated among the firms, and customers begin to differentiate products primarily based on their price rather than on the characteristics or qualities of the products themselves. One of the most basic effects of commoditization is that the maker or seller of a service or product loses the ability to negotiate prices.
This was the situation in the airline and auto insurance industries in the early years of this century, when online marketplaces allowed for greater transparency and increased commoditization pressures. Online marketplaces also make it possible for consumers to make more informed purchasing decisions.
- Consolidation of Industries: When companies are fighting for their very survival, bigger companies often buy out smaller competitors so they can get the benefits of being bigger, having more resources, and reaching more people.
When taken as a whole, these changes affect how value is distributed within an industry. When prices go down, there is less money available for profit overall. At the same time, the way that value is shared between producers, distributors, and customers is also changing.
- As a result of globalisation, it is now possible to purchase goods manufactured in almost any country. It may have been the case in the past when you had only two or three opponents in your backyard – but now you have many.
Products or services that are becoming more and more commoditized
Commoditization occurs when the primary distinction between several sellers of an item or service is the price at which they provide it. This is shown by several cases both inside and outside the technology industry. In the past, for instance, there were only a few businesses that manufactured and marketed laptops and other forms of computer equipment.
However, as time went on, other rivals joined the market and offered computers that were almost similar but sold for different prices. The price is frequently the only thing that differentiates the laptops produced by one firm from those produced by another, with only minor differences occurring in the underlying technology and software. As a result, laptops have developed into a commodity.
- Consumer Products
You can find various variations of the same product at any retail location.
You will get items with well-known brand names as well as items with unknown names that are priced much lower than the items with well-known brand names.
This tactic is used by local businesses to produce items that are similar to those sold by competing brands in the market but at much lower prices. Using this strategy, they divide the market share among the businesses that were responsible for creating the product.
For example, Bisleri, Kingfisher, and Aquafina are some of the brands of bottled water.
If we look at the product category described above, we will see that there is no discernible brand preference. We are prepared to choose any one of them based on the availability and pricing of the options.
The technology sector is one that actively pursues new inventions and developments. However, it is a market that is saturated with things that may be considered commodities. Take, for instance, computers, hard drives, headphones, etc and other such items. These items are examples of commoditized goods, and the only way to differentiate them from one another is based on their prices.
Electronic products like mobile phones, air conditioners, TVs, microwaves, and refrigerators can become commoditized if they are sold in a certain price range. A mobile phone costing Rs 40000, for example, has more advanced capabilities than one costing Rs 20000.
The clothing industry is saturated with highly commoditized items. The clothing industry is home to thousands upon thousands of different brands. In this sector, it is simple to turn products into commodities. Because of this, companies that make clothes have to keep the prices of their goods in line with what the industry says is fair.
One other sector that serves as an illustration of an industry where commoditization is prevalent is the healthcare sector. The healthcare industry is large and features a diverse range of product categories.
Commoditization occurs in industries like pathology lab services and hospitals since these types of establishments often do not have a consistent clientele. People who need assistance are often the customers of these services, and the person who is chosen is typically the one who is nearest to the caller or the first visible one. Products such as bandages, syringes, medical equipment, disinfectants, and others are all too often subjected to commoditization.
Companies use a method called “reverse engineering” to figure out what goes into a specific drug so they can make it again with similar ingredients and sell it.
Because there are many different service providers for each kind of service, it is very simple to apply the concept of commoditization to services. Consider the case of eating establishments.
Most of the time, restaurants create distinct identities by offering distinctive food dishes. For example, KFC was the first restaurant to sell fried chicken, but soon after, many other restaurants began selling fried chicken as well. Even though the recipe for fried chicken is a closely guarded secret, the concept of selling fried chicken is used by many different fast food chains.
Nearly all products and brands will have to fear commoditization. To ensure that brands or products enter this territory, steps must be taken.