Any color you want, as long as it’s black. When the Model T came out, it is said that Henry Ford didn’t care about what the customer wanted. He wanted to standardize car production on his assembly line and he didn’t want to do anything that would complicate and slow down production. Hence, his decision to produce cars only in one color. As we all know, Ford was very profitable for a very long time (being a monopoly helped, too). Cars now come in many colors. Too many, perhaps. And they come from very many companies, and in very many configurations. We’ve reached a point where it’s impossible for a customer to compare between two different models on a like-for-like basis. And it’s a nightmare for car companies to manage their models from one year to the next.
In a day and age where choice seems to be a birthright for most of us and where product variations are assumed to be available to meet everyone’s needs, it can be a relief to not have to worry about a wide range of choices. Think of how easy it is to go shopping for an iPad or iPhone. 2 colors, 2 memory configurations. That’s it.
Are consumers getting tired of choice?
I work in healthcare, and one of the biggest issues is the complicated health insurance plans that we all sign up for. There are so many variations and so much fine print that companies exist just to demystify and decode health plans for customers! With Obamacare’s individual mandate likely to go into effect in a couple of years, there will be even more confusion, as employees are cut loose from employee-sponsored plans, given some money, and asked to pick their own health plan. It’s already starting to happen, and it’s going to create some issues for individuals (and opportunities for consumer-oriented health plans and service companies).
With this backdrop, the question posed in the title of this article is begging for careful consideration as startup teams put together their offerings. And it has to be asked at the level of product development, as well as at the level of pricing. It also needs to be asked at every stage of growth for companies.
Why do product teams get seduced by the idea of offering multiple choices?
Offering multiple configurations is a tempting strategy for startups that are trying to play a game of numbers, especially when the first version of the product doesn’t seem to gain traction.
Let us address the product side of things first. Product teams love to create complexity in the name of product differentiation. We love to believe that customers like choice, and we love to think that having a slew of products on a website makes us look bigger and more sophisticated. In some cases, product developers lose sight of the fact that the product needs to fit simply and neatly into a customer experience, of which their product is just one part. At the other extreme, product teams engage in an alpha male game of mine-is-bigger-than-yours on product features with competitors in the market, often at the expense of the company’s financial stability.
There aren’t many easier ways to run out of cash than to churn through product portfolios without gaining sales traction for any of them.
The other trap that product teams fall into is that they complicate the pricing of the offering and confuse customers. It takes a lot of conviction to stick to one simple price model, especially for a startup. So, the tendency is to offer different options, either out of a lack of ability to simplify the pricing to cover the range of options, or out of hope that the customer will lock on to something that fits their budget or price expectations. This inevitably leads to distraction as the focus turns towards trying to find a “sellable” price point as opposed to finding common ground on how the product can solve the customer’s problem.
Moving towards profitable standardization and simplification
My favorite example of a company that is moving towards profitable standardization and simplification is Southwest Airlines. Southwest standardized itself on one single model of aircraft and dramatically reduced maintenance costs. They standardized cabin service by removing first class cabins and offering peanuts as the only snack in flight. All this drastically lowered their cost of operations and allowed them to be cheap and profitable. Since they started in the ‘70s, they have been the only airline in the industry to avoid layoffs and bankruptcies.
In the tech world, the best examples I can think of are the iPhone and iPad. Standardization reduces decision-making complexity for customers, and it also helps the extended ecosystem of developers and accessory-makers since they don’t have to keep up with multiple and rapidly changing hardware options. All of this translates to a virtuous cycle of sales growth and profitability.
Many large companies in the enterprise tech space have also successfully simplified product configurations and pricing. Great examples include Amazon and Google in the cloud platform hosting space, and Salesforce.com which offers a SaaS-only offering in standard configuration. I have personally witnessed the dramatic reduction in “Total Cost of Ownership” for enterprises adopting SalesForce.com’s platform in terms of reduced application and infrastructure maintenance costs. These tech companies are very profitable, and they are taking away business from other vendors who offer a bewildering range of products and services in complex and incomprehensible pricing structures.
The Obama example
President Obama made a statement in a recent interview that he wears only two types of suits – gray and blue. He prefers to limit the mental energy required to make decisions on things like what color suit to wear in the morning, instead saving it for far more important issues during the day.
So, if you’re a startup CEO who’s looking to gain traction in the market, maybe the focus should be on less, not more. Keep product features simple, offer a limited number of pricing options, and deploy your scarce mental resources on what really matters – customers and their needs. You might be doing your customers a favor too by making their lives simpler and giving them back a bit more of their own lives.