Vivek Kaul
Vijay Mallya, the liquor king, who wanted to run an airline, recently told the staff at Kingfisher Airlines that he had no money to clear their salary dues. Mallya, like many businessmen before him, also became a victim of the line extension trap. “The line-extension trap is using the same brand name on two different categories of products. Kingfisher beer and Kingfisher Airlines. We have studied hundreds of categories and thousands of companies and we find that line extension generally doesn’t work, although there are some exceptions,” says marketing guru Laura Ries, who has most recently authored Visual Hammer.
Along with her father, the legendary marketing guru Al Ries, she has also authored, several other bestsellers like The Origin of Brands, The Fall of Advertising & the Rise of PR and the War in the Boardroom.
But does such a rigid line against line extensions make sense in this day and age, when it is very expensive to build a brand. “We have never said that a company should not line extend a brand. What we have said is that line extension “weakens” a brand,” says Ries. And there are always exceptions to the rule she concedes. “Sometimes, a brand is so strong it can easily withstand some weakening. Early on, for example, the Microsoft brand was exceptionally strong so the company could use it on other software products and services.”
There is also the recent case of Tide, the leading detergent in America, opening a line of dry-cleaning establishments using the Tide brand name. And it might just work, feels Ries. As she explains “Because there are no strong brands or national chains in the category, this can possibly work, although we believe Procter & Gamble, the owners of Tide, would be better off with a new brand name.”
These exceptions notwithstanding there are way too many examples of companies which haven’t fallen for the line extension mistake and are doing very well in the process. Toyota is one such example. And one of the reasons for its success is the launch of three new brands in addition to Toyota. Scion, a brand for younger drivers. Prius, a hybrid brand. And Lexus, a luxury brand.
“Initially, Prius was a sub-brand of Toyota, but the company recently decided to create a totally separate brand. Prius has some 50 percent of the hybrid market in America and is a phenomenal success. The separate brand name will assure its success for decades to come,” says Ries.
What about Apple we ask her? How does she view the brand, everyone loves to love? Hasn’t it also made the line extension mistake by launching the Apple iPod, the Apple iPhone and the Apple iPad? “Apple is not a product brand. Apple is a company brand. Nobody says, I bought an Apple unless they have just visited a grocery store. They say I bought an iPod or an iPhone or an iPad, three brands that made Apple one of the most-profitable companies in the world,” explains Ries.
So in that sense Apple did not really make a line extension mistake. For every new product it created a new brand. And the success of this strategy reflects in the numbers. Apple’s competitors, Hewlett-Packard and Dell, line extended their brands into many of the same products. Both are in trouble. Last year, Apple made $41.7 billion in net profits. Dell made $2.4 billion. And Hewlett-Packard lost $12.7 billion.
But what about Samsung, which has been giving Apple a really tough time in almost all product categories that they compete in. “Currently, Samsung is an exception to the principle that line extension can weaken a brand. But that’s only in the short term. We predict that sometime in the future Samsung will suffer for its marketing mistake,” states Ries. “What keeps Samsung profitable is the principle that in every category there’s always room for a No.2 brand. Coca-Cola and Pepsi-Cola, for example,” she adds.
And Samsung is clearly not as profitable as Apple. Last year, Apple made almost twice as much in net profits as Samsung even though Apple’s revenues were smaller. Apple’s net profit margin was 26.7 percent compared to Samsung’s 11.5 percent.
The other two big companies in the mobile phone market have been Nokia and Blackberry. Nokia recently launched a smartphone under the new ‘Lumia’ brand name. On the face of it this is exactly what Ries would have recommended. The company launched a Lumia smartphone, and did not fall for the line extension trap. Given this, why is Nokia losing out in the smartphone business, we ask Ries.
“What’s a brand name? What’s a model name? What’s a sub-brand name?” she asks. “Many companies like Nokia think they can decide what is a brand name and what is a model or a sub-brand name. So Nokia considers “Lumia” to be its smartphone brand name. Not so. It’s consumers that make that decision. Consumers use iPhone as a brand name and not Apple. Consumers also use Nokia as the brand name and not Lumia. To consumers, Lumia is a model or sub-brand name.”
And there several reasons behind consumers not considering Lumia to be a brandname. “Look at a Lumia smartphone and you’ll see the word “Nokia” in big type. Look at an iPhone and you won’t see the word “Apple.” You’ll see the word “iPhone” in big type and just an Apple trademark,” says Ries.
