Can You Be Both a Price- and a Proposition-Simplifier?…

The following excerpt is from Richard Koch and Greg Lockwood’s book Simplify. Buy it now from Amazon | Barnes & Noble | iTunes

Is it possible for one company to be both a price- and proposition-simplifier? In normal market conditions, where there is a level playing field for all competitors, the answer is a resounding “No!” For our purposes, we somewhat arbitrarily define “normal market conditions” as a time when there’s a low rate of technological change, so all competitors have relatively equal access to the principal technologies of production and marketing, and newer technologies are well diffused. In addition, under normal market conditions, there are no strong non-market phenomena at work, such as stringent government regulation and the like.

Related: How Uber Used a Simplified Business Model to Disrupt the Taxi Industry

But it’s evident that there are some fundamental differences between price and proposition-simplifying business models under normal market conditions. Let’s examine price-simplifying first.

Price-simplifying is defined by a single overriding objective — clear cost and price leadership. A unitary and relatively rigid business form then flows organically from this single purpose. There is no segmentation — the market is the largest-possible mass market. There are no material product attribute trade-offs against lowest price. There are no radically different ways of achieving the scale economics needed to deliver lowest price.

For instance, UK/Irish budget airlines use exactly the same technologies as and bear an uncanny resemblance to U.S. budget airlines. Achieving the price imperative requires highest scale, and this informs every choice in the design of the business and production system. This quest for scale leads to integrated and inflexible linkages in the production system and supply chain in order to coordinate higher throughput. Capital equipment is introduced to automate production and eliminate labor, but this requires heavy investment. These assets have long productive lives and long payback periods, meaning the enterprise is even more tied to a rigid modus operandi over an extended period of time, again limiting flexibility.

Proposition-simplifying is very different because the company has to respond to several variables, not just price. Here the simplifier targets one of several possible large segments, or clusters of segments, and positions the product or service depending on the appropriate permutation of utility, ease of use and aesthetic appeal for that target market. A different combination of attributes might be chosen by competitors attempting to encroach, outflank or re-segment the position that the product simplifier has chosen. This leads to product contention and product evolution driven by competition.

For example, the iPhone established the benchmark in smartphones; then Samsung emulated the basic concept but with a larger screen; then Apple responded with its own larger-screen version. The iPhone ended up as a family of products in order to defend its territory from competitive differentiation.

Related: 5 Bad Reasons Managers Don’t Simplify

This need to respond to competitive differentiation means that the simplifier has to maintain production flexibility and not optimize for price. Fortunately, it can afford to do so because a leading simplified proposition can sustain a premium price and high profit margins, which in turn allow for flexibility and responsiveness in the production system. In many cases, production is outsourced to maintain maximum flexibility.

But there isn’t the same degree of business system simplification, rigidity, integration, design for scale capacity and cost optimization as with a price-simplifier. This would be inappropriate, too dangerous, too limiting on the product side; it would leave the proposition-simplifier too exposed to competition. Hence, the proposition-simplifier needs to focus its main effort on producing by far the simplest and most appealing offering in an evolving field, not on developing a business system with a sharp focus on reducing cost.

In a normal market, the two strategies therefore lead to two very different, incompatible business conditions and requirements. But what if we were to abandon the assumption that technology is stable, with equal access for all? Imagine you’re the inventor of the wheel. You go down to the local patent office and secure the exclusive legal right to use and apply your invention for a long time. That puts you in a rather interesting position. Having unequal access to this extraordinary new technology allows you to produce all manner of products that are fundamentally better propositions than their predecessors — donkeys and horses, canal boats, litters, Sherpas and so on — but also much cheaper.

Related: The Secret to Spotify’s Success

Your groundbreaking invention has enabled you to be both a price- and a proposition-simplifier! Exclusive access to a dramatically better idea or technology is the condition that allows a firm to follow both strategies successfully.

But a word of warning for our wheel entrepreneur and his successors: All technologies diffuse over time. So, at some point in the future, you’ll need to choose just one strategy and abandon the other. If you don’t, your competitors will eventually out-price- and out-proposition-simplify you, and you’ll be stuck between two incompatible paths.

Richard Koch

Richard Koch is an entrepreneur who has made over $300 million from starting businesses and investing in early stage venture capital. His businesses have included Filofax, Plymouth Gin, Belgo Restaurants, Betfair, FanDuel, and Auto1. Former…

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