Price or proposition? That is the question.

WHICH TYPE OF SIMPLIFIER SHOULD YOU BE?

Price or proposition?  That is the question.  Either way you could make a fortune and enrich the world with a great new product or service.

In my last three posts here I’ve introduced the concepts of price- and proposition-simplifying.  The price-simplifier constructs an ingenious system to simplify a product and reduce costs and prices to below half their previous level, without compromising the core function of the product.  You can still sit on IKEA chairs and eat at their tables, and they look nice enough.  Budget airlines will get you from A to B safely and pretty much on time.  A meal at McDonald’s will may not be the most elegant but it will fill you stomach and keep the kids happy.

The proposition-simplifier goes in a different direction – providing a product that is a joy to use because it is simpler: increasing ease of use, usefulness, and “art” all at the same time.  Apple devices are all – perhaps excepting the Apple Watch – easier and simpler to use, more useful, and more beautiful than what went before.  The Google search engine is astonishingly simple and fast.  The Uber experience is delightful and easier to use than the municipal cab systems which it is replacing.

In all cases of price- or proposition-simplifying, the market explodes – tens, hundreds, or thousands of times, sometimes even hundreds of thousands (think hamburgers).  The company gains global market share on a scale and at a speed that turns other suppliers green with envy.

Whatever industry you are in, or interested in entering, there is probably a way that nobody has yet found to price-simplify or proposition-simplify.  If you are successful you become rich and the world is a better place.  But the two ways of simplifying are almost opposites.  In one, the customer has to fit in with the company.  In the other, the company has to fit in with the customer, and provide something at least ten times better than before.  One way involves an obsession with costs and prices.  The other way involves designing a product that cunningly conceals its complexity from the customer, packing enormous genius into making life easier and more fun for the customer.

Which way are you going to choose?  Maybe you’ve already decided, but if not, read on.  And if you like, you can go to http://www.simplifyforceos.com/test.

There are four Tests to help you decide:

  1. The Attitude Test

Price-simplifiers are likely to believe the following things:

  • It would be easier to cut costs and prices in half than design an astonishingly simple but useful product.
  • Low operating margins are nothing to be afraid of, if you can get massive volume of sales.
  • State-of-art systems to speed product flows and cut costs are vital.
  • A long-time horizon is appropriate for investment decisions.
  • Growth is everything
  • Frugality is a great virtue.
  • The firm should be egalitarian – e.g. no obvious management ranks or reserved car-parking places.
  • Get the basics right every time.
  • Limit risks.
  • The aim is to devise a universal product that can be the same everywhere and for a long time.
  • Overheads should be very low.

The proposition-simplifier would not agree with many of those precepts.  For proposition-simplifiers, the following are more important:

  • An “insanely great” product is everything.
  • Customers must be wowed and given something they never thought possible.
  • High operating margins are necessary.
  • The top 10% of people in the company determine its success.
  • Making a product or service better is more important than making it cheaper.
  • Hiding complexity from customers so that it is incredibly easy to use is the way to go.
  • Constant and relentless innovation is essential.
  • There should always be a buzz about change in the company.
  • It’s more important to be free-wheeling, dynamic, and entrepreneurial than to be disciplined, well-organized, and predictable.
  • Unless the product or service has been designed incredibly well from the start, nothing good is likely to happen.
  • High overheads are nothing to be afraid of – they are the seed-bed of innovation.

Which group of attitudes is more like yours?

  1. The Gap Test

Every firm should abide by two decision rules:

  • If the market leader is competing on features and performance, do not try to muscle your way into its market unless and until you have simplified the product so that is greatly superior and easier to use.
  • If there is a gap in the market and no firm is occupying the price-simplifying ground, and you can think of a way to cut prices in half, go for it.

It’s amazing how often companies try to enter a market with the same basic approach and policies as the market leader.  That is nearly always fatal.

Instead, go for the gap – and do the opposite from the market leader before anyone else does.

  1. The Keys Test

Successful simplifiers always come up with a new key or keys to unlock and transform a market.  These keys are almost never based on market research.  Instead they come from insight.

In my post two weeks ago on price-simplifiers, we saw some of the Keys used by great price-simplifiers:

  • Ford – reduce variety, redesign product, introduce new production system, use better-quality and lighter materials.
  • IKEA – redesign products, control furniture-makers, reduce variety, build giant stores, co-opt customers (self-service, self-delivery, self-assembly).
  • McDonald’s – reduce variety, automate, speed up service, co-opt customers and franchisees, make products and outlets all the same, use better-quality ingredients.
  • Penguin Books – reduce variety, create new distribution channels, raise quality of content, lower overheads, co-opt authors and other publishers in pursuit of high volume.
  • Honda motorcycles – reduce variety, scale down product, lower the costs of labor and the main component (the engine).

Last week we saw some of the keys used by proposition-simplifiers:

  • Apple Macintosh – create high-end customer segment, make product more intuitive for the user, design a user-friendly and beautiful item that is also more useful than existing machines.
  • Uber – make experience of using a taxi quicker, more friendly and more reliable, through new software.
  • Boston Consulting Group – create new high-end ‘strategy’ product, condense ideas, select a few simple principles that are based on economics, communicate shared framework throughout the firm, prioritize the best market positions and products.
  • Bain & Company – create new high-end ‘CEO’ service, co-opt the CEO, increase ease of profit improvement throughout the client firm, increase usefulness of consulting process.
  • General Motors – create new segments in middle and top of the market, each targeted at different customers and with different auto styles and appearance, raise customer utility through brand differentiation and new annual models, introduce new features to make cars a joy to drive, raise ease of purchase for customer and dealers by extending credit.

If you can see a vital key in your market, does it belong to price- or proposition-simplifying?

  1. The Better Skills Test

In order to succeed as a simplifier, your company has to have the right skill set for your market, but it must also be better at simplifying than any current or potential rival.  This is a hard test and it is easy to delude oneself.

Think back to the personal computer war of the 1980s and 1990s – a war whose effects we are still feeling today, as it crippled two giant corporations (IBM and Xerox) and was crucial in the rise of another firm, Apple.

The simplicity tests outlined above would have indicated that IBM’s position was hopeless right from the start, because it faced one rival more skilled at proposition-simplifying, and several others more skilled at price-simplifying.

Nobody is the late 1970s or early 1980s realized that IBM was set to fail.  Yet if its bosses had explored whether they were able to pursue either form of simplifying better than their rivals, they would have seen the writing on the wall.  Similar analyses could be employed today regarding some of the world’s most valuable firms, and it would show that several of them, too, are set to fail.

In the fifth and final post on Simplify, I will explore how far established and successful companies are vulnerable, and how the dinosaurs can fight back.

Simplify by Richard Koch and Greg Lockwood was published on April 7 and is available from amazon.co.uk

Image credit – Pixabay

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