In pricing and new product development, we can get so caught up in market research, technical breakthroughs, and phase-gates reviews. These preoccupations can distract us from what is revealed in big picture templates, hence possibly negating aspects of industry evolution.
Memory Refresh of Industry Product Life Cycles
The industry product life cycle is the subject of textbooks. To refresh:
- An idea for addressing a problem with a new approach goes into development with perhaps a few one-off custom solutions being delivered to customers.
- Once the concept has been proven and the offering can be nailed-down for a crudely defined target market, a firm introduces a productized solution and, through luck and hard work, an industry is born.
- Investors and competitors quickly notice the opportunity and start to pile into the nascent industry, driving the industry through rapid growth with new products and product proliferations. Industry analysts talk about “inflection points” and strategists tout competing claims of “first mover advantage” or “second mover advantage”, depending on their predilections.
- Successful industries will mature. Blue oceans become red oceans over time. Economic profits decline.
- Overtime however, most but not all industries fade and decline
Less discussed is the evolution of prices themselves. Price points themselves evolve with the industry, but rarely in one direction. This is particularly dynamic during the industry growth phase.
Price Points during the Industry Growth Phase
Many expect price points to decrease as an industry evolves. It is true that the offerings sold during the development phase are typically higher priced than the productized-solution delivered during the introduction phase. Moreover, history has shown that cheaper products that sufficiently address the same challenge are usually developed while the industry matures, and economies-of-experience and economies-of-scale are uncovered.
Yet cheaper is only half the story. The other half is more expensive.
Growing industries identify new needs that could be fulfilled by the products if they were slightly enhanced. Technical developments enable product enhancements. If the market signals (through research) that a higher-capability product will be bought at a higher price point in sufficient quantities, a more advanced product will be launched.
Between the highest- and the lowest-priced products, other products will be positioned. A plethora of product positions in price and benefits should be considered the norm as an industry moves from introduction, through growth, and into maturity.
Whether this variety of product positions survives maturity and goes into decline, however, is uncertain. (Thus, a dotted line is drawn as one moves from maturity into decline.)
Hence, the expectation of “broadening the price band” is a more accurate depiction of the truth of growth stage industries than one of “lowering the price points.”
Example: Smart Phones
The claim that prices can be expected to increase, not decrease, has been well demonstrated by Apple with their iPhone since launch. While the iPhone was first launched in 2007 at $499-$599, it quickly dropped to $199-$299 between 2008 and 2010. (Prices quoted with a 24-month contract and taken from Wikipedia.) Since 2011, Apple has demonstrated their ability to both broaden and generally increase prices on the iPhone. See below.
As the smartphone market grew, Apple no longer held the market alone. Samsung entered the market with the Galaxy Note in 2011. Since then, Huawei, Xiaomi, Oppo, and many others have entered, and some, notably Motorola, Microsoft, Nokia, have also left.
The competitors have not all pursued the same strategy. Oppo, Xiaomi, and Huawei are better known for their inexpensive smartphones. For example, a quick web search on Smartpix.com found Oppo A3s for around $125 available in India.
As this smartphone market enters maturity, we see a clear broadening of price points. Yes, some products are lower priced than the initial product at launch, but others are fare more expensive.
The theory of “broadening of the price band” is a more accurate description of this market, and many other growth markets, than the theory of “lowering the prices” alone. We can look at antivirus software, tractors, or even shampoo and find relatively the same patterns. Whether it is “some” or “most” industries is a sampling challenge that I won’t bother quibbling about.
If Price Points Broaden, Should I Pursue the Top, Bottom, or Everywhere In Between?
Yes, and it depends.
From the smartphone market, we see all three pursuits. Using Michael Porter’s language:
- Apple currently pursuing the top end of the market in what is best called a Niche Competitive Strategy.
- Oppo and Xiaomi are currently pursuing the lower-end of the market in what is best called a Cost Leadership Competitive Strategy.
- Samsung and Huawei are both pursuing the broader Differentiation Competitive Strategy.
Any of the three strategies can be pursued. Which strategy a particular company should pursue will depend on its resources and goals.
It should be noted that Samsung has a larger global market share of Apple in the smartphone market, Apple was reported by Canaccord to make 87% of the industry profits compared to the 10% industry profits of Samsung. Collectively, the remaining firms made only 3% of the industry profits in 2018. No doubt, some lost money.
Specifically with respect to goals, this examination should clarify actions.
- If the goal is to dominate a set of customers, not just in one industry but also to cross sell other products to those same customers and develop a stronger portfolio for tangentially related markets, history demonstrates that product and pricing strategy should anticipate (perhaps even pre-empt the market with products at both the high- and low-end of the spectrum) in pursuing a differentiated strategy. This may require bifurcating, or even trifurcating, the product line to hit different customers at different price points. A broad based good/better/best versioning strategy will be required.
- If the goal is simply to make steady profits in a specific industry, examples demonstrate that a high-end niche strategy works.
- If the goal is to survive, and you know in your heart though don’t have to admit it to investors, that you aren’t an idea leader but you do have access to low-cost production, then cost leadership is a route forward.
Industry templates should be kept in mind in managing product portfolios through growth markets. Ask yourself: What do you want to evolve into when you grow up? Do you have the right resources to become that?