Apple sells less than 20% of the smartphones in the world and makes 92% of the profits. There are more than 1000 brands in the world for smartphones and most of them follow the bottom of pyramids strategy. ‘Bottom of the Pyramid’ has been the thriving strategy and talking point for many marketeers. Why are they not able to succeed now? Is the strategy passe now?
When we take a closer look at any natural phenomenon, we see a pyramid. We see segments at the bottom and find them large in number; as we go higher up, the opportunities are less in number. Hence, at the higher end of the pyramid, one sells less volumes at high profit margins and thus, the absolute value of the profit generated is moderate. Similarly, in the bottom of the pyramid, one sells high volumes at low profits and thus, profits are moderate. So, any position in the pyramid should be equally good in terms of the value generated by a business. This is common wisdom, but in the case of smartphones, we do not find Apple, Dell, HP, Lenovo, Xiaomi etc making more or less same volume of profits. Something is not right with the theory then?
We know the profits are high because the price point is way higher than its cost and customers do not mind paying the cost because the value that they see in the product is way higher than what they see in the rest of the market. Why isn’t someone else able to displace Apple from this positioning?
Firstly, it’s the timing. iphone came into the market in 2007 when Nokia and Blackberry were the leaders. And there was no large 3rd one. Hence, Apple was an early bird in that sense. So, they got the worm, especially because the large ones were taking a nap after covering some distance. Apple didn’t have to worry about the bottom of pyramids and made equally good profits as its competition. As companies started addressing the bottom of the market, the timing was not in their favour. Many of them entered the same time and many of them fought amongst themselves to take a bite from the same cake. None of them could savour the piece that they got. The worms have been taken away by the early birds. The volumes could never happen and hence, they couldn’t really address the bottom of the pyramid. So, it has to be the right time of entry to make sure that the bottom of the pyramid is addressable.
Secondly, it is the value that Apple delivered to its customers was way higher than what their competition (Nokia and Blackberry) was delivering then. So, it was a big hit and an aspirational lifestyle product rather than a utility tool for communication. The bottom-market started thinning because the smartphone cult was led by them. The only way a new entrant could deliver value was by reducing the price even if it was making a loss. So, the pyramid was weak in its base. So, the bottom of the pyramid has to be strong and large enough for this strategy to work.
Last but not the least, it is the ability to innovate and stay relevant. Most of the 1000-odd smartphone companies are me-too players. So, the segment at the bottom of the pyramid doesn’t really get excited to see a low-cost product especially when it has become a lifestyle product. The players have played the price war to win a part of the segment and hence, not made the profits. howsoever low they might be.
Hence, the strategy is not passe. It works well when the timing is right, value offered is compelling and innovation is ongoing!