The Lure of Emerging Markets– India

With growth looking more and more anemic in the developed world and the fundamentals (expenses outpacing revenue) clearly pointing to a lackluster demand going forward. Can products and services from the developed world find a market elsewhere? Can the Indian consumer market offer a road ahead.

Adopted from Economist, Daily Chart March 7th, 2011

A burgeoning and transitioning Indian economy with buyers on the move bodes well for businesses local and global. Do the numbers justify India’s rise or are we once again succumbing to temptations of finding growth where the fundamentals just don’t add up. Is now the time to step in and serve unmet, latent and unaddressed needs ?

In a two part analysis lets investigate what it means to do business with consumers in India analyzing fundamental drivers of demand, the market potential and the challenges of meeting those demands.

Part-I: Demystifying the Indian Consumer – Market potential, the real numbers

  1. Demystifying the Indian Consumer (Download)
  2. India Consumer Durables Market Forecast: 2011 – 2015 (Download

Part-II:  Go-To Market Challenges – Leveraging networks, Igniting demand.

  1. O Buyer Where Art Thou
  2. Channels – Leverage, Make or Buy

Demand – The Holy Grail

Fundamentally there are only two ways to generate demand for any product or service:

  1. New Sales: Attract new buyers who have never experienced the product category or service.
  2. Replacement Sales: Entice existing buyers to replenish, replace or upgrade their existing product or service.

At the macro level demand is driven by population growth, income growth, productivity gains, monetary policy, trade policy, innovation that renders products accessible and affordable or changes in the regulatory environment.

At the micro level demand is stimulated by awareness, cultural norms, cheap credit, accessibility, education levels, income levels, price, technology, product quality and lifecycle.

Demystifying the Indian Consumer

The Indian market is squarely divided between the urban and the rural. A projected consumer model1 of the Indian market resembles a direction post reflecting the many possible roads businesses can take to reach the various segments.

imageSource: NCAER; MGI Consumer Demand Model.  (Using 2010 $PPP)

The Globals and Strivers are where most MNC’s focus today. But it is the Aspirers and Seekers together making up about 160 million households by 2015 where the mass market will converge.  The Deprived numbering 70 million will continue to march along, relegated to the sidelines and will find it increasingly difficult to break through without government support.

Note: For a detailed discussion on the consumer segments refer to the McKinsey / NCAER report: The ‘bird of gold’: The rise of India’s consumer market. 

Rural and Urban Divide:

Employment Status: The most striking observation one can glean from the employment status of Rural and Urban India is that over half the workforce is categorized as being self-employed. Cash flows within this segment remains volatile something marketers need to keep in mind when projecting numbers.

Another significant proportion falls into the category of casual laborers. This base of the population survives one day at a time. Lastly, the vast majority of salaried professionals are public sector employees with a few participating in the private sector.

An average graduate earns $ 9,474 per year in leading cities, the comparable rural figure is just $ 4,789. The difference, in fact, is higher for illiterates as well –average of $ 3,684 in the elite towns versus just $ 1,184 in the villages2.

Note: The purchasing power of the Indian rupee is much higher than its exchange rate value in USD

image Source: RBI Monthly Bulletin, April 2011

Expenditures: Rural and Urban India spend almost equally on all fronts although the share of the wallet dedicated to food is marginally higher in the rural area. This can be attributed to differences in the average household size which stands at 4.7 for rural and 4.2 for urban3.


On an average, the urban Indian earns 85 percent higher than his or her rural counterpart, spends 71 percent more and saves nearly double.

How Indian Consumers Pay:

The retail industry, with transactions valued at USD 410 billion per year4 is predominantly cash based. India’s consumer durables market was valued at around USD 33 billion5 in 2010, with electronic products (computing devices, mobile handsets and audiovisual products) accounting for almost 76%.

India has 173 million debit cards users (13%) and 23 million credit cards users (2%). However cash continues to be the only mode of transactions for the 40% unbanked population in the country. Overall, 67% of transactions are carried out in cash, while only 33% are done through electronic means6 (60% of these are P2P transactions).

The penetration of PoS terminals in India remains low at 419 terminals per million inhabitants7 (2009). On an average, the debit and credit cards together account for only two card transactions per day per PoS terminal. The economics clearly point to a need for alternate payment mechanism.

