Amazon is proving to be a stubborn competitor. Many people thought Amazon would be severely damaged by the market entrance of the Apple iPad. After all, the iPad does many more things than simply provide an eBook reading experience. But, the Kindle is not going away easily. The company claims that it appeals to “serious readers,” which it estimates at about 10% of the population, and Amazon is chasing that 10% avidly.
Amazon is using the Kindle as a Loss Leader. Recently, a company estimated that the cost of the Kindle, that is all its parts and labor, was about $185. Amazon claims that the cost is much higher. This cost was not a great deal of the problem when the Kindle2 sold for $400, about its introductory price. Nor was it a problem when the Kindle sold for $289, the cost of the second version. Now, the new and improved Kindle3 has a price as low as $139, well below the estimated $185 cost. Amazon is taking a significant haircut on the cost of the Kindle in order to populate future customers for its eBooks. The company makes an attractive profit on its eBook sales and uses the Kindle as the razor to its eBook razorblades.
Amazon has also hedged its bet. Kindle eBooks also are readable on the iPad, so we are about to see an interesting contest between a very inexpensive Kindle and the iPad for the eyes of future eBook readers.
This razor and razorblade strategy is common (see StrategyStreet.com/Improve/Pricing/Reduce Prices). Here are some of the other places it has taken place:
* Caterpillar often reduced prices on new equipment in order to assure itself of the replacement parts business.
* The Palm Trio 600 had a list price of $600, but a consumer could buy it for as little as $330 with a phone service contract.
* Nintendo subsidized the sale of its game consoles in order to boost the sales of its game software.
* Restaurants offer free, or inexpensive, appetizers at the bar in order to increase alcohol sales.
* Charles Schwab offered a $400 analysis of a client’s holdings, including two hours worth of in-person advice, in order to increase the odds that it would be able to manage the client’s money for a yearly fee.
These Loss Leader pricing innovations are worthwhile whenever the revenues from the attendant products, which follow the Loss Leader product, are worth considerably more than is the Loss Leader.
Showing posts with label Caterpillar. Show all posts
Showing posts with label Caterpillar. Show all posts
Thursday, September 30, 2010
Thursday, May 13, 2010
A Tale of Colorblindness Lost
The farm equipment industry is well known for the colors on the equipment of its major suppliers. Deere’s equipment is green, Caterpillar’s is yellow, and New Holland sports a blue color. Normally, customers are very loyal to the “colors” in the industry. This year, however, some customers are losing their green colorblindness. This loss of customer loyalty is coming as a result of a difficult trade-off Deere had to make. This loss of colorblindness also illustrates the way market share moves in many markets.
As the economy collapsed, taking the farm equipment industry with it, Deere had to make some tough choices. Its forecast for the industry’s loss of damage called for it to shrink its inventories radically, and it has done that exceedingly well. Its inventories, as a percentage of the last twelve months of sales, are, by far, the lowest among the industry’s largest suppliers. This inventory reduction, in part, came as Deere borrowed a page from Dell’s success in the personal computer market. Deere is attempting to become a build-to-order company in order to keep working capital investments low and manufacturing economies high.
However, a bump in the road has arisen. The market for farm equipment came back stronger than Deere’s forecasts. As a result, customers who order today will not receive their farm equipment in time for their harvest seasons. In fact, equipment will not arrive for a few months after the harvest. So, some erstwhile “true green” loyal customers are migrating to competing suppliers. Caterpillar, New Holland and others are the beneficiaries of this market share movement.
This illustrates one of the two ways that market share moves in a market. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) In one way, which we call a “win”, a supplier in the industry does something that most of the other industry competitors either will nor, or can not do, and wins market share at the expense of its competitors. (See “Audio Tip #34: How Does a Company “Win” in a Market?”) In the second mode of market share movement, which we call a “failure”, a supplier who is an incumbent in a customer relationship either can not, or will not, do something that at least half the other competitors in the market can, and will, do. (See “Audio Tip 35: How Does a Company “Fail” in a Market?”)
