Product churn or product charm?

18th Jun, 2012

Thinking further about new the MacBook Pro and the discussion around its unserviceability there is a big difference between the commodity PC manufactures and the great product innovators like Ford, Sony and Apple. These companies derive value for their customers using the pattern of break-through new product followed by years of incremental improvements and production efficiencies. Consumers see great new products that start a little pricey, grabbed by early adopters. Then are gifted with affordable luxury due to a steady decrease in price (often with an increase in quality as well).

Other companies launch products differently. They grab the latest spec components and bundle them together in a fashionable-for-today package. The top-end components are expensive, hiding the fact the there’s also higher than average margin being applied to arrive at the final early adopter price. Over time, the prices tend to come down, as with the innovators. But the price reduction is based on the cost of the components becoming cheaper. Rather than a investing in production efficiencies, Dell can benefit from innovation in the supply chain (higher chip yields, etc) that produce cheaper parts. By holding the retail price high as long as possible an incremental increase in margin flows from every supplier innovation. Eventually, competition puts pressure on the fat margin and retail prices are dropped.

The high “launch price, price drop over time” cycle appears, at least from the consumer perspective, to be similar to say the Model-T Ford ($850 to $260 over twenty years). The difference is the point in the product life cycle where the company makes the most money. Is it at the launch, or in the tail?

The key to commodity PC prices coming down is the production innovation from the component manufactures, not production efficiencies from the PC guys. How does this effect the product strategy? It drives the need to get to market with the latest, fastest machine as quickly as possible. Utilising the latest, fastest components to beef up the spec sheet. Not so many fast parts as to make a great device. Only enough of them to get the tick on the box and ensure a margin that’s fatter than average. As soon as the margin is eaten away, its time to look for a new bundle of gadgets and the latest fashion’s colour.

If this is your product strategy, what does your marketing department do when briefed on the companies vision for the new product (latest components = high margin)? It talks up the specs of course! Sound familiar?

The key difference between the spec-sheet strategy and the blockbuster-refine strategy lies in where the bulk of the margin comes from. For innovation companies, paying off the investment in plant setup gives an lower effective operating margin at the start of the production. The longer the same product is made, the more profitable each additional item off the line. Two different models:

  • Quick to market, low average margin, high product churn
  • Slow to market, high average margin, low product churn

They are exact opposites. Both, if executed well, can be profitable. One demonstrates belief in design, trust in getting it right, respect for customers and simplicity. The other does not.