Monday, April 26, 2010

Knowing When You're Buying a Commodity

When aspirin first hit the market, it was exclusively produced by Bayer. Nowadays, it's available from a hundred different sources. And it's the same, no matter where you buy it. This transition from a "differentiated product" to a "commodity" happens in many arenas. Telling the difference is important.

Commodities are, by definition, the same no matter who supplies them, so the lowest price wins. Take, for example, baking soda. Arm and Hammer might be the most recognizable brand of baking soda, but what difference is there between A&H and a store brand? They're both the same chemical formula, so the only real difference is the box.

Oh, and the price.

On the other hand, there are lots of products that successfully differentiate themselves—if you're buying a new car, for example, choosing the cheapest one available might not be the best move. Careful evaluation of the benefits offered by each model is time well spent.

A lot of markets fall somewhere in between these two classifications. For example, garbage bags might look all the same, but while they all may serve the basic purpose of holding trash, thinner plastic might result in rips, tears (in the bag, not from you), and frustrating spills.

Soda pop is another iffy one. I don't drink soda, and I'm not very discriminating in my soda taste. So to me, if I needed a cola for some reason, I would be just as likely to pick a store brand (Shasta?) as name-brand Coke. Which would you pick? To me, a cola is a commodity, so the lowest price wins. If you perceive a difference in the value (taste) provided by different colas, you might decide differently.

But if you're buying baking soda, consider the possibility that paying more for a name brand is just that: paying for the brand.

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