In most markets, failures move more market share than do wins. Competitor offerings are close enough to one another that most customers will not change suppliers readily. It is difficult to “win.” On the other hand, it is much easier to “fail” in a customer relationship. You can fail to offer a new Function; allow your Reliability reputation to erode; you can stretch out the order cycle time on the customer and fail in Convenience; or you can hold prices high and fail in Price.
Deere has a two-fold “failure” in this marketplace. It is failing its end users because it stretched out its order cycle time. Deere failed on Convenience for the end users. A more important failure, though, has occurred with its channels of distribution. Deere is failing its channels in Reliability. It does not have product when they have a market. Of the two failures, the Reliability failure is the more important. Over the years, we have seen many markets where customers will take on a secondary role supplier in order to ensure that they never are short of product when they need it. (See “Audio Tip #12: Supplier Roles and the Customer Buying Hierarchy” on StrategyStreet.com.)
Deere succeeded in beating its major competitors in managing the profit decline over the last year. Their better profit management was the result of its aggressive cost management. On the other hand, its cost management is now causing it to lose market share due to failures of Convenience and Reliability. In the long run, Deere’s profit calculus is likely to work against them.
As the economy collapsed, taking the farm equipment industry with it, Deere had to make some tough choices. Its forecast for the industry’s loss of damage called for it to shrink its inventories radically, and it has done that exceedingly well. Its inventories, as a percentage of the last twelve months of sales, are, by far, the lowest among the industry’s largest suppliers. This inventory reduction, in part, came as Deere borrowed a page from Dell’s success in the personal computer market. Deere is attempting to become a build-to-order company in order to keep working capital investments low and manufacturing economies high.
However, a bump in the road has arisen. The market for farm equipment came back stronger than Deere’s forecasts. As a result, customers who order today will not receive their farm equipment in time for their harvest seasons. In fact, equipment will not arrive for a few months after the harvest. So, some erstwhile “true green” loyal customers are migrating to competing suppliers. Caterpillar, New Holland and others are the beneficiaries of this market share movement.
This illustrates one of the two ways that market share moves in a market. (See “Audio Tip #29: Positive vs. Negative Volatility” on StrategyStreet.com.) In one way, which we call a “win”, a supplier in the industry does something that most of the other industry competitors either will nor, or can not do, and wins market share at the expense of its competitors. (See “Audio Tip #34: How Does a Company “Win” in a Market?”) In the second mode of market share movement, which we call a “failure”, a supplier who is an incumbent in a customer relationship either can not, or will not, do something that at least half the other competitors in the market can, and will, do. (See “Audio Tip 35: How Does a Company “Fail” in a Market?”)
In most markets, failures move more market share than do wins. Competitor offerings are close enough to one another that most customers will not change suppliers readily. It is difficult to “win.” On the other hand, it is much easier to “fail” in a customer relationship. You can fail to offer a new Function; allow your Reliability reputation to erode; you can stretch out the order cycle time on the customer and fail in Convenience; or you can hold prices high and fail in Price.
Deere has a two-fold “failure” in this marketplace. It is failing its end users because it stretched out its order cycle time. Deere failed on Convenience for the end users. A more important failure, though, has occurred with its channels of distribution. Deere is failing its channels in Reliability. It does not have product when they have a market. Of the two failures, the Reliability failure is the more important. Over the years, we have seen many markets where customers will take on a secondary role supplier in order to ensure that they never are short of product when they need it. (See “Audio Tip #12: Supplier Roles and the Customer Buying Hierarchy” on StrategyStreet.com.)
Deere succeeded in beating its major competitors in managing the profit decline over the last year. Their better profit management was the result of its aggressive cost management. On the other hand, its cost management is now causing it to lose market share due to failures of Convenience and Reliability. In the long run, Deere’s profit calculus is likely to work against them.
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