And on top of that Lumia doesn’t even have a website of its own (www.lumia.com is a website of a British IT company). “Lumia” doesn’t sound like a brand name and it doesn’t even have a website. That makes it very difficult to create the impression that Lumia is a brand. This isn’t the first line-extension mistake Nokia has made. Nokia was its brand name for a line of inexpensive cellphones. And today, Nokia is also using the Nokia name for its expensive smartphone products,” says Ries.
The Blackberry story goes along similar line. On the face of it, the company doesn’t seem to have made a line extension mistake. But Ries clearly does not buy that. “What’s a BlackBerry? Is it a smartphone with a physical keyboard? Or a smartphone with a touchscreen? It’s both, of course, and that’s exactly why BlackBerry has fallen into the line extension trap. To compete with the touchscreen iPhone, the BlackBerry company (formerly called Research In Motion) needed to introduce a new brand of touchscreen smartphone. It’s very difficult to build a brand that it has lost its identity.”
And given the lost focus its very difficult for these companies to go back to the days when they were immensely successful. As Ries puts it “It depends upon whether either company (i.e. Nokia and Blackberry) can do two things: (1) Develop an innovative new idea for smartphones, and (2) Introduce that innovative new idea with a new brand name. It’s hard for us to tell whether it’s possible to come up with a new idea for a smartphone. It could be too late.”
And this could work in favour of Samsung, feels Ries. “Every category ultimately has a leader brand and a strong No.2 brand. Since all three smartphone brands (Samsung, Nokia and BlackBerry) are line extensions, one line extension has to win the battle to become the No.2 brand to the iPhone. Samsung made massive investments in product design and development plus massive marketing investments,” says Ries.
So it’s logical that Samsung would become a strong No.2 brand. Furthermore, they priced their smartphones as less expensive than iPhones, another strategy that increased its market share although not its profitability. This has worked particularly well in Asia, feels Ries.
This success of Apple over Samsung comes with a caveat. As Ries explains it “Long-term, every category has two major brands. But they are normally quite different. Long-term, we see Apple as the leader in the high-end smartphone category and Samsung the leader in the “basic” smartphone category. Apple would make a mistake in introducing less-expensive smartphones. That would undermine its position at the high end.” And that is mistake that Apple needs to avoid.
Another massively successful company that has fallen prey to the line extension trap has been Google. The company has introduced a number of products under the Google brand name, but none of them have been massive money spinners like the Google search engine.
As Ries puts it “Currently, I can’t think of any Google product that is very successful. Google +, the company’s social media competitor, is nowhere near as big or as profitable as Facebook. Google’s most successful introduction has been Android, which now is being use by 75 percent of all smartphones.” Google bought the Android company, one of the reasons it probably didn’t use the Google name on the software.
What all the examples given above tell us is that line extensions have had a sketchy track record. So why do companies fall for it, over and over again? Ries has an answer for it. “As one CEO told us, We have a great company and great products. Why can’t we use our great company name on our great products?,” she points out. “Most chief executives believe that the only thing that really matters is the quality of their products and services their prices. Deep down inside, they don’t believe that the name or the marketing makes much of a difference.”
Then there is the pressure to keep increasing earnings. Chief executives are under pressure to increase sales and profits and they see product expansion (including line extensions) as the best way to achieve these goals. “The more important strategic decision is the question of “focus.” It’s our opinion that the best way into the mind is with a narrow focus. That’s not, however, the majority opinion, at least among top management people. Most companies are moving in exactly the opposite direction. They are line extending their brands,” says Ries.
Given this, CEOs don’t believe a new brand is worth the cost and effort required. It’s true, too, that many management people equate new brands with expensive advertising programs, feels Ries.
But that again is a perception that they have. Most big brands in the last ten years were not built because they advertised left, right and centre. Ries questions the assertion that it’s expensive to create a new brand. “It’s only expensive if a company uses advertising to launch the new brand. In our book, The Fall of Advertising & the Rise of PR, we recommend launching new brands with no advertising at all. Just PR or public relations. Advertising doesn’t have the credibility you need to launch a new brand.”
This is because when a consumer sees an advertisement for a new brand, his or her first reaction is, this can’t be very important because I’ve never heard of the brand. And that’s why some of the biggest brands in recent years like Amazon, Twitter and Google, used almost no advertising. They did, however, benefit from extensive media coverage, feels Ries.
In order to succeed in the years to come, companies will have to create multiple brands. “The future belongs to multiple-brand companies. But with one reservation. A company needs to be successful with its first brand before launching a second brand. You can’t build a successful company with two losing brands,” concludes Ries.