Consumers in a Transitioning Economy:  A Moving Target

As a new middle class emerges across India, people will seek greater quality in what they pay for (food, housing and clothing). As incomes rise further, the same will look for convenience and pay for it. Finally once the Indian economy leaps into the league of developed nations buyers will seek customized offerings and services. This scenario has played out numerous times and each time the pattern has repeated itself in every country that made the leap from underdeveloped to the developed.

MovingConsumerShortBreadFactorIndia will be no different although the needs, composition  and behavior of the different segments may deviate.

Note: For an in-depth look at the lifecycle in an emerging market refer to the pioneering work by Alonso Martinez and Ronald Haddock, The Flatbread Factor,  the finest work to emerge from the strategy landscape over the last decade.

Moving Segments, Changing Needs 

Over the years a gradual shift from a joint family system to nuclear family has taken hold across India. The trend will only accelerate further as incomes rise and people demand more freedom, expression and personal space.

India is already witnessing the arrival of new consumers expressing themselves boldly by trying and adopting new offerings triggered by: 

  1. INCOME Effect: As the 2nd fastest growing economy, with 8% plus growth people have more to spend.
  2. MINDSET Change: The post liberalization population numbering 35% is just coming of age.  
  3. AWARENESS: Access to information brought on by increased media proliferation, technology reach and 15 million foreign travellers annually.
  4. ASPIRATION Effect: Desire to experience new things as a consequence of moving up the value chain and the need to fit in by emulating others.  

By 2015 the various consumer segments in India will demand and pay for goods and services differently. Some of the opportunities that will open up:


The Numbers Game:

When all said and done, it ultimately boils down what level of sales can the economy sustain given the consumer makeup and country specific environment they live in. The best way to gauge the health of an emerging economy is to project Consumer Durable (CD) Sales.

Consumer Durable (CD) sales are a bellwether of broader trends and underlying fundamentals in the economy. CD Sales are primarily driven by discretionary spending which correlate strongly with per capita growth in GDP earnings. CD penetration rates are a good indicator of shortcomings in the economy on account of infrastructure, credit availability and stability in household earnings.

Here is what one projection on achievable CD sales looks like and the assumptions made.


CAGR for Consumer Durable Sales (2011-2015E)CAGROne should pay close attention to the adoption rates for the basket of consumer durables under consideration. The adoption rates are a way to cross check sales projections and ensure that sales mirror the size of the consumer segments.


Sizing up Demand:

To develop the same sales estimate from bottoms up one has to look at potential market size among all the available segments and put together a detailed plan to capture individual buyers. One such framework that maybe employed is depicted below.


GBL: Globals (High Income), MMI: Middle Middle Income, UMI: Upper Middle Income

I will leave it those interested to arrive at individual targets for CD sales at each of the segments under consideration.

In Part-II of this discussion we will investigate how having established a sales target one can go about selecting a Go-To Market Strategy to realize the set objectives.

Note: It may appear to the reader that I am biased towards the Indian Market. It just so happens that I can relate to the Indian market better on account of my origin and roots. The worst thing any marketer can bring to his profession is an inherent bias in selecting target markets.

A lack of in depth knowledge and expertise on China and Brazil has hampered my ability to conduct a similar analysis on their market potential.


  1. NCAER; MGI India Consumer Demand Model
  2. NCAER- Inclusive Urbanization Needed, Oct-2010. The numbers are adjusted based of the 2010 $PPP.
  3. National Sample Survey Office (NSSO), Report No. 531
  4. A.T. Kearny Global Retail study, 2010
  5. Confederation of Indian Industries Data, Dec-2010
  6. Mobile Payments in India – Deloitte/ASSOCHAM, April-2011
  7. Bank for International Settlements
  8. McKinsey – Comparing urbanization in China and India, July-2010 (Pg-2)
  9. Energy in India for the Coming Decades, Anil Kakodkar, Chairman, Atomic Energy Commission, India
  10. India- Energy Efficiency report, ABB, Jan-2011 (Pg-2)
  11. World Bank, GDP Forecasts.
  12. International Energy Agency (IEA)
  13. International Monetary Fund (IMF)
  14. Planning Commission of India
  15. India Census – 2010
  16. Modeling Diffusion of Electrical Appliances in the Residential Sector, Michael A. McNeil and Virginie E. Letschert, August 2010
  17. Bass Diffusion Model

Update, Oct 28th 2011: The Implications of the Global Web for US Startups, Point Judith Capital (some interesting data)

Update Oct, 22nd 2011: Economist Special Report : Business in India, rightly captures the challenges of doing business in India and impediments to its growth.

