5 What is Commoditisation

A product, either goods or a service, becomes a commodity when there is a lack of differentiation between competitive products and services. Commodity products are regarded as standardised and common technology that invites more suppliers to enter the market. This cycle of low barriers to entry, high volume and limited differentiation leads to limited and decreasing profit margins over time.

Commoditisation is a form a of market physics that happens in all marketplaces where products or services are popular, profitable and both.

5.1 Process Cycle of Commoditisation

This section examines three aspects of the cycle - Product, Production, Manufacture.

Product Commoditisation Cycle

At the outset, the product ¹ is valuable for it’s uniqueness. This value is derived by the price that a customer is willing to pay for the product to solve a problem using a new technique or method.

services but this book focusses on products so I’ll narrow the discussion.

The Product Commodity Cycle

Production Cycle

A new product or service starts out as a concept or research and development project before moving to early production using “custom built” process. The custom process often uses small batch manufacturing using equipment or processes that are readily available or adapted from existing manufacturing capability.

A successful product will move from the initial production run to a factory process that is specifically designed to make the product uniform, in volume and more profitably. Early stage products typically have high profit margins on limited volume that reflect the risk taken to develop them and higher cost of production.

Product Cycle From Inception to Mass Manufacture



Manufacturing/Production Efficiencies

The higher profit margins of a successful product or service will attract competitors who will reproduce the product or service and offer at lower price and undercut the product in the market. With enough competitors and volume, products tend to become it as uniform, plentiful and affordable as possible. As a result of technological innovation, broad-based education and product iteration, goods and services become commoditised and widely available.

Over time the production process will move from unique and complex to repeatable and simple. Repeatability is important to volume production and successful products will become simpler to make mass production more practical.

Manufacturing Cycle - Complexity to Simplicity

5.2 Case Study - Smartphones

When Apple debuted the first iPhone it was a technological leap. Apple had effectively created a computer in a phone sized unit that lasted most a day and ran software that was appealing to customers. The first iPhones were hard to manufacture and availability was limited. Following generations of Apple iPhones improved the processing power, battery life and software continued to advance.

Google released the Android operating system as an open source and enabled any company with the resources to manufacture a competitive product. Over time, Android-compatible hardware has iterated rapidly to an acceptable level of quality and similar price point to Apple.

Microsoft has also entered the market with the Windows phone while other competitors have failed (HP/Palm) or are close to failing (Blackberry) as the market competition judges those products.

Most commentators would agree that Blackberry has failed to transition to a commoditised market with lower profit margins, large volumes and new features. In fact, Blackberry still deliver the same number of handset as five years previously before the iPhone was shipping.

All smartphones are assembled from components that are readily available from existing factories. Smartphones manufacturers use components that are openly available and can be assembled. Existing silicon factories can produce the ARM CPU under license to their own design and feature set. Touch sensitive displays are made in display factories while sound, motion and graphics processors have existing packaging for use in other devices and were readily updated for use in mobile phones.

Today, the differences between smartphones is relatively small. They all have cameras, roughly the same battery life, operate software at about the same level. Some people would perceive that Apple has an overall lead but Android phones are competing strongly. While the size of the market and the strong growth brings new manufacturers, investment in factories and production processes, ultimately the product is converging towards a universal standard that all smartphones are roughly the same.

Prices on the product are reducing over time and differentiation is becoming limited. This is a market that is well into the process of commoditisation.