Commoditization occurs when certain products or services become interchangeable, leading customers to focus on price as the main factor in their purchasing decision. As a result, these products and services become commodities, with customers choosing the lowest price option available. This can happen over time as products and services within a particular category become more similar, with little differentiation between them. As a result, customers view them as interchangeable and base their purchasing decisions solely on price.
Commoditization can have a significant impact on businesses, as they may struggle to differentiate themselves from competitors and command higher prices for their products or services. It can also lead to increased competition and pressure on margins, as businesses compete to offer the lowest prices in order to attract customers. The following are common examples.
A new and innovative technology may command a high price as long as customers remain interested in new features and improvements. If customers lose interest, the product becomes a commodity that people purchase on price alone. For example, between 1975 and 1985 videocassette recorders were reasonably expensive with prices approaching $1000. There was a significant price difference between models with customers paying significant premiums for advanced features. By the 1990s, prices had fallen dramatically to the $50 to $100 range with marginal differences between top brands and generic equivalents.
Agricultural products are typically viewed as a commodity. However, it is possible for farmers to command premium prices by marketing food of superior quality. For example, grapes for wine making aren’t considered a commodity as some terroirs command a significant price premium.
Service industries such as airlines can be intensely price competitive as customers tend to choose the cheapest flight.
Fashion faces commoditization pressures as fast fashion firms identify fashion trends and get them to market quickly at a low price. In many cases, fashion brands are able to command high prices based on brand legacy and brand image that give the brand social status that some customers value.