Why Does Apple Focus on Consumer Markets?

Ben Thompson at stratechery.com has noted that with pure consumer markets user experience and ease of use are the priorities, and these qualities are never really “good enough.”  Business customers, by contrast, care less about the subjective user experience and are more focused on the measurable benefits of product improvements versus the costs of these improvements.  

Ben Bajarin at techpinions.com says that mass market consumers often choose products based on personal preference, not based on a pure, rational weighing of costs and benefits and what’s good enough, and that disruption theory is less applicable to these kinds of markets.  Consumers often buy appliances based on what’s good enough, but they often buy items like cars, clothes, jewelry, purses, and shoes based on personal preference.  And the greater the role of personal preference, the less that disruption concepts like good enough apply.

The corollary of all this is that with business markets, overserving is a greater risk because subjective, unmeasurable elements like user experience, ease of use, personal preference, and product aesthetics (look, feel, and quality) are less relevant.  A consumer will pay for a BMW as his own personal car based on user experience, personal preference, and product aesthetics — a business buying company cars for its salesmen will not.  Consumer markets also tend to be larger than business to business markets, so there’s usually a sizable market segment willing to pay up for aesthetics and a superior user experience. 

This may be one reason Apple has always focused on consumer markets rather than the enterprise.  At the D8 technology conference held in June, 2010, Steve Jobs stated the following:

"What I love about the consumer market that I always hated about the enterprise market is that we [Apple] come up with a product, we try to tell everybody about it, and every person votes for themselves -- they go 'yes' or 'no.'  And if enough of them say yes, we get to come to work tomorrow. . . .  [But] with the enterprise market it's not so simple.  The people that use the products don't decide for themselves.  And the people who make these decisions sometimes are confused." (emphasis added). 

By focusing on the consumer market, which is much larger than the enterprise market, Apple insures it can always sell to a segment of the population that values a better, never-good-enough user experience, greater ease of use, and superior product aesthetics.  By focusing on consumer markets rather than the enterprise, Apple makes personal preference, ease of use, user experience, and aesthetics more relevant as buying criteria -- these factors are not as important to an enterprise buyer weighing the costs/benefits of purchasing a product for thousands of employees.

Apple's vertical integration

Steve Jobs also repeatedly noted that as an end-to-end integrated company, Apple can take complete responsibility for the user experience, and can innovate in ways that more modular companies cannot.  See Concepts page and discussion of Clayton Christensen.

By squarely focusing on consumer markets and the end user experience, Apple reaps the full benefit of its vertically integrated business model.  Vertical integration makes it easier for Apple to continuously innovate, making their products better and better, and Apple's focus on the end user and the consumer market insures these innovations are valued in the marketplace and are never too good (at least for a large number of consumers).  Consistent with Michael Porter's advice, there's great "fit" between Apple's vertical integration and the consumer market it targets.  See Concepts page and discussion of Michael Porter.   

Can companies that compromise the user experience disrupt Apple?

All this raises an interesting question.  If user experience, ease of use, and product aesthetics in consumer markets are never good enough, then can a company with a business model that targets the consumer market but compromises these subjective elements ever disrupt a consumer-focused company with a business model that doesn’t make these compromises?  

By focusing on best-in-class hardware and easy, convenient access to best-in-class third party apps and services, Apple avoids compromising the user experience for either hardware or apps and services.  Apple can freely integrate its hardware with any best-in-class app or service it chooses (as it did with Twitter and Facebook), since profitable service and content sales aren't the objective, and apps, services, and content are offered at breakeven.  And Apple only has to compete with a limited number of other hardware makers.  Entry barriers for new hardware makers are also high, with significant capital investment required.  See Concepts page and discussion of Michael Porter.

Google, Xiaomi, and Amazon, on the other hand, rely on proprietary apps, services, and/or content to drive profits from ads, services, and/or content, so they have to funnel users into their branded services.  Ads and funneled/limited choices hurt the user experience.  It's why people pay for cable TV instead of just watching over-the-air, network television.  Proprietary services and content from Google, Xiaomi, and Amazon must also compete with apps, services, and content from thousands of third party developers.  Unlike the hardware business, entry barriers for third party apps, services, and content are low, with little capital investment required.

