Daring Fireball linked to an article a while back about The Myth of Market Share. The site is now locked behind a login, but Google is to the rescue.
The article discusses business practices that view the market as a zero-sum game. In other words, the belief that doing well isn't as important as doing better than the competition, that market share is more important than profitability. And the study is a surprise: this tactic doesn't work too well. So much a surprise that the implications are still not fully understood.
News flash: Business re-discovers a half-century old concept, and promptly ignores its lesson. The sad part is, even after the article, the first response (Since I read the cache, I didn't find out if there were replies) still doesn't get it.
Joanna Trudeau, Manhattan Assoc/ Customer Dev Mktg, wrote:
Is it not useful to pursue marketshare goals, utilizing loss leaders, to grow the more profitable post-sale service and support revenues?
Implicit in this is that market share immediately means sales. And that the only use of loss leaders is only to get market share with cheap products out there. That if you don't undercut the competition, they'll make the sale instead of you. This sort of flawed "Them or us" thinking is exactly what the article was about!
If you focus on only being the low-price leader, you'll simply be known as the low-price leader. Your customers won't be loyal to you, only to the price savings. And the second that someone comes along that's even cheaper than you, you'll then be known as a has-been ex-leader. It's the race to the bottom, and it's a phyrric victory.
Furthermore, the razor and razor-blade model doesn't really work here. You'll be selling your actual product, the physical thing, with tiny margins, or even at a loss, in hopes of "profitable post-sale service and support revenues." But that doesn't happen. Because for the razor and razor-blade model to work, you need to lock the member into using only your blades. And guess who can undercut your "profitable post-sale service and support revenues"? Everybody. From Geek Squad to the kid down the street, they can all work on that PC once it's been sold. And this is why the model of everything for market share doesn't work. Because you trivialize what makes you unique, and by doing so, lose support sales.
That's what makes Apple's loss leader so interesting. Part one is focusing on excellence, making yourself look good, not others look bad. Part two is to not make your cash cow into a loss leader. Part three is that there's fierce competition in the support and service realm. Part four is that a loss leader, any loss leader, serves to get potential customers in the long run. In short, make your support and service a loss leader, beyond the competition of the neighborhood kid, to grow the more profitable and unique computer revenues.
And now you know why the Genius Bars have made Apple Stores so profitable.
