Commoditize Definition

Cite this article as:"Commoditize Definition," in The Business Professor, updated March 11, 2019, last accessed August 5, 2020, https://thebusinessprofessor.com/lesson/commoditize-definition/.

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Commoditize Definition

It is the process by which products become inseparable from competing offerings over a particular period.

In general, commoditized products in certain categories are usually the same with price as the only distinguishing characteristic.

Commoditization is responsible for running the scope across consumer goods, starting from computer keyboards to software programs governing technical procedures like business accounting and supply chain management.

A Little More on What is Commoditize

Commoditization normally begins when goods and services offer separate characteristics that enable premium pricing. An example is when Apple Inc. introduced iPhones in 2007. Here; the distinguishing features were a touch-screen interface and multitasking features which enabled the owners to access the web even when making a call. Despite these characteristics being commoditized later at some point, the iPhone clearly distinguished itself from many mobile phones in the market then. Its prices were also premium.

Apple continued releasing updated versions despite its features being duplicated and commoditized. For instance, Apple’s launching of iPhone 4s in 2011 was accompanied by the introduction of Siri-voice-activated assistant. To further distinguish itself from competitors, the brand recognition characteristic generated sound to the end users and large media coverage for the 4s.

For an item to be considered a commodity, it should fulfill 3 conditions namely; must be standardized, it must be usable when delivered and lastly, the price must not be similar so that it justifies the creation of a market.

Majority of people recognize commoditization on the issues of corn, soybeans, cotton or additional raw materials while forgetting that financial instruments can also be commoditized.

In the past, for instance, any mortgage granted was deemed special because of the specialized terms and conditions of the loans according to the one borrowing and the property. Interestingly with time, the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae) commoditized mortgages by purchasing all the mortgages that met the standards. This creation of a vast market for mortgages encouraged banks to organize and standardize the class of mortgages they give consumers.

Why it Matters:

Commoditization enhances the trading of an asset and inspires a more liquid market. In some instances, it can increase volatility in the price of the commoditized entity while in some cases it can encourage economic activity.

In the mortgage industry, commoditization enables lenders to earn money from disposing similar mortgages to government firms and government-sponsored organizations. As a result, the banks can utilize the cash by granting more loans leading to economic growth.

The Challenge for Businesses

One of the major challenges for businesses is delaying commoditization. This has been attributed to decreasing prices and small profit margins from goods without distinguishable characteristics. One example of delaying commoditization is Apple’s continuous innovations of the iPhone.

Putting together commoditized goods with similar offerings can also lead to differences that can be recognized. An example is cable industries that usually bundle commoditized landline phones with television and internet services

Firms can also slow up commoditization by selling goods with different degrees of after-purchase services, mostly to market segments that are not price sensitive. Examples, in this case, are several airlines such as America and Delta Air Lines which aims at business travelers to have a premium membership in order to enter their airport lounges. The services offered here are personal travel assistance, snacks, and shower suites.

The Benefit to Consumers

Consumers gain from Commoditized products because of lower prices and ready access. Consumers are also in a position to compare the commoditized products in terms of price with the belief that goods with a little cost equal those of high priced categories. The competition of companies to sell commoditized products is advantageous to consumers because they have a wide variety to select from. These offers include holiday-themed sales, promotions, free shipping, flexible payment options, and the extension of standard warranties.

References for Commoditization

Academic Research on Commoditization

  • The coming commoditization of processes, Davenport, T. H. (2005). Harvard business review, 83(6), 100-108. The article tries to analyze the processes of business l ranging from coming up with a mousetrap to employing a CEO and checking on the quality. This will result into commoditization and subcontracting to a large extent.
  • The time has come for business model innovation, Johnson, M. W. (2010). Leader to leader, 2010(57), 6-10. The author is informing us that it is high time people start involving themselves in the innovation of various business models.
  • Transformative power of e-business over consumer brands, Dussart, C. (2001). European Management Journal, 19(6), 629-637. This paper is concerned with the different perceptions people have on the influence of e-business on various consumer brands. It tells us how the Trust and involvement of customers are very important elements here. In addition, the author informs us that the purchasing criterion is driven by increased movement and multiplication of loyalties which in most cases interfere with the branding. The paper goes ahead to insist on how key the outcomes of the branding policy are
  • What Does it all Mean?, McKnight, W. (2005).  Information management, 15(6), 80.
  • Business model design: an activity system perspective, Zott, C., & Amit, R. (2010). Long range planning, 43(2-3), 216-226. The paper tries to understand the business model of an organization like that which has interdependent events which cut across the firm and spreads its boundaries. In this article, the activity system allows the firm to and its partners to not only create value but also to allocate a share of that value. Based on empirical and theoretical research, two parameters are considered namely design elements and design themes which narrates the origin of the creation of value in the activity system.
  • Emerging trends in sourcing of business services, Sharma, A., & Loh, P. (2009). Business Process Management Journal, 15(2), 149-165. The paper is concerned with the unfolding trends and the increasing scope in sourcing of business services. Activities are being divided into small units as businesses continue being industrialized. The author concludes that risk management has become complicated because of the sourcing being more strategic
  • Customer relationship management and firm performance: the mediating role of business strategy, Reimann, M., Schilke, O., & Thomas, J. S. (2010). Journal of the Academy of Marketing Science, 38(3), 326-346. This article dwells more on Customer Relationship Management and its effect on the performance of the firm. The research is based on two strategic elements of the organization namely cost leadership and differentiation. The study which focuses on data obtained from interviews reveal that CRM does not have a direct influence on the performance of the firm instead, it is controlled by cost leadership and differentiation. Generally, CRM’s impact on differentiation is more in the case of high industry commoditization.
  • Beating the commodity magnet, Rangan, V. K., & Bowman, G. T. (1992). Industrial Marketing Management, 21(3), 215-224. This paper contradicts the common notion that commoditization of products is a must while accompanied by reducing returns. The author proposes four generic strategies that can be used to avoid commoditization. He goes ahead to name firms that have successfully put into use those strategies.
  • Commoditized digital processes and business community platforms: new opportunities and challenges for digital business strategies, Markus, M. L., & Loebbecke, C. (2013). Mis Quarterly, 37(2), 649-654. The author in this article is highlighting us on the challenges and opportunities that arise from digital business strategies.
  • The myth of commoditization, Schrage, M. (2007). MIT Sloan Management Review, 48(2), 10. The paper is concerned with the beliefs of most investors and entrepreneurs that commodity is destiny which is not the case.
  • New Silicon Valleys or a new species? Commoditization of knowledge work and the rise of knowledge services clusters, Manning, S. (2013). Research Policy, 42(2), 379-390. The article views knowledge service clusters (KSCs) as a geographical cluster and a key component in the developing countries. The statistics from the Offshoring Research Network (ORN) suggests that KCs appeals to many client projects in the case of a medium service commoditization. On the other hand, higher or lower commoditization can either increase world competition or reduce the demand and economies of scale. The availability of skills at low cost and client connection via corporate networks has also made KSC be attractive. These findings have not only contributed to the critical implementation of policy but have also advanced the present debates concerning clusters and the sourcing of the global service.

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