Soft in the middle

Fascinating article about the increasingly soft space in the middle of the market.

http://www.newyorker.com/talk/financial/2010/03/29/100329ta_talk_surowiecki


SOFT IN THE MIDDLE
by James Surowiecki

Apple’s launch of the iPad next week is a gamble in more ways than one. To start with, it’s obviously a bet that there are millions of people looking for a new way to surf the Web, watch movies, and read magazines. But it’s also a more fundamental gamble; namely, that people will pay for quality. Starting at five hundred dollars, the iPad is significantly more expensive than its competitors. But Apple’s assumption is that, if the iPad is also significantly better, people will happily shell out for it (as they already do for iPods, iPhones, and Macs). That’s why when Steve Jobs first introduced the iPad he said that, if a product wasn’t “far better” than what was already out there, it had “no reason for being.”

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.

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.

The boom in information for consumers has also severely weakened middle-market firms. In the past, these companies were able to charge a premium price because their brands were taken as signals of reasonable quality and reliability. Today, consumers don’t need to rely on shorthand: they have Consumer Reports and J. D. Power, CNET and Amazon’s user ratings, and so on, which have made it easier to gauge differences in quality accurately. The result is that brands matter less: a recent Nielsen survey found that more than sixty per cent of consumers think that stores’ generic products are equal in quality to brand-name ones. In effect, the more information people have, the tighter the relationship between quality and price: if you can deliver a product or service that is qualitatively better, you can charge top dollar. But if you can’t deliver the quality you can’t get the price. (Even Apple, after all, couldn’t make Apple TV a hit.)

This doesn’t mean that companies are going to abandon the idea of being all things to all people. If you’re already in the middle of the market, it’s hard to shift focus—as G.M. has discovered. And the allure of a big market share is often hard to resist, even if it doesn’t translate into profits. According to one estimate, Nokia has nearly twenty times Apple’s market share, but the iPhone alone makes almost as much money as all Nokia’s phones combined. But making money by selling moderately good products that are moderately expensive isn’t going to get any easier, which suggests a slight rewrite of the old Highland ballad. You take the high road, and I’ll take the low road, and we’ll both be in Scotland afore the guy in the middle. ♦