The topic of 1% keeps resonating because its both tantalizing to the masses but also very divisive. As Apple launches the latest iPhone priced even higher than earlier Apple phones, its a good time to revisit why that makes a great strategy.
Apple has launched yet another product that many critics call over-priced and focused on the 1%. I posit in this blog post that that is an excellent product strategy.
There are some very interesting startups that are taking the technology to the masses and solving problems for the bottom of the pyramid. The mobile phone has allowed innovations like mCommerce to reach banking and healthcare where not earlier possible.
But I believe that often times, the right answer for an entrepreneur is to do the exact opposite and in stead focus on the relatively wealthy. In fact, innovations like iPhone started out by solving a problem at a price point that could only be afforded by the relatively wealthy. Same for Tesla. And August.
Let’s look at why this seems to work so well, and for what kind of innovations.
Innovation at the Top of the Pyramid — The Future is Rich and Lives in Kansas
One way to imagine what goods and services we all will have access to two to three years out is to look at what the relatively rich are doing today. Electric cars are going to be affordable for all as Tesla builds scale and moves down market and competitors license its technology or build their own versions. We will all get access to slim Macbook Air like computers in years to come as it becomes the industry de facto.
As an entrepreneur, you can essentially project into the ‘future’ by catering to the needs of those who ‘live’ in the future — due to their ability to spend more. In fact, income is just one way to project into the future — you can also target certain geographies. For example, cities with Google Fiber in US, and high bandwidth wireless cities in Korea and Japan where the future has arrived early. When you build a product that meets the needs of these ‘future cities’ and ‘future people’, you are solving a problem that will eventually be relevant to the masses and you would have multi year lead over your competitors.
In the Future, Everyone is Rich (Metaphorically Speaking)
Well, we all know that this is not a true statement in the literal. But if you look at how even the modest among live today, we have a life style that would be the envy of the rich from a few decades ago — airconditioning was rare, access to good entertainment (or any entertainment) was rare, travel was difficult and slow, beds had bugs and no one was immune to the diseases we all have magical immunity to today thanks to vaccine and antibacterial drugs. You don’t have to go 100 years back to feel good. Just compare what you and I can do with a modest smartphone today compared to even 10 years ago.
The Moore’s law and its partners — have essentially lowered the cost of access to all kinds of amazing innovations and inventions. Essentially rendering us rich. Just yesterday, I was interrupted by a minimum wage security guard who was just doing his job — by taking pictures of the shared BBQ areas on his Android phone with an app to do his job!
What this means to you in practical terms is — if you build the product at a price point that is only accessible for the relatively rich, your product over time should get cheaper and become accessible to a much larger market. I believe this will be true of over-priced connected locks, of personalized medicine, of 3D printing, of driverless cars, of learning thermostats and so many more amazing innovations. They all look a bit expensive today — even outrageous when you compare them to their mass produced competitors. But its easier for prices to magically go down (scale & time do that) than it is for your low end product to magically become better (never happens on its own).
The Rich are Multiplying like Rabbits
The income gains of last few decades have all gone to the relative few.The number of households making more than $100K in the US has actually gone up a lot in the last 20 years. So while our median household income is not rising as fast at least here in the US, the number of high income households is exploding. The rich though are getting created through income growth not exactly reproduction — in fact, the fertility rates go down as incomes go up.
Now if you take into account the new millionaires in China and India, the number of people worldwide with high net worth and high disposable incomes is growing very rapidly as pointed out by this BCG report.
We have an opportunity to build products that meet the needs of the affluent mass market. Just as Starbucks raised the average price of coffee from less than a dollar to three to five dollars, the affluent are happy to spend money on products that deliver value.
In technology, we can see this in how how well products from Apple do — not just in volume (which is respectable) but more importantly in profitability.
To me, the following products represent the products that meet the ‘needs’ of the affluent mass market.
- Apple iPhone
- Apple iPad
- Tesla (early and at the top end)
- Organic foods (we all want good food, only some of us can afford it) — see China
- The Trunk Club
Consider building products that may only seem to appeal to those that may be making $250K per year or more. Or if you want to go little more mass affluent, target household income of $100K which in places outside of San Francisco and New York still gets you a lot of disposable income.
What would you build if you focused on the rich?
- Better rental car service? Like Silvercar.com
- Better travel service?
- Better air travel? NetJets.com? Clearme.com?
- Home health care? OneMedical.com? Concierge medical service?
- More devices connected to my body?
- Better Sleep? Sleep Number bed? Foam?
- Faster internet? Google Fiber
- Better locks?
- Better Baby Monitors?
The best part about this is you can now think in a new constraint. (No constraint is usually a bad idea). Take the products you don’t like and think what you could build for 2 to 10x the price!
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