Hi,
This is Vikaas here, Investment Advisor and Founder of www.jaagrav.com. Today I am going to talk about how companies when they simplified their pricing strategies were able to unleash the power of mass market.
The secret of creating a large market and of generating a very profitable business is Simplicity at its core. In the book “How the Best Businesses in the World Succeed – Simplify”, the authors, Richard Koch and Greg Lockwood bring out some wonderful examples of how companies and entrepreneurs simplified their business models / products / services thereby becoming hugely successful.
Some of the Price-Simplifying strategies which were used by Henry Ford of Ford Motor Co, Ray Croc of McDonalds and Ingvar Kampard of IKEA were exemplary.
This required reducing the price of a product or service in half, or even 90% in some cases. While the new, cheaper product or service may not have been identical to the old, expensive product, but it fulfilled the same basic function. However, most importantly, the dramatic price cuts led to multiplying the demand exponentially – 1,000 times in a few cases!!!
Price Simplicity Mass Market
While Henry Ford who came out with the revolutionary new car, the Model T said, “Its most important feature was its simplicity . . . I thought it was up to me as the designer to make the car so completely simple that no one could fail to understand it. That works both ways and applies to everything. The less complex an article, the easier it is to make, the cheaper it may be sold, and therefore the greater number may be sold.”
By making a single product, viz. Model T – for more than a decade, with very few variations, Ford was able to reduce his costs considerably. While the Model T’s price reduced by 63% in 15 years since its launch, sales increased by a whooping 781x during the corresponding period.
McDonald’s Ray Croc famous motto: KISS – Keep it Simple, Stupid corroborates that simplifying the menu card, restricting it to just 9 items including drinks was one of the cornerstones of building huge volumes. The large volumes came about because Kroc believed in sourcing beef, ketchup, buns and other ingredients in large quantities, thereby getting concentrated buying power and building economies of scale. With costs coming down, Kroc was able to keep the price of McDonald’s hamburgers at 15 cents for 19 years – That’s a remarkable feat!!
McDonalds is valued upwards of USD 150 bln and finished with a revenue of ~USD 19 billion for the year 2020.
Another company IKEA was founded on the idea that its goods should cost no more than half – and preferably 1/3rd – the price of equivalent furniture and furnishings.
Employees still talk about the time Ingvar Kampard, the founder of IKEA who attended a glittering event to collect a Businessman of the Year award. The security guards saw him arrive by bus and refused to let him in.
Now furniture is an expensive affair and one of the key costs lies in transportation. For IKEA however, its furniture travels only once at its own expense – from the manufacturing unit to the store. From there, customers line up to purchase the flat pack furniture. For other furniture makers, furniture travels from the factory to the warehouse, from there to the store and then finally to the customer’s home – all at their expense. Apart from reduction in transportation costs, the company has been able to reduce its expenses by having low cost of staff since staff strength has been low. Also, by stocking a relatively limited range within each product category, the company has been able to increase high sales per product stocked.
No wonder, IKEA’s 12-yearly annual sales in 2020 was upwards of 35 billion Euros.
While Henry Ford, Ray Croc and Ingvar Kampard were fanatics with respect to keeping the price extremely low, the low prices enabled them to garner huge volumes. This is what happens when you take a simple idea and execute it seriously.
The above price simplifier businesses and the founders created mass markets, offering the lowest price and the greatest value. Price being such an important weapon that they kept becoming bigger and more efficient. Their moat of low price and cost kept expanding making it virtually impossible for the followers to catch up. This enabled some of these companies to become more dominant over time.
After all, Hans Hoffman, the painter had said “The ability to simplify means to eliminate the unnecessary so that the necessary may speak and grow” (Growth was added by me)
Hope you enjoyed listening to this!!
For more interesting topics, you may check out my website, www.jaagrav.com. If you want to reach out to me, you may email me at vikas@jaagrav.com
Thanks!