The article originally appeared in Forbes India edition dated July 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Apple
Why Flipkart’s Flyte is shutting down and Apple’s iTunes won’t
Vivek Kaul
Flipkart is shutting down its digital music store Flyte. The company announced this in an email to its customers on May 29, 2013. For music lovers, Flyte was a one stop shop for almost all kinds of music. From Runa Laila singing Bangla folk to Ilaiyaraaja’s soulful Tamil melodies from the 70s and the 80s. And of course it also had the most obscure Hindi film songs (This writer even managed to locate songs of a film called Shabash Daddy, made by Kishore Kumar, which has some really soulful songs sung by his son Amit Kumar). It did not just cater to connoisseurs. All the latest music was available as well.
At a price ranging from Rs 6 to Rs 15 per song, a lot of good music was available at one place. A winning proposition one would have thought. But things did not turn out as they would have been originally envisaged. And the digital music store is being shut down nearly 15 months after it was launched.
Several questions crop up here. Why did Flipkart shut down Flyte so quickly? How does Flyte compare to Apple iTunes which is more than a decade old and still going strong?
The quick answer is that Flipkart is shutting down Flyte because it was a loss making proposition. And it was a loss making proposition because Indians do not like to pay for their music anymore. Everyone wants to download music for free. Or buy pirated stuff which comes very cheap.
As Nikhil Pahwa writes on www.medianama.com “Flyte Music had struck deals for India based music downloads on web and app by paying music labels an aggregate minimum guarantee (MG) of around $1 million (Rs 5.5-6 crores) for the year, multiple sources told MediaNama. Given the advent of music streaming services like Gaana*, Saavn and Dhingana, where users could stream music for free, but more importantly, the prevalence of piracy, the number of users willing to pay for a-la-carte music was fairly limited. Revenues from song downloads were fairly low – not even 50% of the minimum guarantee amount (only around Rs 2-3 crore is what we heard).”
And if this wasn’t enough the revenues from this business were not growing as fast as from other businesses that Flipkart runs. “More importantly, revenues from Flyte Music grew in a linear manner, unlike Flipkart’s physical goods business, which was growing exponentially, month-on-month. Flyte, with low revenues and low growth,” writes Pahwa.
Then there were other issues. Many people now listen to music on their phones. And a lot of new phones came with songs inbuilt into them. As a report in The Times of India points out “A service like Flyte also faces challenge from companies like Nokia and Sony that allow people who buy their smartphones to download millions of songs for free or at very nominal cost. Though these songs can be played only on specific devices.”
So this was the quick answer to why Flipkart shut down Flyte. Now to answer the second question as to how does Flyte compare to Apple iTunes. Why has iTunes been a viable proposition and Flyte was not? The easy answer here is that Apple is a great company and whatever they do has to turn out to be successful. But this answer is basically unfair to Flipkart, which has literally changed the way Indians shop. We need to get into little more detail.
The need for Apple iTunes came up after Apple iPod was launched in Ocotober 2001. The iPod had two godfathers: the Sony Walkman and the Napster website.
As John Mullins and Randy Komisar write in Getting to Plan B – Breaking Through To a Better Business Model “For Apple, there were some analogues to light the way, starting with Sony’s Walkman… Further, some 26 million Napster users worldwide, sitting around in their jeans and t-shirts sharing their music files, made it clear that individual songs were just as much, if not more, appealing to music consumers than complete albums.”
Napster was a peer to peer website from which music could be downloaded for free. It soon ran into copyright infringement as music companies got their act together and sued Napster and it had to shutdown.
So the Apple iPod had a problem. Like Napster, it could also get into trouble if the music companies decided to sue it, for encouraging the proliferation of pirated music. As Mullins and Komisar write “Apple had officially entered the consumer electronics industry. But to complete the picture, Jobs (then Apple CEO Steve Jobs) needed a way to sell music as well. Let’s use Gillette as an analogue: Apple was already selling razors (the iPod), but Jobs wanted to sell the razor blades (music), too.”
And unlike Napster, Apple needed to do this legally. It needed to create some sort of a digital service, from which those who bought the iPod could download their music legally.
“Jobs personally called individual artists… to persuade them to make their music available on the service. Apple was the first to negotiate and reach agreement with five record companies, allowing Apple to sell hundreds of thousands of songs from artists… In a revolutionary move Apple worked out a deal to sell (not rent) each song for 99 cents. Once they shelled out the cash, Apple’s customers could keep their songs indefinitely, share them on as many as three Macintosh computers, burn them to an unlimited number of CDs, and transfer them to any number of iPod portable music players,” write Mullins and Komistar.