Update Oct, 17th 2011: India could become one of the top 10 e-commerce hubs in the world by 2015

Update Oct, 16th-2011: Top US based corporate giants like Wal-Mart, Starbucks, Morgan Stanley, New York Life Insurance, Prudential Financial, Intel, Dow Chemical, Pfizer, AT&T, Boeing, and others lobbying hard to enter India

Coupons–Is the time right for going Mobile ? ( Part-I)

The primary use of Coupons, delivered through various mediums, for the CPG manufacturers is to facilitates sales (purchase behavior)through one of the following means:

  1. Trials.
  2. Repeat Purchases.

It is an established fact that Advertising Communications and Promotions (AC&P) play an integral role in stimulating sales across the consumer packaged goods industry. Depending on the product / industry lifecycle a brand manager can employ different tactics (Appendix) that are geared towards one of the following:

  1. Increase Sales on account of Trials by New Users
  2. Increase Sales on account of Trials / Repurchases by Other Brand Loyal’s
  3. Increase Sales on account of Trials / Repurchases by Favorable Brand Switchers
  4. Increase Sales on account of Trials by Other Brand Switchers
  5. Increase or Maintain Sales on account of Repurchases / Stock-Up by Brand-Loyal’s

For the end buyer, Coupons help realize one of the following objectives:

  1. An economic motivation – where the main goal is to save money
  2. A hedonistic motivation – where the aim is to derive pleasure associated with striking a great bargain.
  3. A routine-loyal, or risk-avoiding motivation – where the goal is to reduce the risk associated with trying a new brand or product.
  4. A functional one – where the aim is to reduce search costs.


Strategy Tactics
Brand Loyal’s High Low Increase
Advertising suggesting additional or alternate applications of product
Brand Switchers
Medium High Build Loyalty Advertising to enhance
Price Discounts
Routine Brand
Low Highest Attract buyers keep
search costs high.
Price Discounts
Other Brand
High Low Entice Brand Switching
Minimize Risk
Comparative Advertising
Price Discounts
New Category
Lowest Lowest Initiate
Advertising – Create Awareness, Link Brand with Category need.
Price Discounts

Table-1 : Promotion Strategies and Tactics based on Buyer Groups

Challenges facing Brand Managers:

  1. As newspaper circulation continues to drop across America, Marketers need to adopt new vehicles to push Coupons onto consumers. The available options include Direct-Marketing, Internet based Coupons or Mobile Coupons.
  2. The current means of distributing coupons are not driving incremental sales. They are more likely to offer discounts to those already planning to buy, thereby cutting at the margins for manufacturers and retailers.
  3. Coupon usage history cannot be traced down to the individual level. The best available data is geo-demographic level. This lack of transparency hampers price discrimination and identifying well qualified prospects.

Coupon Usage – An Emerging Market perspective

My observations from studying how Advertising Communications and Promotion work in emerging markets (India) highlight two important deviations:

  1. Coupon distribution is still very much unheard of. Coupon fraud and absence of an organized retail infrastructure have prevented Coupon based marketing promotion from taking off.
  2. A second reason, an important one, arises from the industry lifecycle. A high growth market such as India offers, CPG manufacturers, brands and market segments that are yet to be established and defined. Consequently the use of Advertising to both position a brand and stimulate sales works very well at this stage in the market.
  3. The closest thing to using Coupons is the BOGO offers or Bundling that offer manufacturers an option in attracting buyers.

State of the US Coupon Industry – 2010


Through the first nine months of 2010, coupon redemption is up another 5.3% to 2.5 billion vs. the year-ago period, with the value of coupons redeemed up 7.7% to $2.8 billion according to NCH Marketing Services, a unit of Valassis Communications.


