Leveraging Commoditization
What Commoditization Means and How to Make it Work for You
Increasingly the things we buy and sell are becoming specialized and complex. This is also the case at the wholesale/industrial level in the commercial markets that we all deal in every day. Many of the products that are being developed are made up of unique attributes that are the result of an innovation and/or involve quality distinctions that makes them separate and apart from other similar products available in the market.
These products don’t trade like commodities where traders trade standardized, fungible, short-term delivery contracts in rapid-fire progression as prices change in a transparent and responsive manner. Instead this more complex suite of products trade in the least dynamic way possible, where a seller and buyer often meet in person or over the telephone to negotiate a transaction. This process is conducted one-on-one, in private, between the seller and many buyers, and many buyers with other sellers offering similar products. Transactions can take months to unfold, are highly customized, and for practical purposes often lead to long-term deals with very rigid terms that potentially constrain both sides. Commodities, on the other hand, evolve through the transforming of inefficient processes for trade into efficient ones by increasing the standardization of terminology and contract terms, increasing price transparency, and centralizing trade. At the same time these new efficiencies bring lower transaction risks through increased liquidity and new trading products.
Essentially every commodity you see trade today began as one of these specialized products. Over the course of many years new products can be shaped by market forces into commodities. But not all of them. Many fail to reach a sufficient level of organic market liquidity to attract the necessary market infrastructure like trading intermediaries (ex. aggregators, third party marketing firms, speculators), price reporting agencies, brokers, trading platforms, exchanges, transaction risk software providers, clearinghouses, etc. Despite this, the goal of participants in product markets should be commoditization since it brings with it considerable growth opportunities. Commoditization helps the incumbent industry players by attracting new parties and investment that add value to existing assets while simultaneously de-risking growth plans and future expansion opportunities. Commoditization also brings efficiency, making it considerably easier to trade and to create a more diverse portfolio of purchases and sales that are less restrictive. This enables both buyers and sellers to be more responsive to price signals.
The good news is that today’s technology can make it possible for even the most complex products to begin the commoditization process. A single buyer or seller in a complex product market is now able to cost-effectively deploy a wide variety of online trading solutions to encourage commoditization of their specialized product.
A single buyer or seller can begin conducting its marketing or procurement practices augmented with an online marketplace such as the Neutral Trade trading platform. The buyer or seller can design new markets to increase commoditization of the specialized product by socializing new digital standards through the platform. These new standards can then be turned into executable markets as a component of the buyer or seller’s procurement or sales strategy.
The socialization of standards combined with transparent, executable markets will draw in others to both utilize those markets but also to help shape the standards through liquidity. The standards that are most acceptable to the most buyers and sellers will attract the most trading, stimulating activity in the markets. Once the inertia of the market is overcome, that initial trading activity can then be grown with better market data, increasingly efficient negotiation and trading formats, and new risk management tools and products. Furthermore, digitizing the markets enables smoother processing throughout the life cycle of the transaction by integration with internal systems and by encouraging development of new transaction life-cycle technology to simplify trading.
Commoditization doesn’t need to take years or decades to occur with the support of modern transaction technology. It simply needs to be pushed by a willing buyer or seller who believes that their specialized product should grow rapidly in use. Liquidity has a snowball effect where a few transparent trades that are easy to execute can quickly become continuously-traded active markets. Active markets attract new interest from investors and third-parties who specialize in de-risking trade.
We can help you begin the process of transforming your specialized product market into a commodity market.
Contact Us today for a no-cost design consultation where we can provide you with a roadmap to get there.