Commoditization

Most companies do not want their products to be commoditized. That means there aren’t really any distinguishable features as compared to the competition, so the only thing left to compete with...is price. Perhaps they started out with a laptop computer with a long battery life, lots of storage, a light weight, and a touchscreen. Then, within six months to a year, everyone else offered these features as well, and the laptop became a commodity.

In finance, a mortgage loan or bond could start out being unique to the borrower or buyer, but turns into a commodity when an investor purchases it. With mortgages, government agencies such as Fannie Mae will buy “conforming” (i.e., commoditized) mortgage loans from banks, providing the bank with more cash to make additional loans.

For consumer products, commoditization might mean declining prices and lower profit margins, thanks to more competition. So the goal is to delay it as long as possible. This can be done by continuing to innovate and offer new features, as Apple does continually with their iPhone.

Consumers tend to come out the winners with commoditization, with lower prices and less effort required to compare distinguishing features—they can simply go with the lowest price. And as companies compete for their business, they start offering things like free shipping, longer warranties, and "buy one, get one free" promotions.