Internet coupons still account for only 1% of distribution. The majority of overall growth
in redemptions still come from Free-Standing Print Inserts (FSI), which accounted
for more than 2.1 billion redemptions overall last year, according to NCH data.



According to a recent survey by mBlox almost 70% of coupon users chose Mail/Post and Email as the preferred vehicle for receiving coupons. 


Source: mBlox survey conducted by OnePoll, Oct 5-2010

A follow on post will explore who technology can be utilized to alleviate and successfully administer coupon usage to build brand loyalty. How can social networking sites and local deal site come to add value. What do both consumers, retailers, CPG manufacturers and interested stakeholders wish for. 

  1. NCH Marketing Services, a unit of Valassis Communications i
  2. Advertising Age
  3. eMarketer


Impact of Advertising Communications and Promotions in affecting Sales based on product / industry lifecycle.

  Impact on Sales
Stage in Product / Industry
Advertisements Promotions
# Introductory Phase High High
# Growth Phase

1. Differentiated Product / Leader

2. Me-Too Product





# Maturity Phase

1. High Brand Loyalty

2. Low Brand Loyalty





# Decline Phase None Low

Vizio LCD-TV : North American Retail Channel Strategy

When Digital-TV entered mainstream North American market the price point for a 40-in plasma and LCD-TV system averaged around $2000 – $2500 (2003/2004). With an average CRT TV selling well under $500 the market for HDTV was limited to early adopters and lead users with significant disposable incomes.

Given the dynamics in consumer behavior Vizio’s target market segment for its initial launch was limited to the 35+ age group, who are affluent, college educated with significant disposable income. LCD TV’s sold by Vizio weren’t particularly known for superior image quality or build quality, but rather for affordability and value for the money.

The target market segment for its initial launch was limited to the 35+ age group, who are affluent, college educated with significant disposable income. LCD TV’s sold by weren’t particularly known for superior image quality or build quality, but rather for affordability and value for the money.

How could a relatively new entrant such as Vizio establish a presence and reach its intended target customer base?

This analysis looks at why Vizio, the LCD-TV maker choose Costco as their retail channel of choice at entry. What were the strategic and competitive implications and the overall dynamics within the industry that a relatively new entrant such as Vizio faced when entering the highly competitive LCD TV market dominated by big global players. How did Vizio use their success from the warehouse club retail channel to finally gain entry into mass-market retailers?

Incumbents and Barriers to Market Entry

The market for consumer electronics and television systems has traditionally been dominated by well established players such as Sony, Panasonic, Philips, Toshiba, Samsung and LG among others. A comparative analysis on their strengths is captured in detail below.

Competitive Leverage





Access to Retail Channels


Established Relationship

Established Relationship

Established Relationship

Supplier Strength & Relationship

Dependent on outside suppliers for LCD panel.

May find itself at the mercy of component suppliers during high demand.

Relies extensively on Contract Manufactures

Manufactures Panels.

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production.

Manufactures Panels

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production.

Manufacturers Panels

Can leverage it position in market to squeeze component suppliers.

Combination of Contract Manufactures and In-House Production

Access to Technology

( Software, Hardware, & Manufacturers )

Follow industry Leaders.

In a position to dictate and control technology development and licensing.

Can dictate and control technology development and licensing.

Follow Industry Leaders

Economies of Scale

Limited in its ability to realize economies of scale.

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS.

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS

Economies of scale dependent on LCD units/ panels shipped because of HIGH CAPEX expenditures associated with FABS

Economies of Scope

Relatively unknown brand with limited product offering.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.

Brand name can be leveraged to realize economies of scope in marketing and product adoption.


Has to undercut competitors to gain market share.

Well known brand can command a Very HIGH premium

Well known brand can command a HIGH premium

Well known brand can command a premium

Being a new and unknown entrant in a highly competitive market was one of the biggest challenges for VIZIO. To get an edge in the market VIZIO would need to differentiate based on price. In order to gain access to the customers using well established retail channels Vizio would have to strike retailer partnerships and provide better incentives than incumbent’s margins, sales commission and marketing promotions.

