Wikipedia defines Commodity as having the characteristic that "that prices are determined on the basis of an active market, rather than by the supplier (or other seller) on a "cost-plus" basis".
The implicit meaning in this definition is that a commodity is not unique to a supplier but common among multiple suppliers (the reason that prices are determined by the market). If you and I both sell apples, there is nothing differentiating them. As a seller, I cannot set the price on my apples because they are no different from what are selling and consumers would just pay for your apples.
A commodity business is one that typically competes on price.
You might think that Coke is a commodity business since Pepsi has a very similar product. But anyone who only drinks one at the expense of the other one knows that they are not the same. Coke's "secret recipe" differentiates it from it's competitors and prevents it from becoming a commodity. Now that doesn't mean that the company can charge $10 per soda, but they do have some differentiation. They could either charge more for the soda or charge the same price but have loyal drinkers choose them over other colas.
Non-Commodity Businesses Usually Have a Defensible Position
You may not have a defensible position in your business (a differentiation that your competitors or new entrants cannot easily emulate) but that does not mean that you have a commodity business. But it does mean that you will probably have a commodity business in the not-so-distant future.
Therefore, if you do have a strong, defensible position, you are probably pretty safe from your business becoming a commodity business.
The Problems with a Commodity Business
Warren Buffett, one of the most spectacularly successful investors ever (he is the second richest man in the world) completely avoids commodity businesses - focusing instead on businesses with differentiated competitive advantages.
The problem with a commodity business is that it becomes a "race to the bottom". The company with the lowest price "wins" but in the end, no one really wins that way.
The only companies that can any company can survive in a commodity business is if they become the most efficient at supplying the commodity, thereby having the lowest cost and highest profits. By doing this, they can scale up and maximize their razor-thin margins to eke out a business.
Website hosting is a great example of a business that turned into a commodity based business. When the Internet was still in its infancy in the early 90s, companies who could host websites made a good deal of money because there weren't many competitors out there. Even for a while they could maintain a slight competitive advantage with new features that other companies did not have (like stats or webmail) but now you can get all the features you really need for just a couple of dollars a month.
GoDaddy is a good example of a business that has become very efficient and can have a business by scaling to get the most possible clients in a commodity business. (continued on the source above)
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