Middle market products squeezed from both ends
Middle market products squeezed from both ends
In his Financial Page in the New Yorker, James Surowiecki presents a number of interesting observations, data and to support his theory that the middle is the worst position you can find yourself in these days - at least as far as branded products go.
He writes that Apple’s launch of the iPad is a gamble - that consumers will pay for quality. The iPad is significantly more expensive than its competitors. But Apple’s assumption is that if the iPad is also significantly better, people will happily shell out for it (as they already do for iPods, iPhones, and Macs).
In contrast, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops - the reverse of Apple’s premium-price approach. Similarly, companies like Ikea and H& M are flourishing not by selling products or services that are better than anyone else’s, but by selling things that aren’t bad and cost a lot less: they are engaged in what Wired recently christened the “good-enough revolution.” For them, the key to success isn’t excellence. It’s well-priced adequacy.
These two strategies may look completely different, but they have one crucial thing in common: they don’t target the amorphous blob of consumers who make up the middle of the market. Paradoxically, ignoring these people has turned out to be a great way of getting lots of customers, because, in many businesses, high- and low-end producers are taking more and more of the market.
In fashion, both H&M and Hermès have prospered during the recession. In the auto industry, luxury-car sales, though initially hurt by the downturn, are re-emerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms.
While the high and low ends are thriving, the middle of the market is in trouble. Previously, successful companies tended to gravitate toward what historians of retail have called the Big Middle, because that’s where most of the customers were. These days, the Big Middle is looking more like “the mushy middle” (the term coined by consultants Al and Laura Ries).
The companies there - Sony, Dell, General Motors, and the like - find themselves squeezed from both sides. The products made by midrange companies are neither exceptional enough to justify premium prices nor cheap enough to win over value-conscious consumers. Furthermore, the squeeze is getting tighter every day. Thanks to economies of scale, products that start out mediocre often get better without getting much more expensive, so consumers can trade down without a significant drop in quality. Conversely, economies of scale also allow makers of high-end products to reduce prices without skimping on quality. At the same time, the global market has become so huge that you can occupy a high-end niche and still sell a lot of units: Apple has just 2.2 per cent of the world cell-phone market, but that means it sold twenty-five million iPhones last year.
The boom in information for consumers has also severely weakened middle-market firms. In the past, these companies were able to charge a premium price because their brands were taken as signals of reasonable quality and reliability. Today, consumers don’t need to rely on shorthand: they have Consumer Reports and J. D. Power, CNET and Amazon’s user ratings, and so on, which have made it easier to gauge differences in quality accurately. The result is that brands matter less: a recent Nielsen survey found that more than 60% of consumers think that stores’ generic products are equal in quality to brand-name ones. In effect, the more information people have, the tighter the relationship between quality and price: if you can deliver a product or service that is qualitatively better, you can charge top dollar. But if you can’t deliver the quality you can’t get the price.
This doesn’t mean that companies are going to abandon the idea of being all things to all people. If you’re already in the middle of the market, it’s hard to shift focus - as GM has discovered. And the allure of a big market share is often hard to resist, even if it doesn’t translate into profits. According to one estimate, Nokia has nearly twenty times Apple’s market share, but the iPhone alone makes almost as much money as all Nokia’s phones combined.
Via Marketing Daily
Thursday, 25 March 2010 08:43