Commodities and differentiated products are the two ends of the product spectrum. A product is a commodity when all units of production are identical, regardless of who produces them. However, to be a differentiated product, a company’s product is different than those of its competitors. On the continuum between commodities and differentiated products are many degrees and combinations of the two.
Commodities
Commodities are fungible. This means that each unit of a commodity is exactly like every other unit. For example, every bushel of number 2 corn (15.5 percent moisture) can be substituted for every other bushel of number 2 corn. Because the identity of each producer’s corn does not have to be kept separate, the corn from many farmers can be mixed together. This also means that the price for corn on any given day, at any given location, is the same for all farmers.
Commodities tend to be raw materials like corn, wheat, copper, crude oil, etc. Only commodities can be traded on "futures" markets because every unit is the same. Differentiated products tend to be finished products.
Price Takers
People that produce commodities are referred to as "price takers."This means that an individual producer has no control over his/her price. On any day, they must take what the market offers them. For example, a Midwestern corn farmer has no influence over price because each farmer’s corn is the same. So buyers don’t have a preference which farmer’s corn they buy.
Differentiated Products
A company’s product is a differentiated product if it is uniquely different than those of competitors. If the product is different, the producer can make the case that it is better. If it is a better product, the company can charge a higher price for it. For example, efforts to build a better mouse trap are based on the premise that, if you can build a better one, it will have more value to the customer and you can sell it for a higher price. This is in stark contrast to commodities where every unit is the same, regardless of who produces it.
Price Maker
The producer of a differentiated product is said to be a price maker rather than a price taker. A price maker has some influence over price, but not as much as most people believe. Essentially a producer of a differentiated product creates a separate market for their individual product. For example, the demand for "Johnson’s Better Organic Milk" is unique to Johnson. This allows Johnson the opportunity to charge a price that is different than that of other organic milk.
However, there is a perception that price makers can automatically generate profits because they can charge any price they want for their product. It is true that producers of differentiated products can charge any price they want. Actually, commodity producer can do the same. But will anyone buy the product at that price? Only if the perceived value of the product to the consumer is greater than the price. Remember, the calculation of profits involves price multiplied by sales, not just price.
Perceptions are Everything
A differentiated product doesn’t need to be a better product, it just needs to be perceived as a better product by the buyer. Much of the advertising and promotion that occurs in our society – of which there is plenty – is focused on trying to convince consumers that their product is better than those of competitors. Whether it is actually better is immaterial. The only thing that counts is if you can convince the consumer that it is better. For example, is Miller Lite beer better than Bud Lite beer, or vice-versa? There are millions of beer drinkers who will argue that question from both sides.
The Value-Added Differentiation Fallacy
There is the false perception in agriculture that the emergence of niche markets provides for product differentiation. For example, the organic milk market niche offers you the opportunity to differentiate your milk from commodity milk. While it does allow you to differentiate your milk from commodity milk, your organic milk is not a differentiated product. Simply producing organic milk only puts you in a different (albeit smaller) commodity market. Your product is no different than any other organic producer’s milk.
Differentiation is only of value if it is specific to your product. So you need to convince organic milk drinkers that your organic milk is better than that or your competitors. One way of doing this is to create a brand for your product (e.g. Johnson’s Better Organic Milk), and promote your brand to organic milk drinkers.
So a niche market does not automatically provide you with a differentiated product. It simply puts you in a different commodity market. The advantage is that it does provide you with the opportunity to differentiate your product. By branding your product, providing services, focusing on selected markets, etc., you can create a differentiated product. This is something that is almost impossible to do in agriculture’s traditional broad commodity markets.
See the Ag Decision Maker website for more economic and business analysis concepts.
Don Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu
FAQs
A product is a commodity when all units of production are identical, regardless of who produces them. However, to be a differentiated product, a company's product is different than those of its competitors. On the continuum between commodities and differentiated products are many degrees and combinations of the two.