The iTunes website launched in April 2003, caught the fancy of people, and on its first day, sold a million downloads. But it barely contributed to the revenues of Apple. On a standalone basis iTunes wasn’t probably worth the effort. As the authors write, “Of course, no one was really going to fill an iPod with thousands of songs at 99 cents each. Sure enough, by 2007, only about 3% of music on iPods was downloaded or copied from the iTunes music store. The rest was downloaded from other places and was therefore, unprotected and playable on any device. But Apple didn’t care.”
So on its own Apple iTunes did not probably make sense but Apple still persisted with it due to various other reasons. “The iTunes music store completed the user experience, and as long as the critical mass of people bought at least some of their music from iTunes site, Apple could keep itself out of trouble with the Recording Industry Association of America (RIAA). Shrewdly, Apple had turned the traditional “razor and razor blades model” on its head: Apple could make its money selling razors — the growing assortment of iPods — even if customers continued to steal most of the blades,” write Mullins and Komistar.
Cut to 2013, how do things look for iTunes now?. For the period of three months ending March 30, 2013, Apple posted a revenue of $43.6 billion. Of this nearly $4.1 billion or almost 9.4% came from iTunes and other software services. So the share of iTunes in the total revenue posted by Apple has gone up from 3% in 2007 to nearly 9.4% now. If we look at the period of three months ending March 30, 2012, Apple posted a revenue of $39.1 billion. Of this nearly $3.2 billion or around 8.2% of the revenue came from iTunes and other software services.
The contribution of iTunes in the overall Apple business has gone up in the decade since it was launched. What does this tell us? Well people are still listening to a lot of pirated music but a whole lot of people are buying music as well. This may be due to the convenience of finding different kinds of music at one place. Also while downloading from iTunes one is assured of the quality of the song and there are no risks that one might face on peer to peer networks or websites that let users download music for free. Or for the fact that people genuinely want to pay because if they don’t, how are those creating music expected to make a living. If people can pay for books, why can’t they pay for music as well?
Apple iTunes took nearly a decade to start making a substantial contribution to the total revenues of Apple. But during that period it supported the other business streams of Apple. And even though it may not have made sense for Apple to run the business on a standalone basis, it did save them a whole lot of trouble they could have otherwise faced from the music industry. Flipkart’s Flyte did not have the same kind of luck. Neither could it supported by the other divisions.
Also, all new concepts don’t catch on automatically. Some concepts take time to mature. And during that time need to be supported by the company. Of course, that is easier said than done. In case of Apple iTunes that had been possible, but in case of Flipkart’s Flyte it was not. Flyte had to be revenue spinner on its own and if not that at least show some growth potential, which it did not.
Having said that, if Flipkart had found some way of keeping Flyte going, it could have been a potential money spinner in the years to come. Because Flyte is an idea, whose time will come.
The article originally appeared on www.firstpost.com on May 31, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Why Samsung is the new Nokia
Vivek Kaul
I grew up reading The Indian Express. But a few years back my parents started subscribing to The Times of India after my mother complained once too often that “Express main masala nahi hai!”
The fall of The Indian Express along with The Statesman which used to be two very good newspapers (Express still is. And I haven’t read Statesman in a while, though at a point of time it was regarded the best English newspaper in Asia) are nowhere in the reckoning now, as far as the number of readers is concerned.
What happened? To some extent the papers remained stuck to their past glory and did not see the rise of the new Indian middle class, which along with hardcore news also wanted a dash of masala every morning. They wanted to know how the Congress party was screwing up the country but they also wanted to know whether Amitabh and Rekha smiled when their eyes met at a film industry party.
The Times of India was the only newspaper which caught on to this trend (or should we say created it), raked in the moolah and got way ahead of almost all its competitors in the race.
So what is the point of I am trying to make? Incumbents who are firmly entrenched in their businesses more often than not fail to see the rise of a new category. The most recent example of the same is Nokia, which after being the top mobile phone brand in the world for a period of nearly 14 years has lost out to Samsung.
And the reason for this is very simple. Nokia did not see the smart phone. There are loads of other examples of existing companies that did not see the rise of a new category.
Sony invented the walkman but allowed Apple to walkway with the MP3 player market. RCA which was big radio manufacturer had earlier allowed Sony to walkaway with the pocket radio market. Southwest Airlines created an entirely new low cost airline market which gradually spread to all other parts of the world. Incumbents like Panam, Delta, Singapore Airlines and British Airways did not spot this opportunity.
