How Commoditization Traps Businesses in Low-End Price Battles

Some businesses never seem to climb their way out of the bottom of the market. Some brands never get out of the dollar store, and some never get off the discount page on Amazon.

There's usually nothing wrong with the products these businesses sell, but if they're competing against half a dozen other similar products, there's nothing that sets them apart from the rest of the market. In a commoditized market, customers tend to buy the cheapest box on the shelf. That forces businesses to compete by lowering the price, leaving profits razor thin.

A business that wants to avoid competing on price has to separate its products from others in the crowd. The right branding, marketing, and innovation can achieve this as well as avoid commoditization, and the company can regain control over pricing by safeguarding its products from the competition.

Why Do Markets Commoditize?

New inventions and innovation lead to unique products with particular benefits for customers. As these products age, however, imitators and competitors start offering similar products, especially as patents lapse.

The electric can opener was once uncommon, and that gave the original producer a temporary monopoly. But now there are big-box stores with whole shelves full of electric can openers. Consumers faced with too many choices will pick whatever is cheapest. In other words, the electric can opener market is largely commoditized.

With time, commoditization claims most products to some degree, even expensive goods such as cars when similar vehicles crowd the market. Luxury car brands set themselves apart with unique features, but they also rely on the prestige and value of the brand itself to justify their prices.

Not even highly innovative products are immune from commoditization. In 2010 it was relatively easy for smartphone manufacturers to differentiate their products each year with higher speeds and new features. But by 2016, Wired was already declaring that "the era of insane smartphone growth is all but over." With little left to improve in smartphones, most new features are little more than gimmicks, and that pushes down the prices. After all, why would customers pay for high-end gadgets when low-cost smartphones can run the apps they need?

How Businesses Differentiate Their Products from the Competition

Smart businesses looking to avoid (or get out of) the low end of the market need the right combination of marketing, branding, and innovation. But the more commoditized the industry, the harder it is to set their business and brand apart.

High-end smartphone manufacturers have tried to fight back against commoditization with more advanced features, such as flexible screens, waterproof designs, and unusual materials. However, to differentiate their products, they have come to rely more on marketing campaigns and long-term branding instead of nifty new elements. In the computer industry, Apple owns the high-end market with brand value, but little else. The same might soon apply to their position in the smartphone market.

The longer a product has been around, the harder it is to differentiate it, especially when the patent expires and competitors start duplicating its unique features. Nonetheless, some shoppers faced with many versions of one product will still try to judge its value by scrutinizing the individual characteristics. Otherwise, they probably will buy a brand they know and trust.

That is why brand-name businesses in staple industries spend so much on marketing. The difference in quality between dish soaps is negligible, but name recognition helps draw customers in, especially if the brand touts the benefits of its slight variations.

Innovation is still the best way to differentiate products with useful new features, but companies can carve out a niche if they're willing to put the time and money into research or licensing. Sensodyne sets itself apart in the otherwise commoditized toothpaste market by focusing on one particular problem. The company also claimed its distinction (in some countries) by licensing Novamin, a fluoride alternative that researchers found to protect teeth better than the original.

Not All Businesses Need to Avoid Commoditization

The future isn't entirely bleak for businesses stuck in a commoditized market. Companies that play in the low-cost market can still make a profit if they diversify to protect themselves. They can try lowering prices if possible, although this might be easier said than done.

Competition continually forces companies in commoditized markets to cut costs incrementally. They usually tinker with production and business organization to squeeze more work out of fewer people.

To undercut a commoditized market, innovative businesses and entrepreneurs have to find ways to reduce overhead. For example, Uber and Airbnb applied smartphone innovations to the commoditized taxi and hotel markets, respectively. They offered customers a more convenient service at a lower price, giving their services two huge benefits over the entrenched competition.

There's more than one way to stand out from the crowd and avoid commoditization. It takes some time, money and proper planning with market expert to get right, but businesses that don't want to be stuck fighting it out in the low-cost trenches need to differentiate their products.

At Frontech Ventures, with our vast knowledge of the market, we are working closely with our clients in proper strategy for stand out from the crowd and avoid commoditization.