by Kenneth Rudich
Does the recent introduction of low-cost tablets threaten to ultimately and finally relegate the tablet to loss leader status?
When you consider what’s really at stake, and also, how market forces can work, it’s an entirely legitimate question.
Loss Leader Marketing
According to BusinessDictionary.com., a loss leader is a good or service advertised or sold at a price that is below the cost of producing it. Its purpose is to bring in (lead) customers to the retail store on the assumption that, once inside the store, they will be amenable to buying full priced items as well.
Variations of this tactic can include selling the loss leader product at breakeven (or minimal profit), then selling its companion products at some inflated margin to compensate for the original sacrifice of forgoing a profit.
For instance, a razor blade manufacturer may sell razors at break even, but then sell the blades for a nice profit.
Tablets and the Profitability Challenge
The implications associated with the entry of low-cost tablets into the tablet market were touched upon in the last post titled, “The Clash of the Marketing Strategies for Mobile Tablets.”
In that post, we spoke of the link between the concept of “creating value” and the present state of the economy. In short, as long as the economy keeps sputtering, fewer and fewer consumers are likely to have much, if any, discretionary income for buying luxury items. The degree to which this problem swells in size over time can be disastrous for businesses that operate in this niche.
If you think about this same dynamic from the family perspective, where parents carry the obligation of financially supporting their children, less features for a lower price can look mighty appealing.
Tablets and Ecosystems
For some of the big name players in the tablet business, it’s really a portal of sorts, a way of drawing people into their proprietary infrastructure and the content it contains.
The Kindle is a funnel that leads to Amazon. The iPad to Apple. And though the Android is a child of the Android Open Source Project (AOSP) initiated by Google, the Android Market is an apps store run by Google. As you can plainly see, there’s plenty of motivation lurking beyond the tablet itself.
Consequently, low-cost tablets that connect people to desirable content can change the playing field for higher end tablets.
If a tablet manufacturer happens to be in the position of having to protect an entire ecosystem, and there’s more than one manufacturer in the marketplace with the same challenge at hand, then the tablet becomes a pivotal piece within the bigger scheme of things, especially because it’s at the front end of the funnel (provided, of course, that the content upon which it stands will satisfy consumers).
Under this circumstance, the danger of giving consumers a tablet they cannot afford or would rather not pay for becomes astronomically large. It’s no longer so much about the tablet as it is about the ecosystem.
If you were in that position, wouldn’t you rather entice consumers with a low-cost tablet – possibly at a loss – to bring them into your ecosystem?
And if competitive forces dictate you must provide more tablet features at a lower price, wouldn’t you be inclined to explore that avenue and try to exploit it?
Let’s couch this same challenge in a slightly different way. Which is more daunting: the prospect of taking a small but isolated loss with a product like the tablet; or the possibility of having an entire ecosystem go south?
Can you say “sacrificial lamb?”
Will Consumers Win
I’d like to assert that consumers will invariably win, but that may or may not be the case.
A low-cost tablet chock-full of bells and whistles will give consumers a warm fuzzy feeling if and only if it doesn’t consequently extract an overly large price elsewhere, one that ends up counteracting the initial effect.
Still, with that said, it’s probably a safe bet to assume that consumers stand a chance of getting some good out of this mix.