What is the difference between product and commodity? ›
A commodity often refers to a raw material used to manufacture finished goods. A product, on the other hand, is the finished good sold to consumers. Both commodities and products are part of the production and manufacturing process; the main difference being where they are in the chain.
In what ways can a company differentiate a product that is a commodity? ›
13 Ways To Differentiate Commodities
- Deliver superior product or service consistency (quality control).
- Deliver superior responsiveness (order fulfillment, technical support, customer service).
- Offer a superior range of products and services.
- Consider value chain integration.
A commodity essentially has the same physical attributes as other products on the market, and thus the sole differentiator is the price. While many products may appear to be commodities, there are only very few actual commodities out there!
What is the difference between a commodity and a material? ›
A raw material is an unprocessed natural substance or mineral used in a manufacturing process for providing finished goods. Raw materials are often natural resources such as gas, bauxite or wood. A commodity is any product which a low value added and thus very sensitive to price competition.
What is the difference between commodities and differentiated products? ›
Commodities and differentiated products are the two ends of the product spectrum. A product is a commodity when all units of production are identical, regardless of who produces them. However, to be a differentiated product, a company's product is different than those of its competitors.
What is the difference between commodity and specialty products? ›
Commodity chemicals are not raw materials, of course. They're standardized and uniform, enabling many producers to create, store and deliver these as commoditized input components. Specialty chemicals, in contrast, require extensive engineering and technical support.
What are 3 ways a firm might differentiate its product? ›
Product differentiation depends on consumers' attention to one or more key benefits of a product or brand that make it a better choice than similar products or brands. The elements of differentiation include product design, marketing, packaging, and pricing.
What is an example of product differentiation? ›
When making decisions regarding horizontally differentiated products, it often boils down to the customer's personal preference. Examples of Horizontal Differentiation: Pepsi vs. Coca-Cola, bottled water brands, types of dish soap.
What is the difference between commodity product and brand? ›
A commodity is identical no matter who produces it, while brand refers to a unique good or service that is different from other goods or services in some way. The distinction between a commodity and a brand varies depending on how much they share similarities.
Differentiated products benefit the customers by providing wider options and firms by increasing their chance to capture a larger share in the market as well as stand out from their competing firms.
What are the disadvantages of differentiation strategy? ›
Your product may be perceived as the best now, but as consumers become more informed and technology advances, this could change. This presents a major drawback of the differentiation strategy. Resources can be strained: The differentiation strategy requires substantial time, effort, and financial resources.
What are highly differentiated products? ›
A differentiated product is one that shares many qualities with other, similar products and yet has a unique selling point or difference. Cars are one of the most familiar examples of a differentiated product.
What are examples of commodities? ›
What are Commodities? Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum.
What is a commodity product in simple terms? ›
a product that is the same as other products of the same type from other producers or manufacturers: Sugar is a commodity product and no one company has more chance of controlling its supply and price level than any of its rivals. It is difficult to differentiate and brand commodity products like wood or steel.
What are the three types of commodities? ›
There are three major types of commodities; agriculture, energy, and metals. These three are differentiated in the means of accessing them. The means of accessing them is based on whether they are hard or soft.
What is an example of a commodity? ›
Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum. There are also “soft” commodities, or those that cannot be stored forlong periods of time, which include sugar, cotton, cocoa and coffee.
Is oil a commodity or product? ›
Crude oil is one of the world's most important commodities, and its price can have ripple effects through the broader economy. Rising oil prices mean higher gasoline prices at the pump, higher shipping costs, and increased input costs for producers.
What makes something a commodity? ›
Commodities are raw materials used to manufacture consumer products. They are inputs in the production of other goods and services, rather than finished goods sold to consumers. In commerce, commodities are basic resources that are interchangeable with other goods of the same type.
What is commodity vs brand product? ›
A Brand creates and satisfies a yearning in the buyer's mind whereas a commodity simply completes the need. Jack is a running enthusiast. Buying sports shoes is his need. He could buy those from a local vendor.