In India Hindustan Lever Ltd did not spot the low cost detergent market, Nirma did that. Amabassador and Premier Padmini which were the only two car companies in India did not see the rise of the small car market which Maruti Suzuki captured. More recently Maruti did not spot the growing demand for diesel cars and continued to be primarily a company which manufactured petrol cars. It lost out in the process.
Bharti Beetel, revolutionised the landline phone market in India with the introduction of push button phones. But it got into the mobile phone market very late. And this was a huge business opportunity missed given that Bharti Airtel became the largest mobile phone company in India and could have easily bundled Beetel mobile phones along with Airtel mobile phone connections. An entire first generation of Indian mobile phone users could have ended up using Beetel mobile phones. Kodak a company which invented digital photography went bankrupt recently. And BBC, the most respected news organisation in the world did not see the rise of the concept of 24 hour news and left it to CNN to capture that market.
As marketing consultants Al and Laura Ries,write in War In the Boardroom, “The biggest mistake of logical management types is their failure to see the rise of a new category. They seem to believe that categories are firmly fixed and a new one seldom arises.”
And why is that? The answer lies in the fact that incumbent companies are too cued into what they are doing at that point of time. A brilliant example is Kodak. How could a company which invented digital photography go bankrupt because of it? Mark Johnson explains this phenomenon in Seizing the White Space – Business Model Innovation for Growth and Renewal. As he writes “In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”
Sasson was asked to keep quiet about his invention. This was because Kodak was the biggest producer of photo films at that point of time. And any invention that did not use photo films would have hit the core business of the company. So Kodak ignored the segment. By the time it realised the importance of the segment other companies like Canon had already jumped in and become big players. Also by then brand Canon had come to be associated very strongly with the digital camera whereas Kodak continued to be associated with the old photo film.
The same would have stood true for Beetel in India. They would have been making good money on selling landline phones and wouldn’t have seen any sense in entering the nascent mobile phone market in India where calls were priced at Rs 16 per minute. And by the time the market took off brands like Nokia would have been firmly entrenched. Amabssador and Premier Padmini fell victim to the same thing.
Another excellent example of this is Xerox. “Just think of Xerox’s Palo Alto Research Center, which famously owned the technologies that helped catapult Apple (the graphical user interface, the mouse), Adobe (post script graphical technology) and 3Com (Ethernet technology) to success,” writes Johnson.
But Xerox executives were busy selling the photocopier. They did not have time for these small tinkerings that seemed to have been happening in their company labs. The photocopiers brought in all the money and their attention was firmly focussed on them.
Sony is a really interesting example in this trend. Sony had created the Walkman and the entire market of listening to music anywhere and everywhere. But they somehow failed to latch onto the MP3 player market which was captured by the likes of Apple iPod. An MP3 player was just an extension of the Walkman.
Other than being an electronics company Sony had also morphed into a music company owning the rights to the music of some of the biggest pop and rockstars. Hence Sony supporting MP3 technology would mean one of the biggest music companies in the world supporting the free copying and distribution of music because that was what MP3 was all about.
And with this logic which might have seemed perfectly fine at that point of time Sony lost out to Apple in the MP3 space. Also, over the years music became free anyway.
Getting back to where we started, Nokia made the same mistake. It did not see the rise of the smart phone category as other players like Samsung and Apple did. And the reason was simple. Even though smart phones have been around for a while only now have they really taken over the market because they are robust enough. Hence, as long as the basic phones of Nokia were selling well, as they were till a couple of years back, it had no real interest in thinking about the smart phone market.
By the time the company caught on with the launch of Lumia other international players like Samsung and Apple already had a major presence in the market. In India the smart phone space has loads of local players like Micromax battling for the market as well.
And so Nokia lost the race!
The interesting thing is that Samsung will also will lose the race when the next evolution in the mobile phone space happens. It will be too focused on the smart phone.
The article originally appeared on www.firstpost.com on December 20, 2012
(Vivek Kaul is a writer. He can be reached at [email protected])
Games companies play: Why you pay more while he pays less for the same product
Vivek Kaul
Indian Railways can even spring up positive surprises, now and then.
Recently while travelling from Delhi to Mumbai I was pleasantly surprised to have been upgraded from third AC to second AC. And this of course meant traveling more comfortably.
On entering the coupe in the second AC bogie I found an elderly lady already sitting there who somehow figured out that I had been upgraded.
“How can they upgrade you? You haven’t paid as much as I have!” she said.
And she was right about it. I was travelling second AC while having paid for a third AC fare.
