Commoditize

A commodity is a good where one supplier's unit is much the same as another's, like a barrel of crude oil or a tonne of steel. Commoditising a product means pushing it toward that state, even if it started out as something distinctive such as software, flights or a branded gadget.

The more buyers think "they are all the same", the less loyalty and pricing power any seller keeps. The process often starts when a product matures.

Competitors copy the best features, standards make products compatible, and review websites and comparison tools make price differences easy to see. Once buyers can compare ten options in thirty seconds, the cheapest option has a large advantage.

For finance teams, the important effect is on margins and valuation. When prices fall faster than costs, gross profit per unit shrinks, and the fixed costs of the business are spread over thinner earnings.

Investors apply lower valuation multiples to commoditised businesses because their profits are harder to defend. Businesses respond in a few ways.

Some embrace the trend and compete on scale and cost, aiming to be the lowest-cost producer. Others work to differentiate again through service, bundles, data, design or brand, so that buyers have a reason to look beyond price.

A subtle point is that commoditisation can be deliberate. A company may commoditise a complementary product, such as giving away software, so that demand rises for the product it does sell.

It can also be done to it, as when a competitor releases a free alternative to its flagship product. It is worth separating commoditisation from ordinary price competition.

A price war can end and prices can recover, whereas true commoditisation changes how buyers think about the product, which makes the change much harder to reverse.