Product vs Commodity

I love building software products, but sometimes it makes sense to treat a certain resource more like a commodity.

The definition of a commodity is a raw material like copper or primary agricultural product that can be bought and sold. There are of course many other services and businesses built on top of any commodity. For example, a manufacturer may buy a commodity (iron ore) and then sells steel beams. A builder would then buy the steel beams and sell a building. A real estate mogul may buy the building and then rent out space in the building. And so on.

ArcelorMittal (a steel company) really only cares about one thing when it buys iron ore: price. A new startup, on the other hand may evaluate many different factors when it comes to office space including intangible things like “vibe” and “network effect”. Part of the reason why co-working space renter WeWork is doing so well despite extremely high price per square foot is that they have developed a full product that appeals to young startups.

So, the big question is if you had a commodity like iron ore, should you sell it largely as is (i.e. you are selling a commodity) or should you try to transform it into something else (i.e. you are selling a product)? I think that software developers are naturally inclined to make everything a product, but the key decision point is whether the extra value you get from a transformation is worth the cost.

For example, let’s say you bought a commodity for $5. You could either sell it for $7 with $1 in costs for marketing, operations, etc. OR you could spend an extra $5 to transform it into something else that you can sell for $20. It may seem like the obvious choice is to spend the extra money and create a product you can sell at a higher price point for more profit. However, this isn’t always the right solution. The subtle thing that is often ignored here is that transformations carry risk. Markets can change and if you put yourself in a situation with a lot more overhead you may not be able to move quickly enough to avoid going in the red when your costs jump from $5 to $50.

The point here is that if you can truly make a profit off a commodity without much of a transformation, you may want to consider doing it. I love building products as much as any developer, but sometimes it may make sense to not build something complex and just expose the raw information or downstream tool without much on top of it. The contact information on GetHuman (for example, the Comcast Phone Number page) is built around a commodity. Namely, phone numbers and cheat codes for companies. We have at various times tried to turn this into a product, but nothing has been as valuable as just exposing the raw info in a very clear way. No login, no extra clicks, no downloads, no popups. Just the info the user needs in one shot.


One thought on “Product vs Commodity

  1. Tim Noetzel Reply

    Good insights, Jeff! Love seeing analysis from our convos turn into blog posts!

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