I love rhymes and alliteration. They make reading musical. Poorly constructed rhymes were a key tool in my arsenal while I was wooing the woman who is now my wife. Anyways this article is not about those rhymes. This article is about certain patterns which rhyme across time and geographies, which are probably, dare I say eternal?
The source of the idea was this article shared by my mentor. The article talks about two unusual moves by Apple. First was a recent decision to replace deteriorating batteries at a sharp discount. Apple first launched a battery replacement program allowing customers to replace their ageing batteries at steeply discounted $29 vs the usual $79 out-of-warranty fee.
Second was the recent release of a new operating system which radically improves the performance of the millions of old phones. People who had old iPhones were resigned to the fact that they would have to buy a new phone when Apple released its new operating system iOS 12. But Apple executives said the new system, iOS 12, would be different.
Craig Federighi, Apple’s senior vice president of software engineering, said in June.
“We’re focusing our efforts especially on the oldest devices,”
They stayed true to their word. As per the company, the camera app now opens 70% faster, the keyboard starts 50% faster, and under a heavy workload, multiple apps work up to two times as fast. Users have experienced the same as well.
The actions on the first glance seem really strange, and to some investors worrisome even. Since the advent of the mobile phone, customers have been conditioned to believe that their phones will last for shorter and shorter duration with time. They are led to believe that with fast changing and advancing technology they need to upgrade their phones regularly as well. Companies encourage this by launching new operating systems which ultimately diminish the performance of older phones.
In a scenario where the customers are conditioned so, why would Apple enable its users to extend the life of their old phones? If people continue using their old phones, they would not buy new phones. Would it not affect their sales, and thereby their profitability? Why go for such a bizarre strategy?
The answer lies in the question itself. Apple intends to attack this very conditioning of the customers. As per Tim Cook, the CEO, making old products run well is truly the right thing to do for the customers. Strategically, this might be a brilliant move.
The goal of every business should ideally be to be survive profitably over the long-term, and the key to long-term survival is long-term happiness of the customers. Now let’s use that most important emotion of empathy and consider what a Apple customer would feel about these decisions. Most users swear by Apple products. With the recent decisions, they would become even more hardcore believers in the brand. Apple has just reduced the odds that people would leave the ecosystem due to increasing prices. By giving ‘choice’ to the customers as to when they want to upgrade rather than making it for them, it has vastly improved customer loyalty. It might also nudge fence-sitting customers to move into Apple. The strategy also subtly weakens the position of its competitors - for the same price if I get a phone which would last longer why would I buy something else?
And strategically this has another major advantage. In a mature smartphone market, the key variable for growth is price increase. Apple has been increasing prices for its products by double digits each year. The strategy of improving customer loyalty fits into that neatly, as happy customers may delay the purchase of new phones, but how long can they delay? So the key is to delay gratification.
Meandering mind wanders to Wonderla
The above article reminded me of Wonderla, an amusement park business run by the Chittilappilly family. We covered it briefly in the case study on Kochouseph Chittilappilly.
Wonderla runs three extremely popular amusement parks in South India, and has probably one of the most profitable amusement park businesses in the world. It enjoys around 2.5 million visitors per year and two of its parks are among the top 15 parks in Asia. The returns on capital of mature parks are easily above 25% and this is achieved at an average ticket price of less than $20.
In this year’s annual report, the management mentioned that visitors to the park can now enjoy three meals (breakfast, lunch and snacks) for Rs. 299 ($4.3)! I was stunned when I read this. The reason is conditioning again. Like shortening lifetime of phones, most of us have been conditioned to spend a lot for food when it is part of activities. If you are going bowling with your friends, or to movies, or just to eat out, the cost of food has risen tremendously. In fact, in places like gaming arcades or movie halls, the business strategy is to get the customer in at a price and then make strong margins on food. Many of us are not surprised by the price increases because we have been led to expect it.
So what is the management thinking with this strategy? To understand this, let’s check out their advertisement. The below has been copied from Wonderla’s website:
Get three, scrumptious meals [breakfast, lunch and snacks] inside the park, all for INR 299 or two meals [lunch and snacks] for INR 249! Book your food coupons along with your entry ticket and rid yourself the trouble of planning what to eat. Because, when you’re at Wonderla, the only thing that you should think of is - “Which ride should I go on, next?”
The management has beautifully addressed a key pain-point of its customers. Most of its customers are middle class people who are reasonably careful with money. By directly addressing the pain-point and not exploiting them when they are inside the park the company is increasing the customer loyalty considerably. Let’s use that tool of empathy again and think from the point-of-view of the customer. He / she would be thrilled, for almost at the price of one meal for one person in an expensive restaurant, a family of four can have three meals in their parks . Customers tend to notice such things. The brand in my opinion only gets stronger. This would probably allow Wonderla to enjoy better pricing power for its tickets. And like in case of Apple, I would think some customers might begin to question why they need pay so much for food at other entertainment avenues, subtly weakening their model.
In fact, to avoid over-exploitation of customers, certain state governments have decided to force movie halls to allow outside food and cap movie price tickets at certain levels. The jury is still out on whether the government should have just allowed the free market to dictate terms. As the largest and the most profitable amusement park operator in the country, taking lead in this issue might just have reduced random regulatory risks like this for the industry in the future.
A very interesting observation was when in the AGM a company representative said that while the sales and profit per customer has come down for food, the cumulative profits have gone up since they implemented this measure. The company has been making higher profits after they reduced their food prices!
And this reminded me of TTK Prestige.
Pricing and Prestige
The reason the above reminded me of TTK Prestige is best explained by a couple of excerpts from the biography of TT Jagannathan below.
Shankaran, group director, corporate affairs, says: "We realized that there was a major problem in the way we utilized capital. Prestige had been a margin-led company, and we were passing on our inefficiency to the market. As a result, our products were overpriced all the time. We decided that margin would be a strategy for growth rather than an end in itself, and that we would employ capital more efficiently."
Up to this time, I had thought that since we had a powerful brand we could charge high prices, which would give us high profits per piece sold. But there was some resistance in the market, and with dealers offering lower prices, their margins came down with the result that they sold fewer pieces. Our strategy had failed. We reduced the margin sharply and began to make more money as the dealers sold more pieces. This is a learning that happened the hard way for me. We are still following the margin system that we established in 2003. The money we make has gone up. Those days our gross turnover was Rs 100 crore ($15.7 million), and our margin was 40 per cent of sales. We cut it to 20 per cent, and our gross turnover has grown to Rs 2,000 crore ($315.4 million). From earning Rs 40 crore ($6.3 million) from a 40 per cent margin on Rs 100 crore in sales to earning Rs 400 crore ($63 million) from a 20 per cent margin on Rs 2000 crore ($315.4 million) in sales . . . the earnings difference is huge.
The pattern across the examples above is the ability and willingness to delay gratification. When short-term profits are sacrificed at the altar of customer satisfaction, good things can happen over the long-term. Can you think of more examples of the same?
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