‘By introducing cheaper iPhones, Apple will lose its high end position’

al ries 2Al Ries is a marketing consultant who coined the term “positioning” and is the author of such marketing classics (with Jack Trout) as The 22 Immutable Laws of Marketing and Positioning: The Battle for Your Mind. He is also the co-founder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with Laura he has written bestsellers like War in the Boardroom and The Origin of Branding. In this interview he speaks to Vivek Kaul on why by introducing a cheaper iPhone, Apple will lose its position at the high end. And conversely, it won’t sell very many inexpensive phones because of competition from Chinese and Taiwanese companies.
Apple has come with a low cost iPhone 5C to appeal to the price conscious consumer. Is it a strategy that is going to work?
Yes and no. The strategy will generate additional sales of the iPhone 5C, but in the long term it will damage the iPhone brand.
You have been of the view that extensions tend to cheapen the brand. Will something like that play out in this case?
Yes, it will definitely cheapen the brand. 
Why do you say that?
Here’s what normally happens when a new category develops. Apple pioneered a new category called “touchscreen smartphones” with its iPhone brand. Initially, the new product was a big improvement over existing keyboard smartphones like the BlackBerry. This made the iPhone one of the most successful new products ever launched. At one point, it made Apple the world’s most-valuable company. Then competitors entered the market, especially Samsung. Over time, the two brands (Samsung and iPhone) became quite similar, but consumers preferred the iPhone.
Because the iPhone is a better brand. Not a better product. The next development, a development that happens to every new category, is that the category divides into two categories. One at the high end and one at the low end. Any brand that tries to both ends of the market is bound to suffer.
Can you give us any examples?
Cadillac once was the largest-selling luxury vehicle in the American market. Then it tried to broaden its market by introducing lower-priced vehicles. Today, Cadillac is not considered in the same category as Lexus, Mercedes-Benz and BMW. These three brands each outsell Cadillac by a wide margin. It won’t happen overnight. But long-term, we believe the same thing will happen to the iPhone. By introducing cheaper iPhones, it will lose its position at the high end. And conversely, it won’t sell very many inexpensive phones because of competition from Chinese and Taiwanese companies.
By launching a cheaper version of the iPhone, Apple seems to have started following Samsung’s strategy of having smart phones at various price points. If it’s a strategy that works for Samsung why can’t it work for Apple? After all Samsung has 31% of the smartphone market and Apple has only 14%.
The smartphone market is only six years old. It’s early on in the development of the category. IBM was the first company to introduce a 16-bit, serious personal computer. For several years, IBM had 50 percent or so of the personal-computer market. But because of line extension, IBM’s market share gradually declined until it was less than 10 percent of the market. And so, IBM threw in the towel and sold its money-losing business to Lenovo. Will the same thing happen to Samsung? Perhaps. But it all depends on how smart the competition becomes. If competitors develop narrowly focused brands at the high end and narrowly-focused brands at the low end, Samsung will be the ultimate loser.
Some analysts are of the view that a cheaper iPhone would cannibalize sales of the expensive models. Would that be the case? And even if that is the case isn’t it better that Apple cannibalizes its own sales rather than let someone else do it?
Certainly some cannibalization will take place. But Apple could have used a better strategy than line extension. It could have introduced a cheaper iPhone with a different brand name. Take Toyota, for example. Rather than introduce an expensive Toyota, the company introduced the Lexus. At one point, Lexus was the largest-selling luxury vehicle in America. Currently it’s the No.3 brand. When a category diverges, it is much better to cover the diverging category with separate brands rather than by line extending the company’s existing brand.
When I interviewed your daughter Laura a few months back she told me very clearly that “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.” Do you see that playing out now? Or would that be too far fetched a statement to make?
That was an astute statement, but apparently Apple management didn’t take Laura’s advice to keep the brand focused at the high end. A brand needs to stand for something to become successful in today’s competitive environment. What’s an iPhone? Is it a high-end phone or a low-end phone? A brand can be successful at either end of the market but not at both ends.
A growing view seems to suggest that Apple has lost its ability to innovate after the death of Steve Jobs. Would you agree with something like that?
