October 24, 2020

What exactly is commoditization?

Let’s talk about the word “commoditized.”

Freelancers and consultants and coaches and other independent professionals probably hear this word a lot, specifically with regard to downward pressure on their prices.

But broadly speaking, this is a metaphorical use of the term. The root of the word, commodity, has a very specific meaning in economics.

From Wikipedia:

Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat.

The largest commodities markets trade in things like oil, natural gas, gold, silver, sugar, wheat, and so on.

A distinguishing factor of commodities is that they are highly interchangeable with the same commodity from another producer.

This is called “fungibility” and what it means is that buyers don’t really care who they buy a given commodity from.

In other words, sugar buyers don’t see a meaningful difference between the sugar from Supplier A and the sugar from Supplier B. For practical purposes it’s all the same to them.

Except for one thing...

When all else is equal, there’s a distinguishing characteristic that every buyer finds meaningful:

A lower price.

Again from Wikipedia:

The wide availability of commodities typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price.

Okay but... there’s a big difference between a pound of sugar and web developer (or a copywriter or a photographer or a dance instructor or whatever it is that you do).

Service providers are people, gosh darn it, and all people are different! Yes, yes... this is true. You and I and the next person are all special snowflakes.

But your clients don’t buy you. They buy a service that you provide.

(Unless you are value pricing, in which case you sell the client a result not a service.)

Of course, a client will recognize that as a person Alice is different from Bob, who’s different from Carol.

But if all three of them make websites and the client can’t really tell the good work from the bad work, then the differences between them are not meaningful.

In a case like this, how will the client differentiate between Alice, Bob, and Carol?

Say it with me...

Based on price.

Here’s the thing...

The way to avoid downward price pressure is to avoid commoditization.

And the way to avoid commoditization is to appear meaningfully different to your ideal buyers.

Doing so means making some hard strategic decisions.

The kind of decisions that will feel risky. That will set you apart from the crowd. That will push you outside of your comfort zone.

But if you want to escape the race to zero, that’s exactly what you have to do.