For Apple, which has enjoyed enormous success in recent years, "build it and they will pay" is business as usual. But it's not a universal business truth. On the contrary, companies like Ikea, H. & M., and the makers of the Flip video camera are flourishing not by selling products or services that are "far better" than anyone else's but by selling things that aren't bad and cost a lot less. These products are much better than the cheap stuff you used to buy at Woolworth, and they tend to be appealingly styled, but, unlike Apple, the companies aren't trying to build the best mousetrap out there. Instead, they're engaged in what Wired recently christened the "good-enough revolution." For them, the key to success isn't excellence. It's well-priced adequacy.Related: David Reibstein and Michael Silverstein discuss this issue @ Wharton:
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 reemerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms. And, in the computer business, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops--the reverse of Apple's premium-price approach.
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" (in the formulation of the consultants Al and Laura Ries). The companies there--Sony, Dell, General Motors, and the like--find themselves squeezed from both sides (just as, in a way, middle-class workers do in a time of growing income inequality). 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--the newest Flip, for instance, shoots in high-def and has four times as much memory as the original--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. A top-of-the-line iPod now features video and four times as much storage as it did six years ago, but costs a hundred and fifty dollars less. 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.
Reibstein: How did this book come to be written?
Silverstein: Three and a half years ago, I co-authored a book with Neil Fiske called Trading Up: Why consumers Want New Luxury Goods... and How Companies Create Them. Trading Up is the story of how middle-class consumers around the world are buying products at 50% to 200% price premiums in categories like homes, cars, vacations and food. We call these new luxury goods. Following the release of that book, we began doing a lot of work helping companies understand this premium segmentation. It's a very rich opportunity, with more than $600 billion in sales in the U.S. in homes, transportation, dining, travel, food and beverages, personal products and services apparel, and home goods.
I spoke with some 10,000 people during the past couple of years. Many people would come to me after my presentations and say, "We loved Trading Up, we think it's very insightful, but it's only half the story. You didn't get it all." So I listened. Most of the people approaching me were women, who were heavily into purchasing and acquisition of goods and taking care of their families and very interested in maximizing their budget. The part of the story that they said we missed in Trading Up was basically the trading down side. It was true that consumers were trading up to premium products, but they were also trading down to low-cost products and services, and avoiding the boredom and low value that increasingly characterize the middle. This polarization was reshaping the consumer goods market.