
Everyone wants a monopoly: How to win an undifferentiated commodity business war - apabz
https://azizpabani.com/post/commodity-business/
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nostrademons
Most of the techniques he describes for competing in a commodity business make
you a non-commodity business, by definition. A commodity business with a
network effect isn't a commodity; it's a business whose key differentiator is
the network. Same goes for a commodity business with an exclusive partnership;
its differentiator is the partnership. Branding is a way to differentiate in
consumer's minds, user experience is a way to differentiate in consumer's
hands, access is a way to differentiate by consumer's feet.

A commodity business is usually defined as one where products are essentially
interchangeable between producers and the price is set by supply & demand in
the market as a whole rather than for any one manufacturer's product. And
therefore, there is only one way to compete: be the low-cost producer. That
way, no matter what the price is, you will still be in business and still be
making more than any of your competitors.

Companies use all sorts of techniques to be the low-cost producer. Southwest
Airlines did it for many years by turning planes around more quickly, using
only 737s (to reduce maintenance and ground crew costs), and flying into
smaller airports where they could negotiate lower landing fees. Walmart did it
by negotiating heavily with suppliers, taking advantage of economies of scale
in their superstores, and investing heavily in logistics. Amazon uses many of
the same techniques, plus a heavy investment in automation. Vanguard became
the low-cost producer in investments by piggybacking off the price discovery
of all other investment firms. GEICO became the low-cost provider in auto
insurance by only insuring people who were pretty good bets to begin with
(indeed, if you have a clean driving record a number of insurance companies
can match GEICO).

The key for all of them is that _cost_ is crucial and _quality_ is secondary,
because consumers don't make their purchasing decisions on quality in a
commodity market. So if you're going into a commodity market, you need to have
that same maniacal focus on controlling costs.

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apabz
"The more prudent (and profitable) strategy however, is to remember that your
‘offering’ is not the same thing as your ‘product’, so even while the latter’s
commoditized, there’s ways to compete, and even stand out with an overall
unique offering." That's the difference right? Even when the underlying
product is 'interchangeable between producers', it doesn't mean your entire
business needs to be. Even in your examples, airline seats and car insurance
might be commodities but Southwest and GEICO can (and do) charge a premium to
the lowest cost producer all the time- whether it's because of their brand,
user experience, customer loyalty etc.

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nostrademons
We don't usually call them "commodity" businesses, then.

My examples are imperfect - Southwest and GEICO aren't pure commodity
businesses, the fact that they even have brands indicates that. It's just that
it's hard to point to examples that people have heard of when, by definition,
a commodity business is one where you don't care who produces the product.

A better example might be sugar, or wheat, or iron ore, or screws, but I have
no idea who produces those. Actually, there's a good one: oil. Oil is a pure
commodity business (gasoline is the same regardless of where it comes out of
the ground), and it has the expected behavior. The low-cost producers (Saudi
Aramco) dominates, and they maintain their advantage through a combination of
strategic application of technology, economies of scale, and owning natural
resources that others can't match. And when Wall Street analysts evaluate the
health of an oil company, the #1 metric they look at (besides the price of
oil, which affects the whole industry) is the cost per barrel of oil.

