Growing Profits and Preserving Brand Value

A simpler, cheaper, or more convenient product that targets overserved low end consumers, or that creates a "new market" of new users or new use cases/contexts, isn't always successful, even if the product maker has an asymmetric business model that creates early profits. Early profits are necessary, but these profits must grow so the product can be improved at a rate sufficient to stay competitive. See Concepts page and discussion of Clayton Christensen. Otherwise the new product is never going to see wide adoption, especially if more profitable competitors, often with different business models, keep making meaningful improvements while holding price or moving downmarket. 

Apple moves downmarket -- while preserving its brand image/cache -- by reducing the price of older products that were formerly state-of-the-art. An older Apple product, just like a used Porsche, still communicates status because (1) it used to be state-of-the-art and (2) because an onlooker can't tell whether the product was bought used/old or new. 

With new products Apple holds prices fairly constant, waiting for low and mid end consumers to move upmarket rather than aggressively chasing these consumers downmarket. Apple waits for consumer purchase power to rise over time, skating to where the puck/money will be. At the same time Apple keeps trying to make meaningful improvements, and the occasional technological leap, to prevent overserving and to keep raising consumer expectations of what's "good enough." See Concepts page and discussion of Clayton Christensen.

It's interesting to compare how Apple and luxury car makers like BMW and Mercedes try to preserve brand value. Apple releases one state-of-the-art iPhone each year, and then reduces the price of this phone the next year. All of Apple's product releases are a big deal, with ample press coverage, because Apple has few products and few product releases. As a result lots of people know the name and appearance of the latest iPhone model, and they know it's at least arguably a best-in-class product. 

By contrast, BMW and Mercedes release dozens of car models every year, with many variations in trim, car size, engine size, price, and so on. Because of all these models the typical onlooker doesn't know the cost and functionality/performance of a BMW or Mercedes he sees on the street. BMW and Mercedes don't seem to consider any one model particularly special -- otherwise why release so many versions? They can't all be best-in-class, and if the typical onlooker can't discern which is best-in-class then why should he care about the brand or aspire to own the vehicle?

The author owns stock shares of Apple.

"Quality is the Best Business Plan, Period" and the Low End Dilemma

The quote above comes from John Lasseter, the chief creative officer at Pixar. A similar quote comes from a Jony Ive interview on Apple's product design process: "If it's not very good we should just stop ...." I think these quotes capture why certain companies -- BMW, Mercedes, Porsche, Ferrari, Disney/Pixar, Apple, and so on -- survive and prosper over such a long time period. They consistently focus on delivering a well-designed, high quality product, which leads to a great user experience, a strong brand, and high customer loyalty. These companies all put superior product quality ahead of affordability, allowing them to survive and grow even with limited market share.

Low cost, low end products often lack the quality needed to deliver a great user experience, which leads to disloyal customers who will trade up for a high quality alternative as soon as they can afford it. A college student driving a Ford compact looks forward to the day when he can maybe afford a BMW sedan.

This may explain why Android OEM's are losing business to Apple. It may also explain why low end companies with low margins often seem to disappear, while a few luxury brands survive for decades. In the short run the low end may be appealing, especially from a market share perspective, but in the long run low end customers defect and support the survival of high quality vendors.

The Low End Dilemma

Companies with a low end, modular business model -- that are trying to disrupt incumbents making high quality products that are arguably more than good enough -- face another big challenge: making the meaningful product improvements needed to move upmarket. When a company with a low end disruptive model can't move upmarket, it ends up wallowing in the low end, engaged in unprofitable, price-based competition. See Concepts page and discussion of Clayton Christensen.

This seems like the problem currently faced by many low end Android OEM's. These OEM's are assembling modular components while trying to move upmarket to compete with companies like Apple. The problem is that it's hard to move upmarket -- with meaningful, well-designed product improvements -- with a low end business model premised on cheap, modular components. An integrated competitor focused on high quality rather than price -- like Apple -- is better positioned to make meaningful product improvements (e.g., Apple Pay and Apple's Touch ID) that distance itself from low end, modular assemblers that must rely on superficial improvements to product appearance, components, or features.

This may be why so many Android OEM "improvements" amount to unnecessary changes or features. These changes often add complexity rather than fundamentally improving a product's convenience or ease of use.

The business prospects of a modular low end player that falls too far behind an integrated company making fundamental improvements are not good.

The author owns stock shares of Apple.

Assessing When Affordability is Good Enough

If you don't have the resources/processes to make meaningful product improvements that consumers will value, then you're forced to compete based more on affordability rather than differentiating functionality.  

Integrated companies are better positioned to compete based on meaningful improvements to functionality, usability, and aesthetics.  More modular companies lack the resources/processes needed to make innovative, meaningful improvements to functionality, usability, and aesthetics.  Companies that rely on modular components are effectively forced to compete more on price because it's difficult for them to functionally differentiate their products.

And different segments of the market value different things.  The average or high end consumer values a balance of affordability, functionality, and aesthetics. The low end consumer values affordability above all else.  The problem is that it's difficult to make a truly beautiful, great product that prioritizes low end affordability.  Apple, for instance, drops price when it can, but not at the sacrifice of making something great, or something that will "put a dent in the universe."

The more complex the product (the greater the number of functional variables), and the more visible and intimate the product, the easier it is to continue making meaningful functional/aesthetic improvements that consumers will value.  In this context, it can take a long time for functionality, ease of use, and/or aesthetics to overserve the average consumer. 

The more relevant product aesthetics are, the less relevant pure price is.  GM damaged Ford's price-focused Model T business by offering higher priced cars with better aesthetics/looks.  Aesthetics explain a lot about why luxury cars continue to sell at high prices, and why luxury car makers like BMW and Mercedes have stayed in business for so long.

The author owns stock shares of Apple.