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What's a company's worst nightmare? There are probably a few of them, but one of the worst is commoditization.

Finding your market filled with competition that looks almost identical to your business is a frustrating, disheartening experience, but it's a common one.

Thanks to the ease with which web-based applications and business models can be 'duplicated', most new internet companies will find themselves protected by narrow moats at best.

Even in the hottest markets, this can be seen. Take Groupon, for instance. It still occupies the most enviable position in the group commerce space, but every day the model it has brought to the masses is replicated. Increasingly, Groupon's competition isn't upstarts and wannabes -- it's established web and traditional businesses with massive audiences of their own.

So what can companies like Groupon do? Commoditization is a fact of life in many markets, but that doesn't mean it can't be defended against. Here are five ways to fight it.

Invest in technology

While building a technology-based barrier to entry can be difficult to do, particularly if you're in the consumer internet space, investment in technology isn't always a waste of money in the fight against commoditization. The key: focusing in on the

Using Groupon as an example, there are many indications that Groupon has done a very poor job building technology that serves the merchants it works with.

From making the Groupon experience more efficient, to helping merchants track ROI, there are plenty of opportunities for Groupon to prevent the total commoditization of its business.

Seek scalability

The pursuit of scale is not without its risks and most new businesses in hot emerging markets aren't going to be able to scale massively before others jump on the bandwagon, but that doesn't mean that it's fruitless to think about 'scale.'

On the business model front, look at ways you can tweak your business model to attract and serve more customers. Oftentimes, as in the case of Groupon, a business model provides a natural bottleneck to growth.

On the technology front, think about how some of the most successful companies have found ways to do more with less. Take Google, for instance, which can scale its search engine like few other companies because of its pioneering use of massive server farms consisting of cheap, commodity hardware.

Create network effects

Why is Facebook so successful? Two words: network effects. As more and more people started using the social network, it became more and more useful to them. Today, it doesn't really matter that there are a zillion other social networks and umpteen social network platforms that offer much the same functionality: Facebook doesn't have to worry about commoditization because its network effects are so strong.

Depending on the market you're in, it's not always possible to find easy ways to build and take advantage of network effects, but when there are ways, don't underestimate what network effects can do.

Offer a hard-to-beat level of customer service

By in large, lots of companies talk about great customer service, but most fall far short of the mark. That makes customer service a potentially powerful tool in the fight against commoditization.

Even if your competitors are able to replicate your technology and business model, many won't have the will and ability to match your service. In many markets, customer service is one of the most crucial differentiators available.

Adopt a commoditization-friendly business model

If you can't beat them, sometimes it pays to join them. Instead of trying to fight commoditization, consider embracing it.

In the group commerce space, while Groupon management seems fond of finding creative ways to whine about "copycats", there are companies like Shoutback Concepts which are finding success by providing turnkey platforms for all of the companies that want to be those copycats.

Being a behind-the-scenes platform provider may not be as sexy as being Groupon, but it does offer an interesting and potentially lucrative opportunity to cash in on the market without having to lead it.

Patricio Robles

Published 4 May, 2011 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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