Most people do not use advanced new features in consumer electronics. So why not provide cheaper, simpler products? For years, consumer electronics companies have competed mainly 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 makers 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 newest products.
The result? An industry-wide average profit margin in the low single digits at best, and negative at worst. Looking beyond cutting-edge products may be a better way to grow. Through two surveys of a total of nearly 2,500 people and in-depth interviews with electronics buyers in the US, we found that almost two thirds of consumers were more interested in core benefits and attractive prices than in bells and whistles that are often unused.
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 that we will call "basics", which are priced between 30 and 50 per cent lower than standard offerings and have features that reflect user demand. These new products should not be confused with low-quality, poorly designed ones that use generic components. 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 seldom-used features. Basics come from not only upstart companies but also established ones, although consumer electronics makers have been slow to recognise the potential of the basics market, which has existed for years in other industries. JetBlue Airways, for example, has snared market share in the US since 2000 by aiming for 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 buyers, the success of new entrants such as Pure Digital Technologies is not hard to explain.
The company's inexpensive Flip video cameras, which are light on features, have grabbed 14 per cent 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 per cent of the laptop market this year, just four years after their launch. Like Flip video cameras, which pushed overall category sales in the US 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 survey respondents who bought one had not previously owned a laptop.
What is driving the growth of the basics market? First, consumers are over-served. Our survey showed that less than a third of the respondents actually used all of the advanced features that electronics makers pile into their televisions, video cameras, mobile phones and other products. In fact, less than half of the respondents even knew these features existed. Second, people value lifestyle benefits over technical capabilities. Among respondents who owned a Flip camera, for example, 90 per cent liked it because it was lightweight, easy to carry and use, and "lets me share memories with family and friends". Only 60 per cent said video quality was important.
Third, consumer-friendly products are gaining ground as new tools make it easier for people to compare products and provide feedback. Consumers seeking simplification 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 shift in mindset 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 makers, 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 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 makers invest in features such as sturdy hinges rather than expensive components with high-end technical specifications.
Competing in the basics market also requires makers to reduce their production costs significantly so they can offer products at prices as much as 50 per cent 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 the latest ones, but that 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. The netbook maker AsusTek Computer had an estimated 15 per cent gross margin in 2007 and last year, according to SinoPac Securities. But companies must carefully consider the brand and marketing implications of introducing basics. They should ensure, for example, that the value of existing brands is not lessened and that sales of higher-priced products are not sacrificed.
Pricing and promotion strategies will be required to make customers aware of these new offerings. It's not an easy process. Procter and Gamble (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 per cent less.
What companies such as P&G, Pure Digital - which was bought by Cisco Systems for US$590 million (Dh2.16bn) in May this year - and the netbook and PC company Acer have recognised is the opportunity the basics market offers. Smart makers 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 idea. Andre Dua is a principal in McKinsey's New York office, where Lisa Hersch is an associate principal and Manu Sivanandam is a consultant with the firm
