The point where a product or service is differentiated purely by price is the point where it can be said to have become a commodity. Typically anything that has become commoditized is sold on wafer thin margins with competitors continually seeking to provide their product or service for less. From a client point of view this may be considered to be a positive way to reduce the cost of sourcing various services and perhaps also reducing time spent tendering. From the supply side it threatens margins that may already be fairly thin and potentially removes any differentiators that the provider feels they have.
Commodity markets have traditionally dealt with raw materials such as coal, oil or wheat. There is typically very little difference between such raw materials and so the only differentiator is price. In recent times other products and services have started to become commoditized. Big Supermarket chains such as Wal-Mart have been instrumental in commoditizing food and other retail products in their stores. Various services including insurance, financial services and now legal services have experienced the coming of commoditization. Many of us now buy our insurance over the internet. Thirty years ago in communities across the UK an insurance man would visit regularly to collect insurance payments and also to sell new policies. Today this personal element has disappeared and rather than buying from someone who we know we now buy online with price being our main consideration.
Ryanair is a good example of a company that has chosen to commoditize its services. The business model simply is to reduce the cost as much as possible by stripping out much of what we expect to receive when flying including the meal and well staffed check-ins for instance. The next step is to charge extra for many items that we would normally expect to be included in the price from online check-in fees and credit card fees, priority boarding, baggage fees and more. It is entirely feasible that a flight advertised at £1.99 could up costing nearer £100 once all of the many additional costs are added in. Inevitably other airlines have sought to reduce the cost of their flights but have also the benefit of charging for extras that in the past used to be included in the price.
IT equipment provider Dell is apparently uncomfortable about the commoditization of the IT equipment market although in part it could be said that Dell has achieved its current market position by continually driving down manufacturing and supply chain costs and thereby continually lowering prices. Many businesses are now choosing to buy IT hardware which is not based on proprietary technologies but is cheaper and of course this has an impact on companies like Dell, which already spends less on research and development than many of its rivals.