Commoditization, also called commodification, happens when a product or service becomes so common that consumers no longer differentiate between brands. Consumers buy the cheapest product.
When this happens, the product or service becomes a commodity. Examples of commodities include wheat, butter, eggs, etc.
Commoditization happens when the market gets saturated with producers, manufacturers or providers of the same product or service. The competition drives all these companies to make really high quality products, yet drive down the price.
When this happens, consumers win. They can now choose between all these different brands without having to spend time doing a comparison, since the quality difference will not be substantial.
Commoditization may be great for customers but it is a very big problem for businesses. In order to survive commoditization of a company’s product or service, the company must have a viable strategy. Ignoring the problem won’t make it go away. Eventually, price cuts can make the company go under. Some strategies worth looking into in response to commoditization include:
* Finding new markets or expanding the company’s distribution.
* Selling new products to the existing market. This can be an add-on (related) or totally different product.
* Offer related services. Services should be for the commoditized product and can cater to the competition’s customers.
* Reinvent the company. This is extremely hard but in some cases it might be the best move.