The latest (October) edition of the The Harvard Business Review writes that Customer Loyalty Isn’t Enough – Grow Your Share of Wallet (note: you may need to register to view this material – article authors listed below).

Essentially, the authors (below) are reminding us of the importance to focus less on ourselves, and more on the competition.  Or more specifically, why our customers focus on the competition.  They go further and present a number of simple formulas to estimate your businesses “wallet share” of your customers, or the proportion of their spending that is going to you or away from you to your competitors.  They suggest that where you are not number one in your niche, to ask why, and not get distracted with satisfaction measures that may only lead you to preach to the converted.

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What do you think of all the suing and counter-suing occuring in the market place at the moment?  Samsung recently announced (regarding their largest customer, ironically) that Apple’s Been “Freeriding,” We’re Getting aggressive

Personally, while I am glad to see a little ‘pay back’ for what I am inclined to perceive as un-necessarily aggressive and broad sweeping behavior by Apple using some dubious “look and feel” type patents, I do wonder if all these this arms race is a waste of time and money.  With the Western world teetering in the edge of economic collapse, would these reserves be better deployed to innovation?  Not only would this benefit a lackluster global economy, but it would also enrich our lives.

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Are Telcos ignoring the threat of commoditisation?

I have argued for some time that this is the case and telcos risk becoming just another dumb pipe and as we know commoditisation spells the death of profits.  And low and behold, Telstra’s profitability has plummeted in recent times, admittedly as part of a deliberate strategy but one none-the-less bought about by these dreaded competitive forces.

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It seems I was right, never grow complacent, never take your market position for granted!

http://www.itnews.com.au/News/252196,nokia-stalls-painful-job-cut-talks-to-end-of-april.aspx

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Beware The Vortex of Doom!

Competition is heating up, your suppliers exerting upward pressure, your customers are exerting downward pressure, your products and strategies are being imitated.

Sooner or later no matter how successful your product based business is, you will hit a wall unless you are very lucky.

So how did Apple beat this game?  Lets look at the smartphone market.

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In my previous article I discussed the concept of value and how important it discard old ways of thinking in terms of products and costs, to re-focus around the consumer.

In this article, I will further the case for considering services in your business by distinguishing products from services.

Part Three, will look at the success of the Apple Strategy and some real examples of real profit margins including from the sector spread Woolworths enterprise.

So Why Services?

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I have received a number of inquires from clients and readers about services based business models and how to implement one.  In response to this interest, I have developed a few strategies and illustrations to help you.

In this multipart series, I will take you through what services are, and how you can build a services based business or transform your existing product based business, in to a services based business.

So what are services?

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From across the Tasman Sea comes word that that Apple is ramping up its targeted advertising platform.  This will be the great battleground for the next decade, as the likes of Google, Apple and even supermarkets and airlines with loyalty schemes battle it out for supremacy in the customer profile market.  Think what happens every time you use a fuel docket, every time you pay for groceries and leave a footprint with your loyalty card.  Make no doubt, Big Brother is watching you.

Apple uses customer profiles to target mobile phone adverts – Business – NZ Herald News.

But is this necessarily a bad thing?  I am not convinced it is.  For years we have been giving up our most sensitive information to anonymous government and private entities who then decide if we should have security clearances, credit cards, welfare, tax refunds or be pursued for an unpaid parking fine.  Citizen tracking has long been an integral part of civilisation, and at times used for bad.  However, if used wisely, and if citizens retain control and remain informed of how their data is being used, it could be a tool for enormous good.

And by good I refer to realisation of the dreams of capitalism – the most efficient allocation of limited resources for the good of humanity – driven by needs and wants to provide resources to provide the greatest value.  No longer will we be harangued with irrelevant advertising, no longer will companies produce mountains of products to be pushed on to the market often with colossal waste when those products prove to be failure.

Sophisticated customer profiling will democratise capitalism by putting the consumer firmly in control.  Companies will move from slow cumbersome push driven to dynamic rapidly responding pull driven production.  Businesses that fail to embrace the new consumer driven world will ultimately fail as they will be unable to compete with dynamic responsive businesses.  Smaller entrepreneurial companies will be empowered to identify small profitable market niches previously regarded as unprofitable by traditional large push driven businesses.  This will lead to a flourishing of diverse markets and a more colourful society to live in contrast to push driven conformity.

Companies will be forced to bow down and serve the consumer and adapt to their ever changing whims and needs to survive.  Those that do will be amply rewarded.  The consumer will be the winner.

This is a far cry from the bleak dystopian warnings repeated almost daily in the media and films such as Minority Report where the consumer is portrayed in an omniscient automated society intent on entrapping innocent victims in its web of seduction, lies and corruption.  This world is technologically possible, George Orwell warned of this.  Aldus Huxley, inspired by bold 19th century industrial progress, even espoused it before Hitler popularised industrialised eugenics and Aldus Huxley turned away in horror.

Radio National recently ran an excellent podcast analysing both sides of the story, even interviewing some of those involved in the very act of tracking how we feel.

