Monthly Archives: October 2007

Now that the dust has settled a bit on the $200 price reduction on the much popular Apple iPhone, I think we should give it another look, from a slightly different perspective. Apple’s move caused a massive uproar from the early adopters. But price reduction is not something that happened for the first time. Cellphones get cheaper every other day, sometime even reaching negatives. So what was so special about iPhone? I think it was the differentiating factor, and Apple took that away from its early adopters by making the iPhone considerably affordable.

Apple early adopters are the group of people who are willing to shell additional dollars to get their hands on the latest Apple product, before the masses start adopting it. It is that virtual cult membership that gives them a sense of satisfaction and pride, to say the least. Now when the price conscious buyers got a hand on the iPhone after the price reduction, helping Apple to reach the target of selling 1 million iPhones by September, this cult pretty much dissolved in less than 12 weeks.

Apple tried to calm down the early adopters, its maven community, by giving a $100 store credit. Though it did make some early adopters happy, but for some reason, I think Apple did not hit the bull’s eye this time around. The basic thing that Apple did not fix with this move is the disappearance of the differentiating factor for the cult. How Apple could have fixed it even better? By creating that differentiator, or should I be more clear by saying clearly identifiable differentiator. It could have been an exclusive screen saver or wallpaper on iPhone, an exclusive set of ring-tones only to be available for the early adopters, a couple week early availability of the new apps coming out on iPhone or something else. Though this won’t have discounted for the $100 store credit, but the additional set of bells and whistles would have kept the loyalty of the “very” early adopters more intact.

But then, there is another perspective to take here – by making the iPhone more affordable, Apple increased the number of early adopters to a million, creating a stronger base for future releases…

Selling commodities is hard, or should I say, selling anything as a commodity is hard. But what is a commodity when it comes to marketing? Is water a commodity? I think we have discussed this extensively in the past, so let’s move on to something else that looks like a commodity. How about coffee? Coffee is something many people need as the first thing in the morning. But then you put down $4 for a cup of it at Starbucks when you can clearly get it much cheaper at other places, let alone making your own coffee at home. This clearly throws it out of the commodity category.

Why are basic things like water and coffee not treated like commodities anymore? I think it is because companies like Fiji Water, Evian and Starbucks have very successfully applied the skill of “de-commoditization”. Anything that is treated like a commodity can be moved out of this commodity bracket with the help of marketing principles used by these companies.  All you need to do is make your product as attractive as possible and differentiate it from the lot. Whether it is by calling your bottled water as Artesian water and importing it from a far off place, or by finding tongue twisters to the name of your coffee and creating an atmosphere in there as cosy and comfortable as possible.

Let’s take something that is marketed as a commodity and play with it to de-commoditize it.  How about rice? Let’s try and de-commoditize rice, theoretically (I am not saying it is an easy thing to do. We all know that it took lot of hard work for the likes of Evian and Starbucks to master de-commoditization. We will just think out-loud and put some ideas on the table for the sake of this discussion). Rice is a food product, so like any other food product, we need to bring in two factors into consideration – purity and health – while marketing our brand of rice. Talking of purity, some things that come to mind are things like how it is handled, packaged, added coating and so on. As far as health is concerned, things like fat content, impact on cholesterol, organic production and healthy for heart are some factors that appeal most to the customers while making a buying decision. By advertising and marketing this product around these factors, we can create an impact on customers, hence persuading them to go for this brand of rice. 

In order to add the final push, we need to take packaging into account. This is something that is super important as well. Aren’t you wowed seeing the iPod packaging? Aren’t you excited to open something that is packed with lots of artistic integrity? So to add value to our product, let’s create an attractive packet for it with option to preserve the packet after using it or keep using it on an ongoing basis instead of emptying its content in a box.

By differentiating your product by using aspects like purity and health, and making it attractive using a unique packaging, we are now selling something that is much more than just a packet of rice…so what is it? It’s faith, health and purity being sold in that packet which contains a byproduct known as rice!

The point here is that it is not important what product you are trying to sell, what is important here is how you are selling it. Doesn’t matter how common or how lack-lustrous (you think) your product is, you can make it cool and attractive. Just think about it…if water, coffee and eggs can be de-commoditized, then your product or service can as well!

Warehouse store organizations like Costco and Sam’s club run their stores on a business model where they restrict entry to the stores to members only. Members (for those you don’t know) are the people who pay an upfront membership fee ($50 a year at Costco) to get a permit to buy products in bulk from their stores. How does this work?

Before we talk about how this ballgame is played by the warehouse stores, let’s take a look at some quick facts. First, Costco and the likes have more than 70% of operating income from the membership fees. Second, due to the upfront membership fees, these stored have very less long term debts. Third, the warehouse stores, which sell in bulk packs have significantly less choices for their customers as compared to other stores like Krogers and Walmart.

So how do customers fall in this trap of paying upfront for shopping and living with less than normal number of options? While shopping at these stores, the customers find things cheaper than at other places. There are few main reasons for cheaper products, or this perception of customers. First – bulk packs. By selling everything in bulk, the product manufactures save on packaging costs to some extent and that makes these goods cheaper as compared to individual selling cost at other stores. Second – in-house branding. Costco, to be specific, carry lot of products under their in-house brand named Kirkland. These Kirkland branded products are normally cheaper than the same products of other brands. Costco saves on the advertising expense on its brand and pass on some of the savings to the customers. Third and the most important one that creates a perception that products are even cheaper than they really are is the membership fees. No customer takes into account the membership fee they paid upfront when they compare the price tag of products at these stores to the price tag at any other place.

Another reason a customer goes for warehouse store membership is to get a feeling of being an insider. By getting that membership card and getting access to these large stores, they feel like they are part of something like a cult, which in this case is a really big group. This also creates a repeat customer footfall like nothing else. It is observed that normally a person ends up buying more at warehouse stores as compared to what they would at a regular store. Cheaper products is definitely a reason for this, but I think that’s not the only reason. Another reason, which is not that obvious, is the urge to utilize the upfront membership fee as much as they can. People think that since they already became a member, it’s better to utilize it by buying more.

Initially this model of paying money upfront to buy an entry card to shop at a store sounded very wierd to me, but after trying it for one year at Costco and buying those Kirkland branded product for “less”, I was too much used to it and like most customers, renewed the membership.