Yes. No brand can appeal to everyone. Steve Jobs famously said there are some customers he doesn’t want. (He was commenting on why Apple wouldn’t introduce a netbook, or inexpensive laptop computer.)
Can you give us other examples where extensions have cheapened the brand?
Motorola introduced a $1,400 cellphone called “StarTAC” that rapidly became a very popular high-end cellphone brand. Then the company introduced cheaper versions of the StarTAC phone which undermined its high-end position. (We worked with Motorola at the time and pleaded with them not to introduce the less-expensive StarTAC phones.) Today, Motorola is just another cellphone brand without much of a position. Mercedes-Benz used to be known as the world’s leading high-end automobile brand. But the company keeps introducing low-end models that undermine its high-end perception. Today, BMW outsells Mercedes-Benz on the global market.
On a slightly different what do you think of Microsoft taking over the telecom business of Nokia. Nokia has lost out on the smart phone market. Will Microsoft’s taking over help them in capturing a greater market share in the smart phone market?
Microsoft would have to create a new smartphone category to kickstart the Nokia brand. (Much like Apple did with the touchscreen smartphone.) But that’s incredibly difficult to do in a category that has had so money spent on research & development. Microsoft is unlikely to profit from its Nokia investment. But there’s a larger point to be made. Every company needs a focus for the same reasons that every brand needs a focus.
How do you explain that in the context of Microsoft?
Microsoft is a “software” company. It should not be trying to get into the hardware business. That unfocuses the company and makes it very difficult to manage. Look at Apple, a company focused on selling hardware only. Sure, the company needs software developers to create its hardware products, but that’s a different matter. Look at Apple’s competitors in the American market. Both Dell and Hewlett-Packard are hardware companies trying to get into software and services. And not very successfully. Last year, Dell’s profit margin was 4.2 percent versus Apple’s 26.7 percent. And last year, Hewlett-Packard lost $12.7 billion. 
The interview originally appeared on www.firstpost.com on September 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

"In future, VCs will help launch new brands. Tata, Reliance had better watch out"

Companies are in a perpetual race to expand sales. And the easiest way to do that is to expand their well known successful brands into other categories. As marketing consultant and author of many bestsellers Al Ries puts it “If a brand is well known and respected, why can’t it be line extended into another category. That’s common sense. That’s why Xerox, a brand that dominated the copier market, introduced Xerox mainframe computers. A decision that cost the company billions of dollars. That’s why IBM, a brand that dominated the mainframe computer market, introduced IBM personal computers. In 23 years of marketing IBM personal computers, the company lost $15 billion and finally threw in the towel and sold the operation to Lenovo, a Chinese company.” Ries is the author of such marketing classics (with Jack Trout) as The 22 Immutable Laws of Marketing and Positioning: The Battle for Your Mind. In this interview to Vivek Kaul he speaks on various aspects of branding and marketing.
You have often said in the past that there is a a big difference between common sense and marketing sense. Could you discuss that in some detail with examples?
Common sense is another way of saying “logical.” Almost every rule of marketing is not logical, it’s illogical, which I defined as “marketing sense.” It takes years of study and personal experience to develop good marketing sense. Yet too many management people dismiss the ideas of their marketing managers because “marketing is nothing but common sense and who has better common sense than the chief executive?” Line extension is a typical example. If a brand is well known and respected, why can’t it be line extended into another category. That’s common sense. That’s why Xerox, a brand that dominated the copier market, introduced Xerox mainframe computers. A decision that cost the company billions of dollars. That’s why IBM, a brand that dominated the mainframe computer market, introduced IBM personal computers. In 23 years of marketing IBM personal computers, the company lost $15 billion and finally threw in the towel and sold the operation to Lenovo, a Chinese company. That’s why Kodak, a brand that dominated the film-photography market, introduced Kodak digital cameras. In spite of the fact that Kodak had invented the digital camera, the company was never successful in marketing the cameras under the Kodak name. And recently Kodak went bankrupt.
With all the experience you have had consulting companies all these years which area of marketing do you feel that marketers have the most trouble with?
