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New Product in a Fast Growing Industry: The Pre

The mobile phone hand set industry is fast growing, especially the segment known as smart phones, which combine the functionality of a limited PC or a good PDA with the normal telephone hand set functions. The new Palm Pre is entering this market. Let’s use the Customer Buying Hierarchy to evaluate the prospect for the Pre’s success.

The Customer Buying Hierarchy (see “Video 27: Full Description of How the Customer Buying Hierarchy Works” on StrategyStreet.com) holds that customers buy a product using four categories of evaluation: Function, Reliability, Convenience and Price. Function (see “Video 13: Definition of Function” on StrategyStreet.com) refers to the features of the product that affect how it is used. Reliability (see “Video 14: Definition of Reliability” on StrategyStreet.com) refers to the benefits of the product that assure the customer that it works and will continue to work. Convenience (see “Video 15: Definition of Convenience” on StrategyStreet.com) refers to the ease with which the customer may find and purchase the product. Price is the cash cost the customer pays for the product.

In Function, the Pre performs well. In a high-growth industry such as smart phones, product innovation, especially in Function, is the name of the game. The Pre does not disappoint here. It offers a number of Function innovations, some of them unique to the Palm Pre, to entice customers.

The Reliability and Convenience nods go to Pre’s competitors. Research In Motion’s BlackBerry dominates the corporate market while Apple’s iPhone controls the consumer market in smart phones.

Price appears not to be a competitive issue in this market. Apple learned with its experience with the original Apple computers, and then with the Mac, that it can not charge high prices and hope to be the largest competitor in the market. Apple became a shrewd maket-pricer with the iPod. It continues its smart ways with the iPhone. The key price point for smart phones today is $200 and the major competitors all seem to offer a strong product at that price point. Any price reduction at this price point is likely to elicit an immediate response from the other competitors. In addition, any new, lower, price point for the smart phone is also likely to be matched by the other competitors in the marketplace. (See our Blog on the $99 iPhone.)

Can the Pre win on its Function advantages? The key Function innovations in this market will save customers time. Styling may bring some early customers, but differences in style are likely to be minimal in customer decisions. New applications, though, are critical. These really do save customers time and, therefore, costs. Here the current advantage clearly rests with Research In Motion and Apple, both of which have a large number of third party applications available for their phones. Apple has more than 35,000 apps available for its current phone. Even Google’s Android operating system has nearly 5,000 apps available. The Pre has a long way to climb to match the Function advantages that third party apps confer on the incumbent competitors..

While this is a very fast-growing market, the Pre is coming late to the game. Palm has to hope that their major competitors will not copy the Functions that are unique to the Pre. Then they have to hope that app developers will fall in love with the Pre and its operating system and write many new programs for the new phone. These are possible, but not probable developments. Since smart phone pricing is unlikely to be potential point of advantage for any of the current competitors, the outlook for the Pre is not strong. It may attract a relatively small segment of the market, but it is unlikely to become the industry leader in smart phones. (See the Perspective, “The Dangers of Competing on Features” on StrategyStreet.com.)

Posted 6/15/09

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