This blog first appeared as Steve Wunker's piece for Forbes
By Steve Wunker
Apple recently hit $1 trillion in value, the first company anywhere to do so. This looks like a mighty accomplishment, but a peek beneath the surface reveals a disturbing signal about its future.
The stock’s performance was juiced by an extraordinary earnings report, and that report in turn was fueled by a huge increase in the average selling price (ASP) of Apple devices, with iPhones clocking in an ASP of $724 vs. $606 just one year ago. This is the iPhone X effect; the company is bold enough to ask about $1,000 for its flagship device, and consumers – through love, lock-in, or a combination of both – have been forking that out. Meanwhile, its unit volume grew all of 1%, and it was surpassed as the #2 smartphone vendor in the U.S. by Huawei, a Chinese company making much lower-cost but still high-quality devices.
Where does this path lead? Can Apple raise its prices by those amounts, forever? Of course not. While its consumers become highly tied into Apple’s suite of offerings, and it becomes hard to ditch the iPhone for a lower cost device, those who haven’t yet adopted an iPhone will become increasingly wary of doing so if the brand costs so much. Moreover, another bright spot in Apple’s growth has been its increasing revenue from services, but if people aren’t entering the ecosystem with iPhones, they won’t be buying those services. Apple risks being trapped at the high end of the market, catering to loyalists through constant premiumization but missing out on the new consumers who can drive long-term growth. The company’s executives have certainly read the book, but they are nonetheless becoming stuck in Clayton Christensen’s Innovator’s Dilemma.
Apple certainly isn’t the only company to have this challenge. As financial metrics bias firms to pursue ever higher-margin offerings, and as flagship products generate the kind of buzz which bolsters the careers of the people responsible, companies chase their most lucrative customers into a dead-end. These customers will pay a lot, but their ranks will shrink.
The solution is to turn the tools of innovation toward costs, not just towards churning out new offerings with top-end prices. Companies can tap massive growth by creating high-quality, low-cost offerings targeted at clear customer segments.
Consider Planet Fitness, a wildly popular gym chain that just passed 10 million members. It leads the fitness industry in measures of customer satisfaction, yet the cost of a membership is only $10 a month. That’s 80% less (at least) than some competitors. How does it pull this off?
Planet Fitness knows who it is. The company is laser-focused on casual exercisers, and it offers them just what they want – and nothing more. There are rows and rows of cardio machines, in gyms open 24/7. But there’s little staff, few complex add-ons like personal trainers, and not many weights to satisfy the serious gym-goer. The company has a simple business model tightly attuned to a clear target market.
The same goes for Trader Joe’s, JetBlue, Dollar Shave Club, and many others. They have figured out who their customer is, how they can inexpensively delight them, and what longstanding industry assumptions they can jettison.
Apple needs this kind of thinking. It could use a $500 device that customers eat up, along with the $1000 offerings that cater to the top of the market. Could they achieve that price through hooking consumers into more services, making money from consumers paying out over time for content they really want? Could they offer a lower-performing, less battery-hogging phone that gives a customer segment long battery life even if the device doesn’t play games terribly well? The company has many possibilities, but it needs the courage to break with a formula that served it well in the years before its products reached such stratospheric prices.
Innovation on companies’ costs may lack the sexiness of jazzy new products. But it is half of the equation of a successful business. Making big leaps on costs, not just pumping out high-end products, enables firms to remain relevant, affordable, and growing.
You can download the first chapter of my book Costovation (HarperCollins, 2018) at www.costovation.com