The dystopian vison would only eventuate if we consciously sought this world and allowed it to be created.  I do not believe this is possible.  It is possible that the very act of having this discussion averts this possibility just as the penning of George Orwell’s 1984 in 1948 raised awareness sufficiently to prevent his nightmarish vision.

I am more optimistic and foresee a natural evolution toward a consumer centric demand driven capitalist society where consumers, and even the environment, benefit from a more responsive and resource efficient productive society.

As long as our democratic institutions remain strong, and we remain intolerant of corruption in all collective endeavours, the future will remain bright.

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2010 is indeed heating up to be a battle of battles between Google and Apple.  Several years ago it would have been incomprehensible to imagine Google and Apple going head to head in an all out war, or at least Apple declaring all out war on Google.  The interesting thing is their entirely different business models.  Google’s is founded on advertising, subsidised with a small amount of paid applications.  Apple’s is the other way around – with high margin products and software, subsidised with a small amount of advertising in the (predictably named) iAd platform.  Google has a vested in interest in driving down margins and costs to broaden their market appeal.  Apple has a vested interest in maintaining profit margins through ecosystem lock in and clever marketing.

It is not the first time Google’s apparently charitable business model has come in conflict with a margin dependent business model, and it won’t be the last time.  On the surface, Google like to appear as the good guys who give everything away for free and eschew system lock-in, however this is only because they can afford to do it and in fact need to so they can drive ‘traffic’ through their ecosystem and sell ads.  Google also gathers a level of freely given market  intelligence that would have made George Orwell quiver.

Other companies like Apple rely on attracting and retaining high margin consumers to their ecosystem and providing a high quality level of service and product, in return for being tied to the platform.

So now Apple is launching a new assault on Google with the concept of a paid cloud offering, which essentially means less stuff to carry around and more stuff that is carried for you and available when you need it through the network.

Apple’s War With Google Takes To The Skies With iTunes In The Cloud.

However with all this gold rush toward the ‘cloud’, one question remains.

If access to the cloud is interrupted, what do you do?

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Android is currently riding on a wave of euphoria having blasted in the global and Australian smartphone market this year.  However, is this  just a honeymoon period, or is Android here to stay?  Android is based on a radically different business model to the established players of the declining Symbian and the mature Apple iOS (hardly breaking new ground with a naming convention there).

The Android business model is based on the open source Linux operating system – founded on a passionate merging of socialist ideals and advanced technology where software is poured in to a creative commons to be shared by all of humanity, free of charge.

Android is no exception, however Google is no charity either.  Google have chosen Android because it suits their business model of supply chain integration to drive down costs, and broaden their market for their core business of search and advertising.

This business model, by driving down costs, will commoditise everything it touches, the process by which consumers come to expect products and services to be low cost, undifferentiated and possibly even free.  This suits Google just fine, but offends established players such as Apple who rely on healthy gross device profit margins, while Google’s business model relies on broadening their market reach to more consumers with free or cheap services and products.  Apple and Google could not be any more different, and Apple are not happy about it having launched a proxy lawsuit against Google via HTC.

A comparison of relative profit margins in mobile device manufacturers reveals that on company operations, Apple enjoys EBIT(1)  profit margins of 40%, compared to Microsoft at 38%, Nokia at 4.9% and Dell at 4.1% (Forbes Magazine 2010).

In terms of gross margin on products, on the iPad alone, Apple enjoys gross margins of up to 55%, with concerns raised when the gross profit margin falls to ‘only’ 40% (Forbes Magazine 2010), with up to 60% gross profit for the iPhone (Elmer-DeWitt 2010)

Conversely, Nokia and HTC fall to almost half of this figure at just over 30% gross product profit margin.

So there is a lot to lose, as Nokia have shown with their declining profit margins and their CEO coming under increasing pressure to do something about it.  Meanwhile Android, based entirely on ‘free’ is becoming very popular with device manufacturers, who don’t have to pay royalties to use Android, and consumers, who enjoy cheaper devices and a more ‘open’ platform, in contrast to the Apple ecosystem ruled over by the benevolent dictator Steve Jobs.

2010 will be a very interesting year in the smartphone market, and only one true winner will emerge: the consumer.

Definitions

(1) Earnings Before Interest And Tax, otherwise known as Operating Profit is a measure of profitability that takes in to account the operating structure and expenses of the organisation such as marketing and R&D.  EBIT does not include potentially anomalous measures such as depreciation and asset write-downs structured to minimise taxable company income.

References

Forbes Magazine. “Apple Suffers Mildly From Slimmer iPad Margins.” Forbes.com. 14 April 2010. http://blogs.forbes.com/greatspeculations/2010/04/14/apple-suffers-mildly-from-slimmer-ipad-margins/ (accessed June 07, 2010).

Elmer-DeWitt, Philip. iPhone gross profit margin nears 60%. 02 March 2010. http://tech.fortune.cnn.com/2010/03/02/what-doth-it-profit-an-iphone/ (accessed June 07, 2010).

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