There are various sectors where this can be observed:
Technology - Most technological equipment and spare parts like pen drives, mice, keyboards, monitors and extension boards are commoditized because of how their performance is almost the same and their only differentiating factor is the price.
Services - Mostly services like internet providers come under commoditized services because the speed is almost the same amongst most internet providers. Also, basic service sector like taxis, hairdressers, launderers belongs to the commoditized sector as they usually don't hold a brand value.
Health Care - Services like pathology services or hospitals fall under commoditized as they don't usually have a loyal base of customers. Mostly, the consumers of these services are people in distress and the closest one or the first visible sighted one is picked.
So why does commoditization occur?
Price cutting is the primary reason for this. Companies innovate and bring new products into the market and arrive at a certain price point to earn considerable margins. As soon as this happens, the competing brands come up with an imitating product mostly at a much lower price. Due to this, the new unique product turns into just another commodity in the market. This kind of market is created due to companies not having a far-sighted approach. Hence, one brand acting like a substitute isn't a surprising factor.
How does it affect the brand and the market?
During the 60s and 70s, the automobile sector's top 10 players had average profit percentage of 10%. This dropped to 4.7% in the 90s. Why has this happened? What change in the structure of the automobile industry has let this happen? One of the reasons is commoditization.
When this occurs, the organizations adapt to price cut as the only way to win over competitors thus reducing the profit margins of the entire sector. This isn't suitable for the product's life cycle and it needs to be overcome.
How to overcome brand commoditization?
Disruptive Innovation: When one company comes with a product that sweeps the market before competitors can react or cannot emulate, the brand stands to have its own identity and doesn't get lost in the din.
For example, the Indian telecom industry was more or less a commoditized industry wherein all service providers provided all services at almost service rates. The factors like coverage area and customer care were mostly the same across among most private players. A lot of new entrants trying bringing innovative products like Virgin Mobile tried "Earn on incoming calls" plan or Docomo was the first to bring "Per second billing", but they eventually fell prey to bigger players in the market such as Vodafone and Airtel.
But when Jio entered the market with the unlimited internet plan and free calls and messages, they stole a huge chunk of market share from the big players even before they could react. This is an example of overcoming Brand commoditization through disruptive innovation.
Relationship with retailers: Companies to increase their market share in a commoditized product segment, depend on retailers to promote their products. Big FMCG brands have got shopkeepers of pop and mom stores to promote their products. With the shopping shifting to supermarkets, they fight for shelf space visibility as it most often converts to sales.
Differentiation: The company needs to ensure that the product is so unique or innovative that it regains its brand status even in the existence of other competitors in the market. Once the brand gets its identity, the brand begins to have loyal customers that prefer buying the product while the other brands are available. Once, this kind of loyalty is set in, it becomes very difficult to poach customers from the brand they're loyal to.
How to build a relationship with retailers?
In a typical pop and mom store, the retailer must get a higher profit on the products he sells for him to push for any particular product. Otherwise, there would be no motivation to go out of the way and suggest a product unnecessarily. In the event of such a profit margin not being able to be offered to the retailer, the company must launch retailer reward programs so that the retailers feel the motivation along with the relationship building between company and them.
How to Differentiate?
The organization must understand the consumer requirements and expectations from the product and be able to create a product that caters to all such needs in the form. Once they achieve this, the market will immediately switch towards this product and before the competitors react with a similar product, a major chunk of the market share is stolen.
From the consumer point of view, when a product caters every need of the consumer, he or she develops a personal connection with the brand and they begin to associate themselves with it. This is what leads to brand loyalty. This will eventually help in creating a market share that's easy to sustain and won't be lost to rivalling brands.
What strategy to pick up?
A major part of getting over the commoditized market depends on the strategy that is being chosen to overcome it.
The most appropriate way to choose such a strategy would be trying to analyze the company and understand its core competitive advantage. They could be anything like, supply chain network, brand communication, research and development among others. Now, the company must focus on them to make a difference.
A company with a good supply chain system should convince the storekeepers to push for the product and keep it in line of sight of the customers. Once the product is spotted, the increase in potential sales greatly increase.
A company with good Brand communication can just market their product in a way that's unique and desirable to people and ensure it to be noticed by the consumers.
On the other hand, the companies with good Research and Development teams, can actually innovate and come up with new products that cater to the needs of the market.
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