Marketing Profs

My client's face was stuck somewhere between horror and disbelief, and possibly anger, after I said, “Over time, all products become commodities, including yours.”

Then again, most people take bad news poorly.

However, this is a basic fact of life in all industries: left to the competitive strains of a free market, all products will be reduced to being a commodity over time. In high tech, it simply happens much more quickly. And in the case of Open Source software, the industry started as a commodity industry and had to find ways of breaking its “for free” image.

Given that commoditization is as inevitable as death and higher taxes, you need to review your strategies on how to deal with this transition… without resorting to denial, anger, bargaining, depression and acceptance. Outlined below are a few strategies, and one reversible non-strategy.

Incremental Enhancements

In high tech, the classic response to commoditization is to create small differentiating features in products. This is often called “adding +1 features.” Doing so allows a company to avoid dropping prices to attract new business, and adding functionality that in some small way attracts customers or converts.

An ongoing example of this strategy is in the Windows personal computer market, where the standard entry-level box sells for $350 and has almost 100 times the horsepower of the navigation computers on the Space Shuttle.

This is a good strategy for high-volume markets that are expected to last indefinitely. But it leads to a constant escalation of features and an equally constant downward pressure on prices and profits.

One of the oddest things to happen in high tech has been Linux, which started life as a commodity product. Each commercial distribution began grabbing every piece of Open Source software and dumping it onto the CD as a way of creating more value for an inherently commodity product.

Bundle Your Cow