Nevertheless, this sort of “price-discrimination” has now become a quintessential part of our lives. Airlines are an obvious example. You could have paid many times more than the guy sitting next to you because you booked the ticket two hours before takeoff and he had it all planned out three months back. Yours might be a business trip wherein you need to be a particular place on a particular day at a particular point of time. The person sitting next to you might be simply travelling for pleasure and could have thus planned it all in advance.
When books are first launched they are typically launched in the hardback form. A few months later a cheaper paperback is launched. The hardback is targeted at an avid book reader who just can’t wait to have his hands on the book, and so is ready to pay more. When the bestselling Shantaram first came out in India it retailed for around Rs 1200 in hardback form. Prices finally fell to around Rs 400 for the paperback, which was 66% lower.
But these as I said a little earlier are the obvious examples. Companies have also started using the discriminatory pricing strategy when it comes to electronic products. This has started to happen primarily because being spotted with the latest cell phone (be it an Apple iPhone 5 or a Samsung Galaxy G3) or a tablet (the Apple iPad) gives so much meaning to the lives of people these days. Till a decade back a man’s worth was decided by what he wore. Now it’s decided by the brand of cell-phone that he carries.
What was once a luxury became a comfort and is now almost a necessity for a large number of individuals. When such products are first launched they are targeted at the “geeks” or early adopters who find a lot of meaning in their lives by being the first ones to use the latest i-Pad/i-Phone and hence are willing to pay more for it.
Companies tend to exploit this human need by charging more for freshly launched electronic products. Of course, once companies have skimmed higher prices off these early adopters, they cut prices so that you, I and everybody else, can start buying the product.
In the apparel industry, fresh stocks go for higher rates towards the beginning of a season, whereas as the season ends the same set of clothes is sold at a discount.
The logic behind price discrimination is to divide consumers into various categories and get them to pay what they are willing to pay. As Seth Godin points out in All Marketers are Liars “Ralph Lauren generates a huge portion of its sales from seconds… There are so many of these stores that many of the items aren’t seconds at all.”
So those who are price sensitive buy the “so-called” seconds, those who are not buy the “so-called” originals. Companies try and cash in on this price sensitivity of consumers through price discrimination. Anyone living in Mumbai can go to Parel and buy all kinds of things from the so called seconds shops that swarm the area and get a good discount doing so.
As Jagmohan Raju a professor at Wharton Business School says in an article published by Knowledge@Wharton “Companies…charge people different prices depending on the buyer’s desire or ability to pay…They reap wide profit margins from those willing to pay a premium price. In addition, they benefit from high volume, even at a lower per unit price, by building a wider customer base for the product later.”
But this logic doesn’t always work. Consumers may not mind discounts for senior citizens or lower prices for early morning cinema shows, but they can be touchy about discriminatory pricing.
In the late 1990s Coca Cola developed a vending machine which charged the consumer a higher price on warm days. As Eduardo Porter writes in The Price of Everything “When Coke chief executive Doug Ivester revealed the project in an interview…a storm of protest erupted.” Coca Cola had to ultimately drop the idea.
In September 2000, it was revealed that www.Amazon.com was charging different prices for the same DVDs to different customers. The company denied segregating customers on the basis of their ability to pay, something they could easily figure out from their shopping histories.
The early adopters of Appne iPhone were an unhappy lot when in 2007, the company decided to cut prices of the 8GB model from $599 to $399 within two months of launching it. The company had to placate this lot of customers by offering them a $100 store credit.
However, there are no easy ways of ensuring that your customers do not feel cheated. One way is to differentiate the offering in some way. “Companies have to sell products that are at least slightly different from each other,” writes Tim Harford in The Undercover Economist. ”So they offer products in different quantities (a large cappuccino instead of a small one, or an offer of three for the price of two) or with different features (with whipped cream or white chocolate),” he adds. The products are marginally different, but it gives the company a reliable excuse to charge “significantly” higher prices. The next time you go to a coffee shop try this little experiment by just try saying no to everything extra that the barista tries to offer you and see by what proportion your bill comes down.
Book publishers tend to launch a book in a hardback form. The cost of production of a hardback is slightly higher, but the price difference between a hardback and a paperback is significantly different (as we saw in the case of Shantaram earlier). The hardback is just a way of telling the early buyer that the book firm is offering him something more.
Frequent flyer programmes work in a similar way where the frequent flyer may get a cheaper rate because he is a frequent flyer and thus other flyers do not feel cheated.
Companies practice price discrimination in the hope of raising their average price per unit of sale. This of course works if the core business model of the industry is strong. But even price discrimination cannot rescue a flawed business model.
