Imagine this scenario.
Your product has been on the market for several years, and the competitors have copied most of its key features. Customers perceive your product and its competitors as very similar, and the price is becoming the main factor considered for buying decisions.
Moreover, your marketing efforts put in place to communicate the value proposition and brand equity seem not to be working as in the past.
Does this sound familiar? Then it means there’s an ongoing commoditization of your medical product.
What is commoditization?
Merriam-Webster dictionary defines a commodity as “a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (such as brand name) other than price,” i.e., an undifferentiated product.
According to the same source, commoditization means “to render (a good or service) widely available and interchangeable with one provided by another company.”
In essence, the commoditization of a medical product is the process that makes the product or service interchangeable and almost equal with another.
Commoditization is not necessarily bad. For example, it allows the healthcare system to save resources to invest in more advanced products or services. However, it has a significant impact on the company’s profitability.
The drivers of commoditization of a medical product
At least 4 interlinked forces drive the commoditization of the medical market. They transform previously unique and well-differentiated products or services into a commodity.
1. Change in technology: Although at a slower pace compared to other sectors, the technology shift is responsible for the change in the perception of the product. Transforming the once innovative product into a “mature” one. New technologies shorten product lifecycles and reduce overall profitability.
The technological maturity, i.e., low rate of further development and the standardization of technologies, is a typical force toward commoditization. Also, patent expiration drives the commoditization of pharmaceutical products.
2. Better informed customer: Product savvy customer is another market force that pushes toward commoditization and decreases customer loyalty. Customers have become more informed than before.
They can learn a lot about a product and its technology and will be able to find substitutes if necessary. For example, today even in the more remote areas of the planet doctors can access clinical trials, meta-analysis and scientific articles through on-line platforms.
3. Increased competition: Competition is faster than before, and even the most innovative medical products need to deal with me-too products “shortly” after the market launch. This phenomenon quickly creates a product category of undifferentiated products. Some market segments also see the entrance of new market players from lower-cost or developing countries.
4. Consolidation: To manage the costs of medical products and services, healthcare providers have started a process of consolidating their purchasing organization. And that has led to the development of powerful buying groups.
The commodity trap
In a commoditized segment of the medical market, the buyer has much higher bargaining power. While the seller risks falling into what is called the “commodity trap”.
The commodity trap is a situation where a supplier of the commoditized medical product faces high price pressure, which could lead to a spiral of pure price-based competition or even a price war resulting in a reduced margin.
To counterbalance the reduced marginality, the seller reduces the investment in product development, innovation, and promotion. However, this leads to further loss of differentiation and consequently greater pressure on prices and margins.
5 common elements of commoditized medical products
The process of the commoditization of a medical product involves these 5 distinctive and interconnected aspects.
1. Product uniformity: A key characteristic of commoditized medical products is high product homogeneity. This means that products are perceived as being interchangeable.
Examples of commodity-like products are medical supplies, often disposable, and single-use, non-durable products, which are typically identical in quality and performance. Another example in pharmaceuticals is generic drugs.
2. Price sensitivity: High price sensitivity for commoditized medical products results from buyers looking for the best price for a standardized product. Mostly on the assumption that it will be equivalent in quality and features.
3. Influence shift to the economic buyer: For commoditized medical products, the role of hospital administrators is key. Moreover, purchasing decisions have become more centralized. And the healthcare professional’s preference will not be a strong force for the purchase.
4. Low switching cost: The switching cost is the combination of multiple factors and is considered low for commoditized products. Those factors include product use learning cost, set-up cost, benefit loss, economic loss, personal relationship loss, and brand relationship loss costs.
5. High market stability: For commoditized medical products, market stability is high. Therefore, market demand is generally stable and predictable, and the competitive environment is steady.
Final Thoughts
The commoditization trap is hell for any company. Sadly, MedTech and pharmaceutical companies that are inwardly oriented and focused on their technology will fall into this trap.
Companies facing commoditization must quickly understand its process and adapt to remain profitable. In my next post, I will discuss a few strategies (based on customer needs) that can help companies avoid the commoditization trap.
Is your product becoming a commodity? Share your thoughts in the section below, and if you like the content of this blog, don’t forget to subscribe or connect on LinkedIn for more updates.