Posted in Marketing and Strategy Terms, Total Reads: 644
Commoditization is a process in which a product or a service becomes so common that the consumers cannot differentiate between the different brands offering the product or the service. This way a product becomes a commodity.
Effects of commoditization are:
a) Market – Pure competition
b) Product – Highest quality
c) Price – Lowest
Commoditization is common when there are a large number of producers and sellers in the market. There is an intense competition which forces the producers to produce better quality products and sell at a lower price. When pen drives are launched in the market the prices were very high in the range of Rs 1000-2000 for a 1 GB pen drive. Due to competition and large number of companies entering the market the price fell down sharply and today even an 8 GB pen drive is available for Rs 300. Other examples are auto parts, taxi services, laundry service, generic drugs etc.
The winner of commoditization is the consumer who gets the best quality product at the lowest possible price. Producers, on the other hand, don’t have much incentive. They have to constantly innovate and optimize their Supply chain to bring down the cost of the product as they don’t have any control over the selling price. It is determined by the market forces.
There are some ways in which a company can avoid commoditization.
a) Enter new markets - This way a company can have the first mover advantage and they can reap the benefits before competition brings the price down.
b) Improve positioning and differentiation – It will help pull more customers.
c) Offer after-sales service – This will create a value differentiation in the minds of the consumers.