Today’s Reality: Accelerated Commoditization
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Commoditization of products and services is occurring more quickly today than ever before, and nobody is feeling the pressure more than businesses that generate the majority of their revenue by selling to other organizations, otherwise known as Business-to-Business (B2B) firms. Commoditization occurs when products and services become indistinguishable from, or inferior to, the competition’s offerings, thereby eroding a company’s ability to charge a premium. This cascades down into missed revenue and margin targets, a limited ability to produce an ROI on R&D, and the evaporation of market share.
While the challenges of commoditization have plagued business for decades, the accelerated rate of commoditization (RofC) in today’s fast-paced economy, is making these problems increasingly difficult to manage. As technological advances increase, as does the RofC – the rate of diminishing revenue and/or margin for R&D investment in a product, product line, or service (demonstrated below in the Commoditization S-Curve graph).
The fact that commoditization is now somehow “accelerated” is based on Moore’s law, the observation that technological capabilities double every 18 months. The result of capability advancement is:
- The quality of the product improves and/or
- The cost of product production or providing a comparable service is reduced.
While commoditization benefits customers – the products and services available in the market are continually getting better or cheaper, and they are doing so at an ever-increasing pace – it wreaks havoc on businesses, especially those with high-priced items that have a long time between buying cycles (e.g., MRI machines), hence why B2B firms are impacted most significantly. If a company isn’t creating the most recent, advanced version of a product or service, then their existing offerings quickly lose out to better or lower-cost competitors.