A great example is the newspaper/magazine industry worldwide. It started putting news and analysis free online while expecting those buying the newspaper/magazine in their physical form to pay a price for it. Of course consumers will take what is free and shun what they have to pay for, especially if it’s the same product. No wonder, worldwide the industry is in trouble. While it was easy to put news/analysis free online and get the so called “eyeballs”, nobody bothered to figure out how would they go about earning money doing the same?
The other example of an industry which has been disaster despite all the price discrimination is the airline industry. As Porter points out “For all their efforts at price management, competition has pushed airfares down by about half since 1978, to about 4.16 cents per passenger mile, before taxes…In terms of operating profits, the industry as a whole spent half the decade from 2000 to 2009 in the red.”
At times companies end up in trouble because of price discrimination practiced by someone else. A spate of websites which sell books at a discount of as high as 40% have been launched in India over the last few years and this has led to bookstores getting into serious trouble. People now use bookstores to browse and check out what are the latest titles to have come out and then go home and order the books online at a discount.
Price discrimination is a new game in town and impacts consumers and companies in both good and bad ways. Hence it’s important, at least, for consumers to be aware when and where are they being price discriminated. Or else, they are likely to react like the old lady who travelled with me from Delhi to Mumbai.
The article originally appeared on www.firstpost.com on November 22,2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
Why you shouldn’t write off the Tata Nano just yet
Vivek Kaul
A little over three years after it was first introduced Tata Nano is being widely touted as a flop. The car which was supposed to cause traffic jams all over India is not selling as much as it was expected to.
Between January and July this year 55,398 units of the car have been sold. This is 13.3% more than the number of units that were sold during the same period last year. So even though the numbers are looking better this year they are nowhere near the installed capacity that the Nano plant in Sanand in Gujarat has, as an earlier piece pointed out. (You can read the complete piece here).
Numbers of reasons are being pointed out for the Nano flop show. Let me discuss a few here. In the book The Little Black Book of Innovation Scott D Anthony, who is an innovation consultant, points out a conversation he had with a colleague in late 2009. ““Here’s a provocative perspective,” my colleague said in late 2009… “I think the Tata Nano is going to be a disappointment.”… So why was my colleague being so skeptical? “Look at it from a customer’s perspective,” he said. These people could already afford to pay twenty-five-hundred dollars (or around Rs 1 lakh as the Nano was expected to be priced initially) for a perfectly good used car. Instead they consciously chose the scooter.”
Ratan Tata had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai. But despite the safety hazards people still preferred a two wheeler to a Nano. “Why would consumers choose a scooter? It wasn’t that these people didn’t care about their family. Rather, they didn’t have the space to park a car, or they found scooters that fit into tiny gaps on India’ chaotic streets a much more convenient form of transformation,” writes Anthony.
Another major reason being pointed out for Nano’s failure is it’s positioning. As Rahul Shankar points out in a blog post titled “Why did the Tata Nano fail as a disruptive innovation?” “The Nano was essentially branded as the world’s cheapest car…The truth is that no one wants to own a car that is thought off as cheap. Very few people treat a car as just a machine that takes them from point A to point B. This is basically what the Nano has been reduced to. People want to brag about how awesome their car is and how it kicks their neighbor/friends car’s butt….The advertisements that I have seen for the Nano have unfortunately come off as bland and catering again to the theme of affordability.” (You can read the complete post here)
These are valid points that have been raised. Even Ratan Tata has admitted to mistakes having been made. “We never really got our act together…I don’t think we were adequately ready with an advertising campaign, a dealer network,” Tata remarked earlier this year.
But these reasons notwithstanding, it’s too early to write off the Nano. Nano is what innovation experts call a disruptive innovation. This term was coined by Harvard Business School professor Clayton Christensen. “A disruptive innovation is an innovation that transforms an existing market or creates a new one by introducing simplicity, convenience, accessibility and affordability,” is how Christensen defined disruptive innovation when I had interviewed him a few years back for the Daily News and Analysis (DNA).
An important thing with disruptive innovations is that they tend to work out over a period of time. As Christensen said “It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
A great example is the Apple personal computer which took around a decade to establish itself. As Christensen put it “A great example is the Apple personal computer. The incumbent companies of the time were those like Digital Equipment Corporation (DEC) that made minicomputers, which were big machines that sold for lots of money and could handle very complex tasks. When the personal computer burst on the scene, it sold for significantly less money than the minicomputer did…the PC wasn’t as good as the minicomputer for the market as it existed at that time. Apple made a wise decision and first sold the personal computer as a toy for children. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Given this any disruption does not come as an immediate shift. “Disruption rarely arrives as an abrupt shift in reality,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class —How Disruptive Innovation Will Change the Way the World Learns.
