The Commoditization of Ecommerce

What is Commoditization?

Commoditization refers to a process in which goods or services become relatively indistinguishable from the same type of offerings presented by a rival company. Generally speaking, commoditized products within categories are so similar to one another that they are only distinguished by the price tags attached to them. These good and services lose most of their distinguishable attributes and end up becoming simple commodities in the eyes of the market or consumers. A key effect of commoditization is that the pricing power of the product manufacturer or service provider is weakened.

 While it may sound counter-intuitive, innovation is often the cause of commoditization. When a company introduces a revolutionary new product or improves an existing product to an extreme degree premium pricing is justified for these items. This galvanizes the market and before you know it everyone is incorporating once revolutionary features and technology into their products. A good example of this is the iPhone, upon release it’s touchscreen and multitasking capabilities were revolutionary, but it wasn’t long before every phone had a touchscreen and the same type of multitasking ability, these once distinctive features are now available everywhere, they’ve been commoditised. This is part of the reason you see Apple release a new iPhone so frequently, they are constantly trying to stay ahead of commoditization. 

Challenges of Commoditization

One of the primary challenges of commoditization is that innovation isn’t enough. It turns into a Red Queen’s race. In Lewis Carroll’s Through the Looking-glass the Red Queen and Alice are running but staying in the same spot:

“Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else—if you run very fast for a long time, as we’ve been doing.”

“A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

Innovation is continuous, quickly copied and what one company does the others soon meet. Innovation erodes profit rather than increasing it. Value chains become more efficient, there is often less profit to share, and what profit there is, generally flows to the part of the value chain in direct contact with the end user. Differentiation disappears. So Software providers quickly reach feature parity across all devices and platforms. Standing out in this environment becomes exponentially more difficult.

Artificial intelligence is driving commoditization among ecommerce platforms. AI is helping us understand our customers, optimize our systems, segment our markets and build all sorts of functionality. It is not a differentiator. It is table stakes at this point. This is another barrier to entry for some and a factor which keeps the playing field level within the established

Commoditization is good for consumers, the buying decision is streamlined for them; the complications of purchase decisions are largely removed and they can find the product they want at increasingly low prices. The problem for businesses is that they have to find a way to provide their products at increasingly low prices in order to remain competitive. This causes ever declining profit margins.

To summarise, the commoditization of ecommerce platforms is a very real hardship that has the potential to steadily intensify as time goes on, being stuck in an increasingly difficult Red Queen’s race isn’t a prospect any company would look forward to.  In an environment where companies have to ‘run’ just to stay in the same place within their market, innovation is risky and gaining a real edge is increasingly difficult.

How to Overcome the Challenges of Commoditization

• Innovation is better understood than ever before. Buyers are also more sophisticated and read the same blogs as the investors and innovators. To some extent, differentiation depends on information asymmetry and information asymmetries get driven out of markets quickly these days. However, being at the forefront of this information distribution is a way to stand out.
• Building your own brand ( webinars, hackathons, conferences). Once again Apple and the iPhone provide a good example, part of the reason Apple has managed to keep their prices so high is by building their brand and marketing based on that.
• Become the OEM (original equipment manufacturer) provider of choice. – Many commoditized applications are built on top of other commoditised solutions, like Databases or by using AWS as their backend solution.
• Customer service, Even if your competitors are able to replicate your technology and business model they might not be able to beat the level of customer support you can offer for your products and implementations.

References

Through the Looking-Glass, chapter 2 – https://www.gutenberg.org/files/12/12-h/12-h.htm