Great Business Ideas: Avoiding commoditization

Great Small Business Ideas to Start: Avoiding commoditization

When a product becomes easily interchangeable with other products of the same type, it is said to become a “commodity.” The process of a previously differentiated and specialized product becoming interchangeable is known as commoditization. While it is believed to increase overall economic efficiency, it can be difficult for individual companies to handle. Economic value and profits come from scarcity, whereas commoditization can curtail the potential for profit.

The idea

A famous example of commoditization is the microchip industry. While microchips started out as a specialized innovation that commanded a high price, they gradually became mass produced and interchangeable. This commoditization altered the nature of the microchip industry, increasing competition and decreasing profit margins.

Harrah’s Entertainment, a gaming corporation that operates hotels and casinos in America, recognized that traditional attempts made by casinos at avoiding commoditization—such as creating increasingly garish and noticeable designs—were becoming stale and ineffectual. It decided that the most effective way to avoid becoming an interchangeable commodity would be to establish an increased level of customer communication and gratification.

A loyalty program was introduced where valuable customers were rewarded with significant gold-, platinum-, and diamond-level privileges. Harrah’s CEO Gary Loveman commented, “When I started, this business was commoditized—you have a big box and gaming tables. Your challenge is to differentiate yourself from the other big boxes.” While commoditization is viewed as the largely inevitable fate of many products, companies can increase their chances of avoiding it by differentiating themselves, recognizing when commoditization is about to occur, and taking steps to ensure their product remains on the cutting edge.

READ:  The Ultimate Guide to Funding Your Private Member Club Business

In practice

  • Find new ways to make your product or service distinctive, and avoid letting your product become an undifferentiated commodity.
  • Ensure that some aspect of your product remains specialized, unique, and valuable for your customers.
  • Consider the potential for commoditization when deciding to invest in growth industries.
  • Utilize intellectual property protection laws, and create products or services that cannot be easily mimicked by competitors.