Being a new and unknown entrant in a highly competitive market was one of the biggest challenges for VIZIO. To get an edge in the market VIZIO would need to differentiate based on price. In order to gain access to the customers using well established retail channels would have to strike retailer partnerships and provide better incentives than incumbent’s margins, sales commission and marketing promotions.

Consumer Segmentation

The ideal customer segment that VIZIO went after was “Imitators” a self-informed segment with awareness about LCD-TV product and the technology. By going after “Imitators”, VIZIO won’t have to incur the costs of promoting the product to the innovator segment and ride on the marketing awareness generated by established incumbents.

North American Retail Channels and Power
The retail channel in North America is dominated by four major categories of retailers each with significant clout, market reach and market share:

  1. Big-Box Retailers : Wal-Mart, Target, Sears and the likes
  2. Specialty Electronics Retailers: Best Buy, Circuit-City, RadioShack and the likes
  3. Warehouse Club Retailers: Costco, Sam’s Club, BJ’s and others
  4. E-Retailers: Amazon, Crutchfield and Dell among others

Online retailers were not really an option for Vizio since the average consumer spent less than $300 on a consumer electronics purchase.


Retail Channel Costs and Margins

The various retail channels pose different challenges, margins and capability for Vizio in reaching its prospective end customer. Table below summarizes the key challenges with various retail channels.

Channel Characteristics

Warehouse Club Retailers

Traditional Retailers

Specialty Electronic Retailers

Marketing & Promotion Costs for Manufacturer




Sales Commission


Low – Medium

Medium – High

Revenue / Profits Streams

Mark Ups

Markups, Volume Discount, Double Marginalization, Sales Promotions

Markups, Volume Discount, Double Marginalization, Sales Promotions

Influencing Buyer Purchase Decision


Manufacturer Incentives and Commissions

Manufacturer Incentives and Commissions

Profit Margins

10 – 15%

20 – 30%

25 – 40%

Distribution & Logistics

Managed by Retailer or 3rd Party Distributor

3rd Party Distributor

3rd Party Distributor

Table 1: USA Retail Channel Characteristics and Costs

Warehouse VS. Retailer Margins

Keeping prices low was one of the key differentiating and positioning factors for VIZIO. Catering to high-end retailers meant that there could be additional marginal costs added by the retailer, which would hike up the price. The warehouse clubs do not double marginalize the products they sell since 70% of the revenues come from membership fees. By selling products only at warehouse club retailers, Vizio would avoid double marginalization and ensure a lower retail price for the consumer.

Warehouse Club Retailers and Market Reach

Some of the major players in the Warehouse Club Retailer space were BJ’s warehouse, Sam’s Club and Costco. The average stock keeping unit for each of these warehouses and the number of stores nationwide is shown below. Given the reach of this warehouse retail network to the consumer public, and its low margin cost model, VIZIO used these outlets as the channel for its products.

The three major warehouse club retailers are located throughout the USA, and offer full geographical coverage across the country. Therefore, their reach to the broad consumer base is not diminished. The break-up of VIZIO’s average sales percentage at each of these warehouse stores is shown in the chart above. As we can see, a large percentage of the sales will occur at Costco.

Analyzing Competition at Traditional Retail Channels using Game Theory

An intuition for incumbent reaction across traditional and specialty electronic retail channels can be built using the Game Theory. Based on anticipated response the incumbents will fight aggressively against Vizio’s entry. A protracted pricing war would seriously undermine Vizio given its limited financial resources to fight incumbent promotions, volumes discounts and sales commissions.

Unit Sales (Traditional Retailers) (Payoff is # Units Sold)

Sony / Samsung / Philips / LG





30%, 70% (M+)

40%, 60% (M)


20%, 80% (M)

25%, 75% (M)

If both incumbents and Vizio “Fight” there will be price erosion leading to an increased market size M+ (# units sold). All participants will benefit with established players such as Sony, Samsung and Philips gaining more than Vizio on account of their brand image and prevalence in the consumer electronics market.

If the incumbents and Vizio both accommodate, then there is no price erosion and market is expected to be M (# units sold).The market (M) will probably be split among all players and whoever accommodates is to expected loose share of market share to the other.