We have had the most trouble working with large companies marketing big brands. And the issue is always line extension. Companies want to expand their sales so they figure the easiest way to do that is by expanding their brands into new categories. In other words, line extension. We have worked with Burger King, Intel, Xerox, IBM, Motorola, Procter & Gamble and dozens of other companies that invariably wanted to expand their brands whereas we almost always recommend the opposite strategy. Narrow the focus so your brand can stand for something. The second issue is timing. We have always recommended that companies try to be the first brand in a new category. But that is a difficult sell to top management. Their first question is usually, What is the size of the market? Of course, a new category is a market with zero revenues. And many, many management people never want to launch a product into any category that doesn’t already have a sizable market. We worked for Digital Equipment Corporation, a leader in the minicomputer market. We tried to get them to be the first to launch a personal computer for the business market. (IBM eventually was the first to do so, but without a new brand name which led to their failure.) In spite of days of meetings and presentations, the CEO of Digital Equipment refused to launch such a product. “I don’t want to be first,” he said, “I want IBM to be first and then I’ll beat their specs.” After IBM launched its personal computer, Digital Equipment followed, but never achieved more than a few percent market share. Eventually the company more or less fell apart and was bought by Compaq at a discount price.
How can a No. 2 brand compete successfully with a leader?.
What a No.2 brand should do is easy to explain, but difficult to execute. A No. 2 brand should be the opposite of the market leader. Why is this difficult to do? Because it’s illogical. Everyone assumes the No.1 brand must be doing the right thing because it’s the market leader. Therefore, we should do exactly the same thing, but better. That seldom works. Take Red Bull, the first energy drink and the global market leader. One reason for Red Bull’s success was the fact that it came in a small, 8.3-oz. can that symbolizes “energy,” like a stick of dynamite. So almost every competitive brand was introduced in 8.3-oz. cans and marketed as “better” than Red Bull. Except Monster, a brand introduced in 16-oz. cans in the American market. Today, Monster is a strong No.2 brand with a 35 percent market share compared to Red Bull’s 43 percent share. Also in the American market, BlackBerry was the leading smartphone until Apple introduced the iPhone. BlackBerry had a keyboard. Apple eliminated the keyboard and used a “touchscreen” instead. Mercedes-Benz was the leading luxury-vehicle brand until BMW came into the market. Mercedes vehicles were big and comfortable, so BMW became smaller and more nimble, as dramatized in the brand’s long-running advertising theme, “The ultimate driving machine.” As a matter of fact, BMW introduced the campaign with a two-page advertisement headlined: “The ultimate sitting machine vs. the ultimate driving machine.”
Do long running marketing campaigns help? How many companies have the patience to run a marketing program for two or three or four decades?
Next to line extension, that’s the biggest problem in marketing today. Companies don’t run marketing programs nearly long enough. The best example of a long-term successful campaign is the one for BMW. “The ultimate driving machine” strategy was launched in 1975 and the company still uses the same slogan today. That’s 37 straight years. Most marketing programs don’t last longer than three or four years. That’s way too short a time to make a lasting impression in consumers’ minds. I can’t recall any major marketing program, except for BMW, that has lasted more than a decade or so.
In a recent column you wrote that logic is the enemy of a successful brand name. What did you mean by that?
By “logic” I mean what you would use as a brand name if you did not study marketing and had no experience as a marketing person. In other words, common knowledge versus specialized knowledge. It’s like the Sun and the Earth. Common knowledge would suggest that the Sun revolves around the Earth and not the reverse. Look out your window and it’s obvious that the Sun is moving and the Earth is standing still. But specialized knowledge knows that isn’t true.
What is the connection with brand names?
As far as brand names are concerned, logic or common knowledge suggests that a generic name like Books.com would be a better choice than Amazon.com. If the prospect wants to buy a book, then logically the prospect would go to a website like Book.com or Books.com.
But a marketing-trained person knows that isn’t true. It’s not how a mind words. When a person hears the word “Book,” he or she doesn’t think it’s a website at all. It’s the generic name for a category of things. On the other hand, thanks to its marketing program, “Amazon” has become a specific name for a website devoted to selling books. So when a person thinks, “I want to buy a book on the Internet, he or she doesn’t think “Books.com,” he or she thinks “Amazon.com.” In almost every category, a specific “brand” name performs better than a generic “category” name. Google.com is a better name than Search.com. YouTube.com is a better name than Video.com. There is a caveat, however. In the absence of a marketing program that establishes a brand name in consumers’ minds, a generic name could do well.
