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The “Commoditisation” Trap (Part 1)

The “Commoditisation” Trap (Part 1)

  • João Gomes • Partner @BlueBiz

This article is about a negotiating objection¹ that is very common in the Mozambican market, and which my clients on the Advanced Negotiation Course can’t escape, as they search for a solution:

“We don’t see any added value in your proposal… that justifies the high asking price!”.

In this article, I invite my reader to answer the question: How do I identify the signs that my service and/or product is becoming commoditised (Part 1)?

Let’s look at commoditisation in turn:

Definition.
Examples.
Causes.
Effects.
Conclusion.
As this is a complex topic of great interest², this article will continue:³ I promise my readers that in future editions I will develop the following topics:

Successful strategies for (De)Commoditisation, and combating (Re)Commoditisation.
Effects of (De)Commoditisation.
Concrete Action Plan for (De)Commoditisation.
Risks and challenges of (De)Commoditisation.
Public policies to support (De)Commoditisation.
Statistics on (De)Commoditisation in Africa.

A. Definition of Commoditisation

In my opinion⁴, the commoditisation of services and products can be analysed through the following lenses and consists of:

  • The fact that products and services have no distinctive characteristics (i.e. no differentiation).
  • And that therefore, in terms of customer perception, they are perceived as interchangeable (i.e. easily substitutable for other similar products and services).
  • As a result, the main competitive strategy is based on low prices (i.e. “Price Wars”).
  • [Commodities] which, in terms of market dynamics, are exposed to greater competition, higher risks and more susceptible to frequent market shocks.
  • As a result, prices are very volatile.
  • Pricing is out of the control of those who create commoditised products and services.
  • The impact on profitability is felt through very low profit margins.
  • Managers’ main objective is to minimise costs, maximise volume and efficiency.
  • The “scissor effect” resulting from the fatal combination of [high interchangeability + high competition + narrow margins + high volumes + high price volatility] poses major long-term viability challenges for these businesses.

BExamples of Commoditisation

Let’s look at practical African examples of the Commoditisation trap.

Telecommunications: In Africa, several telecoms companies offer similar services, such as calls and internet access. Competition often comes down to lower tariff plans, leading to commoditisation.

We can no longer be held hostage by commoditisation. We must redefine our services and products, bringing undeniable value that transcends prices

App-based transport: app-based transport companies such as Uber and Bolt are present in many African cities. However, the lack of differentiation between these platforms often results in price competition, making services more commoditised.

C. Causes of Commoditisation

Let’s now explore the causes of this trap, from different perspectives, accompanied by practical examples.

  1. Cultural perspective: Price valorisation

Example: Tourism in Kenya.
In the tourism sector, travellers often opt for lower-cost packages, prioritising price over the unique experience that African destinations can offer.

  1. Technological: Automation

Example: Digital banking in Nigeria.
The automation of banking services has reduced the need for physical branches, making banking services more efficient but less differentiated.

  1. Political: Price regulation

Example: Energy in Ghana.
Government intervention to control prices often results in standardised services and a lack of incentives for innovation.

D. Effects of Commoditisation

Let’s look at the positive and negative effects of the commoditisation of services and products, with brief explanations and examples.

Commodities guarantee debt, but dependence on them can lead to political instability.

Positive effects of commoditisation

  1. Generation of Export Revenues

Explanation: the production of commodities generates significant revenue through exports, contributing to the balance of trade and foreign exchange reserves.
Example: Nigeria’s oil exports are a vital source of revenue for the country, boosting its economy.

  1. Infrastructure development

Explanation: commodity sectors often require infrastructure such as roads, harbours and storage facilities, which can benefit economic development.
Example: mining in South Africa has led to the development of important transport and logistics infrastructure.

  1. Job creation

Explanation: commodity production generally employs a large number of people, providing employment opportunities in rural and urban areas.
Example: agriculture, including coffee production, employs millions of people in countries such as Tanzania⁵, Ethiopia and Uganda.

Negative Effects of Commoditisation

See Also

  1. Economic monoculture

Explanation: Excessive dependence on commodities can create an economic monoculture, making the country vulnerable to economic shocks.
Example: Angola faces economic diversification challenges due to its dependence on oil.

  1. Environmental Impacts

Explanation: the exploitation of commodities can have negative environmental impacts, including soil degradation and pollution.
Example: gold mining in Ghana has faced environmental concerns due to the use of mercury.

  1. Political instability

Explanation: dependence on commodities can lead to political instability as groups vie for control of resources.
Example: the conflict in the Great Lakes was fuelled by the dispute over mineral resources in the region.

E. Conclusions

In this reflection on “The Commoditisation Trap (Part 1)” I have revealed important aspects related to the commoditisation of services and products, from its definition to the overwhelming effects it can have on African economies.

  1. Definition of Commoditisation: in the article, I provide a definition of commoditisation, pointing out that it refers to products and services without distinctive characteristics, often perceived as interchangeable, which leads to competition based mainly on price.
  2. African examples: in the article, I illustrate commoditisation with African examples, such as tourism in Kenya and microcredit institutions in Africa.
  3. Causes of Commoditisation: in the article I explore the various causes of commoditisation, including economic, cultural, technological, political, global competition and supply chain factors. And I demonstrate how these causes manifest themselves in different sectors.
  4. Positive effects: in the article, I identify the positive effects of commoditisation, such as the generation of export earnings, infrastructure development, job creation.
  5. Negative effects: in the article, I also highlight the negative effects of commoditisation, including economic monoculture, social inequalities, environmental impacts and political instability.
  6. Future commitment: in the article, I promised to explore future topics related to commoditisation, including (De)commoditisation strategies, concrete action plans, risks and challenges, public policies to support (De)Commoditisation.

We can no longer be held hostage by commoditisation. We must redefine our services and products, bringing them an undeniable value that transcends price. (De)commoditisation is the key to success.

The future is (De)commoditised! In the next few issues, come and find out how to (De)commoditise your services and products and gain a sustainable competitive advantage.

¹ Negotiation objection is a term used in the context of negotiations and commercial transactions, referring to a contrary manifestation or resistance presented by one of the parties involved during the negotiation process. This objection can be related to various aspects, such as price, contractual conditions, payment terms, differentiation, quality of the product or service, among others.

² Other relevant authors in this field: RICHARDS, Thomas, “The Commodity Culture of Victorian England: Advertising and Spectacle, 1851-1914”, ISBN: 978-0198173352 (1990); YOUNG, Laurie et. All, “From Products to Services: Insights and experience from companies which have embraced the service economy”, ISBN: 978-0367331452 (2019).

³ This article will continue: it will be published in Economia & Mercado magazine and on the Diário Económico and 360º Mozambique portals.

⁴ In addition, see SEBASTIANY, Guilherme, “Decommoditisation: Rethinking business models”, ISBN: 978-8576086155 (2014).

⁵ UMSCHEID, Marc, “De-commoditisation of Differentiated Products: The case of the Tanzanian coffee sector”, ISBN: 978-3659651615 (2016).

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