Analyzing Competition at Warehouse Club Retailers using Game Theory

An intuition for incumbent reaction across warehouse club retail channels can be analyzed using the Game Theory. Based on the anticipated response, the incumbents will ‘Accommodate’ & Vizio will ‘Fight’

One reason for this behavior is that the Federal Robinson-Patman Act that prohibits manufacturers and suppliers from providing price discounts and other forms of preferential treatment to some buyers and not to others. Existing contracts with traditional retailers will prohibit incumbents from matching Vizio’s low prices and margins offered to warehouse club retailers such as Costco.

Unit Sales (Warehouse Club Retailers)(Payoff is # Units Sold)

Sony / Samsung / Philips / LG





30%, 70% (M+)

40%, 60% (M)


20%, 80% (M)

25%, 75% (M)

Vizio – Costco Retail Partnership: A Win-Win

Vizio’s strategy to enter the retail channel with Costco to launch its range of LCD-TV’s was the right choice given the enormous power that USA retailers enjoy. The low-price strategy and lack of brand name were factors that played in favor of Costco.

At Costco, Vizio relied extensively on prospective buyers to pick its LCD-TV’s without any assistance from retail floor personnel in influencing and steering the customers during the sales process. The strategy made sense given Vizio low brand awareness. At traditional retailers Vizio would stand no chance competing against big brand names with marketing muscle and promotions aimed at influencing consumer buying process.

A typical USA Warehouse Club Shoppers shares the following traits:

  • 35+ yrs,
  • Affluent, with disposable income

Costco also requires that a manufacturer sell directly to them. This works in favor of Vizio and eliminates costs and markups associated with middle distributors.

Costco’s no frills based selling with minimal marketing and advertisement expenditures is synergistic with Vizio’s low cost approach to selling. Vizio as a new entrant does not have the advertisement and marketing budgets to take on established stalwarts such as Sony, Samsung, Sharp and others.

Given Vizio’s limited financial resources and low brand awareness, Costco was the ideal choice to enter the highly competitive LCD TV market for the following reasons:

  1. Costco’s profits margins and hence markup on products sold at its retail locations average between 10-15% compared to other retail channels. Allows Vizio to sell products at a lower cost its key differentiator against major brand names.
  2. Eliminates additional cost associated with maintaining a 3rd party distributor as Costco manages all its inventory and logistics in-house. Avoids channel conflicts associated with double marginalization as Costco negotiates a standard markup irrespective of the number of units sold or incentives offered.
  3. Vizio does not need to spend marketing dollars on sales commission or to run major promotions and advertisement campaigns. Costco runs a lean-mean marketing campaign with limited promotions advertised only to members.

Vizio success can be attributed to its unique channel strategy. Its warehouse club channel focus and lack of channel conflicts enabled the company to achieve disruptive price points-helping to fuel the rapid rise of the warehouse club channel in the US TV market and causing its shipments to surge.

Expanding Retail presence

Finally, VIZIO management knew that they did need to make a concerted effort to move outside the warehouse club channel and did so successfully at Circuit City, Sears and Wal-Mart. The early success with Costco and Sam’s club that enabled Vizio to reach #3 ranking by 2006 allowed it to negotiate better terms and gains additional retail presence.

Vizio was able to maintain the Club channel price points in most cases and benefited nicely from Circuit City and Wal-Mart ramping in Q2 2007, which resulted in significant growth and the #1 ranking in the North American flat panel TV market.



This analysis would not have been completed without the helpful and critical inputs provided by Archana Arunkumar, Anoop Ramgiri and Venkata Duvvuri. The informal discussions with Costco retail store employees have also contributed immensely in understanding the business of warehouse club retailers.


  1. DisplaySearch LCD-TV Market Research data
  2. Samsung LCD-TV projections 2005 – 2011
  3. US Census Bureau Annual Benchmark Report for Retail Trade, 2006
  4. NPD Group
  5. ABI Shopper Poll, Nov 2005
  6. Costco : Telsey Advisory Group Report
  7. Vizio Company Press Releases.

iPhone Launch: Navigating Powerful Intermediaries

In most consumer oriented markets powerful intermediaries such as retailers, distributors or powerful stakeholders yield significant clout in deciding what products or services reaches the end buyer/user.

