Boost Profits by Escaping the Land of a Thousand Features

In many industries, competitors barrel ahead into a features-war. After all, if customers want features shouldn't we lard them on?  And this is not just in the obvious spots like consumer electronics, where for example VCRs and TVs routinely carry dozens of features that very few customers use or know how to use. 

The same problem extends into other fields: Think of Starbucks, now deep into a midlife crisis, partly created by a distracting proliferation of new products: CDs, books, sandwiches, ice cream, liqueurs, etc. Starbucks share are declining for the first time in many years vs. a steady rise in more-focussed, simpler Tim Hortons.

Another example...Here's a sharp contrast between two telephone companies:

• Cingular offers a choice of more than 200 cell phones, 50 pricing plans and 43 choices of various optional services, bundles and discount packages.
• CBeyond, a smaller company focussed on small business, offers a choice of four cell phones and eight service options.

The financial performance of the companies shows an interesting gap. CBeyond, although smaller, is generating higher growth and much higher margins:

• Cingular revenue grew 10% in Q4 of 2006 and normalized operating profit grew 38%. (Cingular no longer reports financials because the company is now 100% owned by AT&T.)
• CBeyond revenue grew 32% YoY in the first quarter of 2007, while operating profit grew 68% and gross margin rose 2 points to 70%.

The gap, of course, could be attributed to the fact that CBeyond is still a small company.

But that would be to overlook some crucial differences in the company's business model. By offering a limited menu of service choices and by focusing on a narrow segment which is typically underserved by the large telephone companies, CBeyond has an ability to reap profit through simplicity. Fewer choices means fewer operating costs and more focussed selling. The 70% gross margin tells the story of competitive disruption.

**Other Thoughts**

The Wall Street Journal's Informed Reader blog says many consumer devices suffer the same sort of feature creep that Cingular wireless customers are drowning in: “The strange truth about feature creep is that even when you give consumers what they want they can still end up hating you for it.”

Reason Magazine looks at what it calls 'consumer vertigo': Too many choices scare off customers

Comments

[Roger Anderson]

I think the concept of drowning in a sea of options is nearly perfect. This also reminds me of "The Paradox of Choice: Why More Is Less" by Barry Schwartz. His video on the TED conference site is well worth the time (20 minutes I think).

http://www.ted.com/index.php/talks/view/id/93

The short version:
The super-abundance of choices in our lives often creates a situation where we do not take advantage of the choices because we can't decide what we would like best.

I think there is another side:
Too many choices are intimidating but also the availability of our "favorite" at all times often works to limiting our selection. Why choose something you don't know over what you do know. MS Word has a million features but most people only learn a few of them. Once they are comfortable with those they stop learning.

If I may be so bold: I wrote a piece I put on Gather earlier this month: Why Diversity Means You Will Not Eat a Peach Today that I think explains this in more detail. (http://drrogera.gather.com)

There are many stories where a reduction in choice leads to greater customer satisfaction. I just don't have all those references with me at this time.

Thanks for the thought provoking post.