User research is about understanding personal stories. For the sake of efficiency it is necessary to aggregate individuals’ experiences and prioritise designing for the most prevalent trends. However, in doing so, the personal meaning of each user’s unique journey is diluted, resulting in an overview which does not always reflect the strength of emotion and illogical feelings which drive users as individuals. We ignore these emotions at our peril: they are what governs human behaviour.
I came across a user example recently which helps illuminate a perennial mystery of the technology industry: how Apple continues to command premium margins in excess of its competitors and convince users to become long-term, loyal customers. It also highlights the scale of the challenge facing Apple’s competitors, a challenge which is increasing as the smart mobile devices market transitions from a period of high growth driven by first time users to a mature business of longer upgrade cycles.
Our user became an Apple customer about 10 years ago, buying one of the original iPods. It was a hard drive model and, as a runner, they found it broke after about a year and just outside the warranty period. It was a common story at the time: the moving parts of the original iPod didn’t stand up well to the motion of running. However, by then, our customer was already invested in the iTunes ecosystem through the music they’d bought for their iPod. They purchased a new one, despite knowing it had broken in just over a year.
Already we see part of Apple’s positive spiral at work: the user was convinced iTunes was the easiest way to acquire new music and therefore had bought into not just the product, but the content ecosystem built around it. This investment helped persuade the user to become a repeat customer of a product they already knew to be fragile and unreliable.
Next came a gift. The user’s parents gave them one of the first iPod Touch. It was an effective and much appreciated replacement for the hard drive-based iPod because the solid state architecture meant no moving parts that could be damaged while running.
It is also indicative of another Apple strength: how brand awareness creates the perception of category ownership. The parents purchased the iPod Touch because to them it was the only option. In a market of literally hundreds of personal music players, Apple’s name recognition ensured – for the non-geek majority – they were synonymous with an entire product category.
The user’s upgrade path followed a familiar trail. When their mobile phone broke, they bought an iPhone 3GS because they were already familiar with the iPod Touch and it was the obvious choice to access their growing collection of iTunes content and apps. Subsequently they received an iPad 2 as a gift and bought themselves an iPhone 5 as an upgrade.
The iPad broke after a year – again, like the original iPod, just outside its warranty period. It was purchased on a 2 year contract with an operator and when they refused to replace or repair it, the user took it to an Apple store. Apple acknowledged the problem and, there and then, provided a like-for-like replacement free of charge, even though it was technically out of warranty.
This, perhaps, was a pivotal moment in the user’s emotional relationship with Apple as a brand. What could have been the start of a terminal decline, frustrated by a growing sense of Apple’s unreliability, was turned around to become another part of the positive spiral. The user came away delighted that they’d spoken to someone who understood the problem and was empowered to solve it for them, especially after their own network operator had failed to offer a solution.
It highlights another of Apple’s differentiators: the direct relationship it can maintain with customers through its network of retail stores. Crucially, these locations are places where it not only sells new products and accepts returns, but where it can also provide direct, face-to-face support. It is often said a customer’s perception of an experience starts to improve as soon as they feel they are being listened to, even if they never actually get to solving the problem. Apple’s retail network is where this happens and is important in maintaining those relationships.
Most recently the replacement iPad they received stopped connecting to Wifi. Once again, it was about a year old. The user’s first instinct was not to seek greater reliability from an alternative brand or to criticise Apple, but rather to start searching for how much it would cost to buy a replacement.
There is a tempting analogy with ‘Stockholm Syndrome’, the psychological condition where a captive forms an emotional bond with their captor.
Every day the user remains captive they are buying more content, more accessories and more apps. With every purchase they make, the user becomes less likely to move away when something goes wrong because the perceived cost of doing so goes up (both financially and in terms of not wanting to learn a new system). They also become more likely to buy future Apple products which extend the ecosystem they’ve invested in and more likely to recommend them to other people in their household, friends and family in the interests of compatibility and familiarity.
As a result, competitors face a two-fold challenge. Not only must they break a customer relationship which grows stronger with each passing day, they must also do so at a financial disadvantage. The positive spiral Apple creates has turned it into a formidable generator of cash. It already holds around $150 billion in cash and short-term investments on its balance sheet and, even though it is currently executing a programme to return $100 billion to shareholders by 2015, it is still producing cash at such a rate (an additional $9.9 billion in the three months to 28th September 2013 alone) that the $150 billion cash pile is unlikely to actually fall much in that time.
The loyalty I observed in this user means Apple has to spend less on marketing than its competitors, yet still commands a premium for its products. As a result, its gross margin hovers around 37 percent. Users are more likely to buy multiple Apple devices and, when they do, Apple also generates revenue – indeed, some of its highest margin sales – from the ecosystem of software, content and accessories it offers.
To compete for customers like this, other companies would need to invest in building an ecosystem of comparable quality – a huge upfront cost – while Apple is already in the position where its ecosystem not only funds itself, but actually generates profit. Competitors would also need to find a way to overcome the stumbling block of customers not wanting to lose access to the library of iTunes music, movies and apps they’ve built up. How long before we see a major consumer electronics manufacturer striking a deal to deliver a Spotify or Netflix-like subscription bundled with their products?
If a competitor achieved both of these – creating the ecosystem and finding a way to ensure customers did not lose their content – they would still only be at parity with Apple in the minds of people like our example user. Given the inertia of most customers when it comes to changing brand, the competitor would still need additional unique selling points to stand a chance of winning these users away from Apple.
However, most of Apple’s competitors continue to try to beat at its own game, offering what they perceive to be incrementally better or more feature-laden versions of the iPhone or iPad. It is a futile strategy which will become financially impossible as the industry matures and the easy pickings of first time customers are replaced by the harder battle of competing for upgraders.
The answer, I suspect, lies in investing in a deeper understanding of user’s lives to identify where there are opportunities to establish anchors for new digital ecosystems. Intriguing, then, to see Google paying $3.2 billion this week to buy Nest, a manufacturer of thermostats, smoke alarms and – no doubt – other smart home appliances. A new front on which to fight for customer loyalty.
I’d love to hear your feedback on this article. Do you know of other brands – perhaps in industries outside of technology – which enjoy similar relationships with customers? Where would you look for opportunities to establish new digital ecosystems in users’ lives? Please post your comment to the blog below.