In the cell phone market we have two important stakeholders whose participation is a must for any product to succeed – Cell-Phone Subscribers and Wireless Service Providers. Between the two Wireless service providers holds enormous leverage over handset manufacturers on account of their stranglehold on cell phone subscribers.

In 2007 Apple an established name in the PC and consumer electronics world decided to enter the cell phone market. To successfully launch a product such as the iPhone you need to get two important stakeholders on board – wireless carriers and end-users; application developers constitute the invisible third front.

Specifically which of the 4P’s and 1C’s: Product, Promotion, Price and Place and Complementors were strategically more important than the others.

When dealing with powerful buyers (end-users or intermediaries) the strategic options that can be successfully employed depends on whether strong buyers / intermediaries :

A) Can be neutralized – In this case, the strategic choices that one can employ are:

    • Product Differentiation
    • Leap Frog
    • Create Switching Costs
    • Co-opt key influencers or decision makers

    B) Cannot be neutralized – In this case the strategic choices that one can employ are:

      • Integrate-Forward (Eliminate Intermediaries)
      • Adopt a “Low-Cost” Model ( Drive out weak competitors, industry consolidation)
      • Go after Niche Markets ( Focus on Segments that are not powerful)

      Strategies to neutralize powerful intermediaries:

      1. Product Differentiation:

      With a Product Differentiation strategy the idea is to offer and position a product that no one else comes close to matching on all product attributes. In the process you ensure low price elasticity.

      Apple developed a product that is far superior and ahead of competition on all fronts and then complemented the same by providing an ecosystem (applications) around it. In doing so Apple neutralized the power of wireless carriers to negotiate better terms or to even refuse carrying the product.

      2. Leap Frog over intermediaries:

      Apple had built a strong brand awareness and reputation with its iPod product line. By leveraging its brand name and effective use of ‘Pull-Marketing’- (advertisements) directly targeting consumers-end-users, Apple managed to create strong demand for the iPhone ahead of its launch.

      By going after the end user Apple, to a certain extent, managed to tilt the balance of power during negotiations with wireless carriers in its favor.

      3. Co-opt key Influencers and Decision makers:

      A wireless carrier is more concerned about ARPU (Average Revenue per User) rather than which handset to carry. But handsets are the primary draw to lure in subscribers. Apple positioned the iPhone in the sweet spot for AT&T by signing an exclusive contract and allowing AT&T to set its own terms for end users. Subscribers were forced to carry a pricier data plan with a 2-yr contract.

      Breakdown of Costs & Revenue for Carrier* 2007 2008 2009
      Average Handset Subsidy per User -$200    
      Average Annual Revenue per User $345 $828 $345
      Lifetime Value of a Subscriber $828    

      * Note: Based on a data plan with a monthly fee of $69.00 and a 2 year contract starting July-1st 2007 and terminating on July 1st 2009.

      Even with $200 subsidy for each iPhone sold, the carrier (AT&T) stands to make money over the 2-yrs lifetime of the customer (see table above). It is a “Win-Win” situation for both Apple and the carrier.

      4. Switching Costs – The use of Complementors:

      Apple launched the iPhone Applications platform allowing handset users to customize and harness the full potential of their handsets using third party applications. Here again Apple allowed application developers full control on what apps to develop, how to price them and whom to target.

      In the process Apple managed to create switching costs for both carriers and end-users.

      Appendix: Why did Apple choose AT&T as an exclusive carrier over others ?

      An exclusive contract with AT&T allows Apple to sell the handset at a higher price and register higher revenues even at the expense of losing some market from the other carriers. The strategy makes sense when you have a superior product, weak competition and skimming prices.



        1. With an exclusive contract, Apple can capture 5% of the subscriber base at AT&T and sell the handset at $299 (8GB) to the carriers.
        2. With an non-exclusive contract Apple can capture 2% of the subscriber base at each of the carriers (AT&T, Verizon, Sprint) and 1% with T-Mobile. Handsets will be sold to each of the carriers at $149


              • FierceWireless – The wireless industry daily monitor
              • SEC Filings for AT&T, Verizon, Sprint