Commoditisation
A market state where competing products are seen as interchangeable, so competition happens almost entirely on price and no seller can sustain a premium.
In plain language
Some products are hard to tell apart. Cement is cement; a tonne of steel is a tonne of steel. When buyers see no real difference between one seller's output and another's, they simply buy on price.
That is commoditisation, and the workbook names it as one of the industry factors — alongside competition intensity and price elasticity — that decides whether a company can set its own prices at all.
How it works
The workbook's own contrast: "Mining business may be commoditized but FMCG and white goods may be sold purely based on power of brands." A mining company's ore is essentially identical to a competitor's; an FMCG brand's identical-looking product is not, because the brand itself creates a difference buyers will pay for.
Commoditisation is a spectrum, not all-or-nothing — the workbook's petrochemicals example shows this. Petrochemical products are broadly commoditised, yet Reliance Industries, as the natural industry leader, sets the price the smaller players then follow — meaning even within a largely commoditised industry, the largest, most efficient player can retain pricing power that its smaller rivals cannot.
A worked example
Two cement companies sell the same grade of OPC cement in the same city. If Company A prices its cement Rs 20 per bag above Company B, buyers simply switch to B's bags — the product is commoditised, so there is no reason to pay more. Prices for the two converge to within a few rupees of each other, say Rs 380–385 per 50 kg bag.
Contrast a branded biscuit maker in the same city, selling a product buyers perceive as genuinely different. It can price Rs 10 above a generic competitor's pack and retain most of its volumes — commoditisation, and the pricing power it removes, simply does not apply to it in the same way.
Why NISM asks about it
Chapter 7.3 (Pricing Power and Sustainability of This Power) names the level of commoditisation as a direct driver of pricing power, and Chapter 6.6.4 (SCP analysis) revisits the same idea under "conduct." Expect a question on which industry factors determine pricing power, or one using the mining-versus-FMCG contrast.
Common exam traps
- Commoditisation is a spectrum, and even a largely commoditised industry can have one player retain pricing power — the workbook's Reliance Industries petrochemicals example shows the market leader pricing the product, with smaller players following. Do not assume commoditisation removes pricing power industry-wide.
Check yourself
1.Which of the following is a COMPANY-SPECIFIC factor behind pricing power, as opposed to an industry factor that affects all companies in the industry?
- a)Brand affinity among customers
- b)Price elasticity of the product
- c)Level of commoditisation of the product
- d)Competition intensity in the industry
Show the answer
Answer: (a) Brand affinity among customers
The workbook splits the drivers of pricing power into two groups.
Industry factors affect every company in the industry: "the competition intensity in the industry, the price elasticity of the product, and the level of commoditisation of the product." Those are options B, C and D. The workbook says pricing power is "most often" driven by these.
Company-specific factors put one company ahead of its peers: "its natural leadership position in the industry, brand affinity among customers and its cost base."
The workbook’s examples for each company-specific factor:
- Natural leadership: smaller petrochemical players price off Reliance Industries, which is seen as the natural leader, so RIL can price independently.
- Brand: a company with strong brand loyalty can price its product independently.
- Low-cost base: the company can keep prices low without fearing that rivals will follow, because cutting prices "may not be financially viable" for competitors with a higher cost base.
This split matters because the first group tells you which industries are likely to do well. The second tells you which player in an industry is likely to outperform.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Attractive industryAn industry structure, under Porter's Five Forces, with low competition, high entry barriers and weak buyer or supplier power — letting its companies earn strong, durable margins.
- Business modelHow a company actually makes money — what it sells, to whom, and how it delivers and prices it — which the workbook treats as the real basis of competition between companies.
- Porter's Five ForcesMichael Porter's framework for judging how much profit an industry can sustain, through five competitive pressures: rivalry, new entrants, substitutes, and the bargaining power of suppliers and of buyers.
- Pricing powerA company's ability to set and raise its own prices — passing on cost increases and growing margins — without losing customers to competitors.
- Product differentiationMaking a product distinct from competitors' through features, quality or functionality, so customers see genuine reasons to prefer it beyond price alone.