Why do you say that as a general rule, any name that specifically defines a category is bound to be a loser?
Consider how a mind works. If I say “coffee,” you literally hear that word in your mind spelled with a lower-case “c.” It’s a common noun, or a generic word that stands for an entire category of things. The same reasoning hold true for a more specific name like “High-end coffee shop.” If I say “Starbucks,” on the other hand, you literally hear that word in your mind spelled with a capital “S.” It’s a proper noun, or a brand name that stands for a specific chain of high-end coffee shops. Oddly enough, you can use common English nouns in another country as brand names? Why is this so? Because consumers don’t know the meaning of these common words. So these words become proper nouns instead and usable as brand names. For example, a stroll down a street in Copenhagen turned up these store names: Biggie Best, Exit, Expert, Face, Flash, Joy, Limbo, Nice Girl, Redgreen, Sand and Steps. Nice brand names in Copenhagen perhaps. But they wouldn’t work in America.
What do you mean when you say that “the internet is exceptionally good at promoting web, not physical, brands.” Could you explain through examples?
First of all, consider the fact that the Internet has created a host of new, very-valuable Internet brands including Amazon, Google, Facebook, YouTube, Groupon, Pinterest, LinkedIn and dozens of others. How many new physical brand names were created on the Internet? I can’t think of any. The Internet is the newest, latest medium. It attracts people who are interested in what’s new and different on the Internet. So there is intense interest in any new website that promises a revolutionary way to handle some of your affairs. But there’s not the same level of interest in new physical brands. Like a new toothpaste, or a new camera, or a new breakfast cereal. That doesn’t mean that new physical brands can’t take advantage of the PR potential represented by the Internet. They certainly can, but it’s going to be more difficult for a physical brand to get a lot of attention on the Internet than an Internet brand.
You recently wrote that “If you don’t have the right strategy, good tactics won’t help you very much. And social, like all media, is a tactic. What concerns me is that too many marketers have elevated tactics — especially those of social media — to the level of strategy.” Could you elaborate on this statement?
Our leading marketing publication is called “Advertising Age.” I have suggested facetiously that the publication should be called “Social Media Age,” because a high percentage of the stories the publication writes about involve social media and marketing on the Internet. Strategy is seldom mentioned. One reason for the intense interest in the Internet is because many aspects are easily measured. A video on YouTube, for example, will be measured by: (1) The number of “Views.” (2) The number of “Likes.” (3) The number of “Dislikes.” And (4) The number and content of “Comments.” That’s a range of responses no other medium can deliver. No wonder marketing people devote endless hours to evaluating the success of Internet programs. But suppose a marketing program is not successful. Do you blame the strategy or the tactics? Today, it’s too easy to blame the tactics. My feeling, however, is that most of the time strategy is at fault.
Are there any ideas on branding which you have espoused in the past which you have now junked?
Yes, we used to think that brand names ought to communicate something tangible about the brand. Duracell is a good example. It suggests that the appliance battery is a “long-lasting” brand. But today, there are too many competitors in any given market. A tangible name like Duracell is likely to be surrounded by many other brands with similar names, confusing the consumer. A meaningless name is often a better choice. It allows you to develop your own unique meaning for the brand. Google is a good example. Initially it meant nothing, but today it means “search.”
What is your opinion on big brand names. India has a lot of them like Tata and Reliance. And they attach these names to every business or product they launch? How do you view that?
That’s line extension and it might work today in India, but would never work in America. In America, there are too many competitors in every category with distinctive brand names. A line-extended name like Tata and Reliance would be at a serious disadvantage here. Why does it work in India? I’m not an expert, but I believe that India suffers from a shortage of venture capital as compared to the United States. It’s hard for an entrepreneur to launch competitive brands to Tata and Reliance because it’s difficult to raise enough money for their introduction. But I believe that will change in future so both Tata and Reliance should be concerned about the future of their brands.
(Interviewer Kaul is a writer and can be reached at [email protected])