This is something that Nirmalya Kumar, a professor at the London Business School (LBS) agrees with. “What I know about is radical versus incremental innovation. The more radical the innovation is the longer the time customers take to adopt it. People think of Nesspresso as being as a great radical innovation, but what they don’t know is that for 20 years it did not sell a whole lot and then the sales went up in a spike,” Nirmalya Kumar had told me in an interview I did for the Economic Times. Nespresso is a cappuccino maker sold by Nestle.
Amazon, which started off as a bookseller is another great example of a disruptive innovation which took time to get settled in. Another great example from the field of cinema is the movie Sholay. The film was massacred by critics when it released on August 15,1975. As Anupama Chopra writes in Sholay: The Making of a Classic “Taking off on the title of the film, K.L.Almadi writing in the India Today called it a ‘dead ember’… Filmfare’s Bikram Singh wrote: ‘The major trouble with the film is the unsuccessful transplantation it attempts – grafting a western on the Indian milieu.”
The Indian audience had never seen anything like this before. And it thus took time to sink in. The film went onto become the biggest box office hit of all time.
What these examples tell us is that it is too early to write off the Nano, despite the fact that the initial planks on which it was sold are largely not true anymore. “A cheap car that’s not really cheap. A safe car whose safety has been questioned. A poor people’s car that poor people aren’t buying. That sounds like a failure, certainly. But really it’s not. It’s par for the course for almost every breakthrough innovation,” writes Matthew J. Eyring the president of Innosight, a strategy innovation consulting and investment firm, on the HBR blog network. (you can read the complete piece here). “In fact, I can think of only one example of a CEO who pre-announced an innovation that was going to change the world and actually delivered it. That’s Steve Jobs of course,” he adds.
Critics point out that a lot of assumptions that Nano’s initial strategy was built on are not turning out to be true. The two wheeler riders aren’t upgrading to the Nano as they were. It’s no longer as cheap as it was initially promised to be. And people are buying it more of as a second car rather than their main mode of transport. But this is again in line with the way breakthrough or disruptive innovations operate.
As Eyring puts it “There’s nothing unusual about a company having to adjust the price, the production process, the marketing, or even the market of a breakthrough offering. The Nano’s price changes, the new maintenance contract Tata is rolling out to assure buyers of quality, the test drives it’s introducing, the new smaller showrooms, and the new commercials — all widely discussed in the press — should not really be news.”
All these things are also happening with the Nano because Tata Motors went in for a full fledged launch of the car rather than a small one. As Nirmalya Kumar put it “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch. With radical innovation you need to keep tinkering and figuring out what is it exactly that the customer wants. This is because with radical innovation pre market testing is not really relevant because the consumers are not good at telling you whether they will buy a radical new product because they have no conceptualisation.”
This is something that Godrej & Boyce did with the ChotuKool refrigeratior. “Long before most people had heard of the low-power fridge ChotuKool, Godrej & Boyce spent quite some time investigating people’s refrigeration needs, designing and redesigning the product, and redoing its distribution strategy, carefully, slowly, and quietly,” writes Eyring.
It would have helped if Tata Motors had followed a similar strategy with Nano. As Eyring points out “It might not have been easy, but had Tata piloted the Nano quietly, on a small scale, perhaps through a limited production run in a small city like Durgapur in West Bengal or Ranchi in Jharkand, its engineering, pricing, financing, and marketing might have been adjusted far from the limelight to suit the needs of an optimal target customer… the Nano might have made its debut to the wider world with less hype and greater effect. It might not have been a 1 lakh car or even an alternative to motorscooters. But when it first appeared in the mainstream, it would have been right product for the right price in the right market.”
So now the Nano has entered the tinkering phase. And as this goes along Tata Motors will figure out what works and what does not. And this may be totally different from the assumptions the company started out with.
What still doesn’t change is its low price, despite the fact that it never sold for Rs 1 lakh as it was initially expected to. As Nirmalya Kumar put it “That’s the real startling novelty of the product because there is no car available anywhere in the world for $5000.”
The article originally appeared on www.firstpost.com on August 24,2012. http://www.firstpost.com/business/why-you-shouldnt-write-off-the-tata-nano-just-yet-429044.html
(Vivek Kaul is a writer and can be reached at [email protected])