Commoditization is when a product is so easy and cheap to make that the price keeps dropping until almost everyone can afford it.
Story: Commoditization and Pizza
Most products start off with an invention. One person figures out a clever way to make something great, and customers flock to their door.
But once that product succeeds, other people want a piece of the action and start making similar, competing products.
If it’s easy to compete, the product gets “commoditized”.
Take pizza. Why are there a zillion pizza places all over the world? Because pizza’s a commodity.
The first person to invent pizza (likely in the Italian city of Naples) probably thought they’d discovered gold. Pizza was delicious! And everybody wanted some.
But it turned out all you needed for great pizza was some dough, olive oil, tomatoes, and an oven. Since all of things are commodities (readily and cheaply available worldwide), pizza itself quickly became commoditized.
That led to a ton of competition, and since global demand for pizza was huge, pizzerias could only make money by selling large quantities at low prices. Great for pizza lovers, but not easy for pizza makers.
Over the years, entrepreneurs tried to fiddle with the pizza formula to “differentiate” their pizzas, to make them unique (not a commodity), so they could charge higher prices. They added fancy toppings, or made deep dish pies or gourmet wood-fired oven pizzas.
But it turned out that pepperonis and mushrooms and deep dishes and wood fired ovens were all commodities too, so pizza was once again a commodity.
Commoditization is a relentless process in our global economy. It’s a big world with a lot of smart people, and information travels fast. Be prepared that your business, whatever it is, will have to fight the forces of commoditization.
But don’t let that stop you – tasty products with great ingredients and a good reputation will always have customers!