For years, consumer electronics companies have competed primarily through technology, by cramming ever more features into products in a race to offer consumers the latest and greatest. But this approach can be fruitless. Even in the best of times, many manufacturers struggle to make money: despite falling component costs, intense competition can restrain price increases, and rapid obsolescence often makes it necessary to discount all but the very newest products. The result? An industry-wide average profit margin in the low single digits at best and negative at worst.
There may be a better way to grow: by looking beyond cutting-edge products. Through two surveys spanning nearly 2,500 people and in-depth interviews with electronics purchasers in the United States, we found that almost two-thirds of consumers were more interested in core benefits and attractive prices than in often-unused bells and whistles (Exhibit 1). While there will always be high-end buyers willing to pay premium prices, we identified an attractive emerging market for easy-to-use consumer electronics products, with features that reflect user demand, priced 30 to 50 percent lower than standard offerings.
These new products shouldn’t be confused with low-quality, poorly designed ones that use generic off-the-shelf components. Easy-to-use consumer electronics offerings, which we call “basics,” have been designed to be simpler, not just stripped down and made more cheaply. Basics are well conceived, well made, and have the features consumers demand—even those typically found in high-end products—but lack little-used features. Basics come from not only upstart companies but also established ones, though consumer electronics manufacturers have been slow to recognize the potential of the basics market, which has existed for years in other industries. JetBlue Airways, for example, has snared airline market share in the United States since 2000 by targeting customers who want relatively high-end features (such as in-seat entertainment) yet are willing to arrive at secondary airports in exchange for lower fares.
Given the appetite for basics products among consumer electronics purchasers, the success of new entrants such as Pure Digital Technologies isn’t hard to explain. The company’s inexpensive and feature-light Flip video cameras have grabbed 14 percent of the US market in the past two years, trailing only long-time leader Sony. Similarly, netbook computers, which sacrifice processing power for size, are forecast to make up as much as 14 percent of the laptop market in 2009, just four years after launch. Like Flip video cameras—which pushed overall category sales in the United States to 4.1 million units at the end of 2007, compared with 3.7 million two years earlier—netbooks are expanding the category: more than half of the respondents who bought one hadn’t previously owned a laptop (Exhibit 2).
What’s driving the growth of the basics market? First, consumers are overserved. Our survey showed that less than a third of the respondents actually used all of the advanced features that manufacturers pile into their televisions, video cameras, mobile phones, and other products. What’s more, less than half of the respondents even knew these features existed (Exhibit 3). Second, people value lifestyle benefits over technical capabilities. Among respondents who owned a Flip camera, for example, 90 percent liked it because it is lightweight, easy to carry and use, and “lets me share memories with family/friends,” while only 60 percent said that video quality was important.
Third, consumer-friendly products are gaining traction as new tools make it easier for people to compare products and provide feedback. Consumers seeking simplification rather than overspecification can read online reviews: current users are becoming powerful advocates for products via word-of-mouth. Finally, the recession has accelerated the flight from expensive, high-end products. This mind-set shift seems unlikely to be reversed even when the global economy improves, and the underlying demographics in most developed economies point to thrift, not frivolity.
For consumer electronics manufacturers, entering the basics market poses challenges: they must rethink their approach to product development, moving away from efforts to push the limits of technology and focusing instead on features users really want. Our research found, for example, that durability was by far the most important aspect of quality for most consumer electronics customers. That’s why netbook manufacturers invest in features such as sturdy hinges rather than expensive components with high-end technical specs.
Competing in the basics market also requires manufacturers to reduce their production costs significantly so they can offer products at prices as much as 50 percent lower than those of their regular lines. That calls for early involvement from suppliers and for a company’s manufacturing and supply chain units to look broadly for cost reduction opportunities, such as using older components that are significantly cheaper than up-to-date ones but can still deliver the performance consumers require. Although established companies may have to battle the additional hurdles of legacy expenses and ingrained practices, low-cost production is possible: netbook maker AsusTek Computer had an estimated 15 percent gross margin in 2007 and 2008, according to SinoPac Securities.
Finally, companies must carefully consider the brand and go-to-market implications of introducing basics products. They should ensure, for example, that the value of existing brands isn’t diluted and that sales of higher-priced products aren’t cannibalized. New pricing and promotion strategies will be required to make value-oriented customers aware of these new offerings. It’s not an easy process: P&G wrestled with the question of whether to introduce a cheaper version of its best-selling Tide laundry detergent for three decades before finally launching Tide Basic this year. The new product has fewer features than regular Tide and costs about 20 percent less.
What companies such as P&G, Pure Digital (bought by Cisco Systems for $590 million in May 2009), and the netbook and PC company Acer have recognized is the opportunity the basics market offers. Savvy manufacturers willing to meet the consumer’s growing demand for well-made, affordable, practical products can cater to it and increase their overall market share while retaining their traditional sales base. At a time when consumers are spending less and saving more, going back to basics may be a good bet.