Last updated: 6/16/2002; 10:19:39 AM

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Marketing 101: When Your Market Gets Commoditized

One of the most difficult marketing challenges you can ever face is what to do when your product or service becomes an off the shelf commodity.  In this article we're going to illustrate this first with theory and then with an example of what a vendor of email server software might choose to do.  In the next commoditization article we'll cover it from the example of a web development consulting firm.  In the third and final part we'll go over additional commoditization issues like pricing.

What's a Commodity?  What's Commoditization?

The term commodity is used by economists to indicate an "undifferentiated good or service".  The classic example of a commodity is something like butter or wheat -- there just isn't much difference between butter or wheat from vendor A to vendor B.  The term commoditization indicates what happens when a market moves from the status of a differentiated good to a commodity.  For example, when no one knew how to make butter except for one or two farms, butter was not  a commodity.  And it had a premium price.  When everyone knows how to make butter then it becomes a commodity and prices fall.  Think about it: Do you really care what brand of butter you buy? 

Email Servers -- What Do You Do?

Let's take the example of a company in the business of selling email server software.  Thanks to the advent of open source tools like SendMail and QMail, it's hard to see why to pay for email server software.  Classic approaches (and one new one) towards handling commoditized markets include:

  1. The Ignore It, We're Not a Commodity Approach
  2. Search for New Markets for the Existing Product
  3. Search for New Products for the Existing Market
  4. Move into Services
  5. Open Source It
  6. Do Something Different

Ignoring It, Hoping It Will Go Away

Option #1 really isn't even worth discussing.  This is an "I want to go out of business eventually" approach.  'Nuff said.

Search for New Markets for the Existing Product

When you have a product and it's market disappears, you can always look for a new market for it.  Let's say, for example, you sold an email server to just general businesses.  As that market becomes commoditized you might instead look at high security applications.  Why?  Because, rightfully or wrongfully, SendMail and QMail as Open Source products are perceived to be a security risk.  Another possible market might be legal firms and trying to tie email traffic into the accounting system so it can be billed for.  A final example could be email for financial trading.  At least in the U.S. there are very specific regulations about how long email has to be archived for to prove that a broker didn't defraud someone.  Implementing this as an addon product is quite tough.  But if you already owned the mail server it probably wouldn't be all that bad.

Search for New Products for the Existing Market

If you have been selling a product for some time then you have built a customer base and reputation associated with that market and type of product.  You have become what amounts to a "trusted vendor" in this area which gives you the ability to credibly offer new products to your customer base -- if they are somehow related to your product.  To go back to the email server software example, you might offer anti spam software.  Another approach could be a client side email enhancer like Inbox Buddy (disclaimer: Inbox Buddy is a product of mine).  Perhaps a backup tool aimed at email could be sold (backing up email servers of any size is actually a surprisingly large problem).  And, of course, there are the obligatory monitoring, reporting, analysis and customer service tools for email.

Move into Services

As noted in the previous item, over time, vendors become recognized as credible sources for other products related to their core business.  This holds for services as well as products.  As email becomes ever more important, any failures are less and less acceptable.  I'm not 100% certain as to what services could be offered with regard to email but I'd be very surprised if there aren't a few.

Open Source It

An answer with respect to software a few years ago was "Just Open Source It".  This really isn't an option for most products developed commercially for many different reasons including:

  • They're not designed for it (lots of miscellaneous reasons like proprietary class libraries)
  • Poor documentation
  • Even commodity products generate some revenue.  Open sourced products often generate no revenue.

Do Something Different

This is the hardest decision of all.  Sometimes a company has to just bite the bullet and accept that there isn't a good option, that this revenue stream is just going to disappear.  In this case the company needs to take a huge step forward and make a very tough decision.  Rarely does a company succeed at this.  The one classic example is when Intel left the memory chip business permanently and focused on CPUs.  While this does indicate that it can be done, it's very rare.

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