Perhaps most problematic, vendors that subsidize breakeven hardware with profitable ads, apps, services, and/or content -- like Google, Amazon, and Xiaomi -- lack the hardware driven profit incentives needed to continue improving the consumer's user experience through hardware innovations and improvements.  See Concepts page and discussion of Clayton Christensen.  As noted by Horace Dediu at asymco.com, a vendor doesn't want to improve breakeven or loss-leader hardware that's subsidized by other profitable parts of its business (at least nothing beyond the bare minimum necessary to compete) -- it wants to extend the life of subsidized hardware as long as possible.  Companies with this model can get left behind by competitors that sell profitable hardware, because these competitors are motivated to continue investing in hardware innovations and improvements.  A breakthrough innovation by a profitable hardware company can change customer expectations of what's "good enough," leaving a company that subsidizes its hardware far behind.  See Concepts page and discussion of Clayton Christensen.

For all these reasons, Apple may be much harder to disrupt than people think.

If user experience and ease of use are never good enough, can Apple abandon other jobs that need done like accessibility and affordability? 

With most if not all Apple products, the price of the initial device stays flat with each update, while older devices decline in price.  And with the iPod Mini, iPod Nano, iPod Shuffle, iPad Mini, and iPhone 5c, Apple has done product redesigns that make the device more affordable and accessible to a larger group of people.  In the Businessweek article published September 20, 2013, Tim Cook explained the rationale for the iPhone 5c as follows:

"We wanted to make the phone more accessible. For us it’s all about products, and so we don’t look at things and say, 'I will never sell a phone below that.' We don’t look at it like that.  We say, 'Let’s think about a great product that we’re doing.'  If that great product can be sold for less, then we sell it for less. . . .  

With iPhone, we just entered the business in 2007—not that long ago. It became clear to us that we could come up with a great product that appealed to a different consumer and had the benefit of costing less, so we could make it more accessible, and therefore grow the number of people that we could serve. That’s the reason." (emphasis added).  

Businessweek, September 20, 2013 (http://mobile.businessweek.com/articles/2013-09-20/apple-ceo-tim-cooks-complete-interview-with-bloomberg-businessweek).

The question is, if user experience and ease of use are never good enough, then why does Apple use flat pricing and product redesigns to make their products more affordable/accessible?

The answer may be that while large consumer markets help insure that a significant portion of the market will pay for an ever-improving user experience (helping prevent Christensen-style disruption), Apple can generate greater revenue and profit growth by still focusing on unmet jobs that need done, including affordability and accessibility, when it's technologically feasible and/or when production costs decline.  By improving affordability and accessibility, Apple also discourages potential new entrants and hedges against any new market or low end disruption it fails to anticipate.  See Concepts page and discussion of Clayton Christensen and Michael Porter; also see post titled "iPhone 5c and 5s:  Apple still focused on jobs that need done."   

As an operations and supply chain expert, Tim Cook has played an integral role in Apple's ability to keep products affordable and accessible (through production efficiencies and massive, block purchases of component supplies), which has helped Apple expand adoption of its very sticky ecosystem and platform, all of which creates a huge competitive barrier for potential new entrants.  Tim Cook may not be the "product guy" Steve Jobs was, but he's successfully led Apple's effort to keep products affordable, to move downmarket when possible, and to increase consumer adoption, and these steps should help prevent new market or low end disruption.

Apple's flat pricing strategy also diminishes the relevance of the "good enough" debate.  Disruption theory assumes that overserving products get that way through a steady stream of product improvements, which companies use to justify higher prices/margins in moving upmarket.  Apple challenges this assumption by keeping prices and gross margins flat, despite a stream of product improvements that could justify higher prices and margins.  Apple's gross margins for the past 12 months and the past four fiscal years are as follows:

Past 12 months (last four reported quarters):  38.3%

2012:  43.8%

2011:  40.5%

2010:  39.4%

2009:  40.1%

If you keep prices and margins flat while continuing to make functional improvements that improve the subjective, unmeasurable user experience, customers may feel they're getting a good deal instead of feeling overserved. 

The author owns stock shares of Apple Inc.