Product Edges

The edge of your product comprises its marginal aspects, the elements that have varying value to different customers. As we introduced in chapter 1, a way to think about your edge is to visualize a circle representing “your core offering” (see figure 2-1). The inside of the circle represents the sum of your product’s features and benefits, and the edge of the circle reflects the perimeter of that product’s scope. Take, for example, Apple’s iPod. It is a digital music player; you can add music via Wi-Fi or a direct cable to a computer; it comes in various colors, sizes, and forms; it has various capacities for storage; it has a color screen; it can be bought online or in a store; it confers access to the iTunes library, and more. These are all features and elements of the same product offering.

If we draw a second circle to represent what your customers currently want from you, the edge of the circle frames what your customers give you permission to address in meeting their needs. We call this the “customer permission set” because it reflects what the customer is asking you to deliver. For example, it could be “I want a music player that can hold at least a thousand songs that I can carry in my pocket when I am jogging.”

In an ideal world, the two circles would align perfectly, creating a kind of total eclipse (see figure 2-2). This would indicate that your offer is fully meeting your customers’ needs.

In reality, this rarely happens. Even the target customers you focus on are not always fully satisfied with what they are buying. This could be because their needs have evolved since the product was originally designed. Alternatively, there could be shortcomings in the design itself, which is compounded when we factor in customer mix. We commonly find subsets of customers whose needs vary slightly or even materially from those of the archetypal customer to whom the base product is targeted. In these situations, the core offering does not align perfectly with customer needs either. The result of these misalignments is an opportunity for product edge strategies.

The most common form of product edge is what we call the “outside edge.” Typically, your product is missing something that some customers really want. In every industry, some customers, even satisfied ones, tend to have some needs beyond what is met by the core offer. Put another way, they have needs that are just beyond the definition of our core offering: on the outside edge (see figure 2-3). To use the outside edge opportunity involves offering these customers enhancements to the core offer. These enhancements are typically priced and presented as add-ons or optional extras. The logic of this strategy plays directly to the heart of the idea we introduced at the start of this chapter: many customers will open their wallets wider if you can address their needs more precisely.

Apple’s Edge

If you walked into one of the first two Apple Stores in late 2001 and purchased a brand-new iPod, you would have paid $399.¹ This product, originally launched that year with the slogan “1,000 songs in your pocket,” was a clever combination of great design and the latest hardware components. This made it the smallest, most powerful and stylish personal music player yet. With it, you could upload from your Mac computer (the first version required that you own a Mac) nearly a hundred albums of music to carry around in your pocket, with up to ten hours of battery life.² Despite its considerable capabilities, your economic relationship with Apple didn’t stop there. In fact, it had only just begun.

Buying the first iPod or any of the six generations that followed or the mini, nano, shuffle, and touch variants would have presented you with a set of options.³ In addition to your music player, you may well have also purchased a case, or a charging mount, perhaps some mini speakers, headphones, or an extra cable to connect to your stereo. You may even have purchased an FM transmitter.⁴

These are all peripherals or accessories. Though none are essential to operating the iPod, all in some way provide incremental utility; they make the product more useful or just better. Apple manufactures some of these; for others, it licenses the rights to be labeled “brand compatible,” but all are available as options in the Apple Store.⁵

This familiar story is full of product edges. The core product is the iPod, and the product edges are the broad range of add-ons that a consumer can purchase to meet specific needs. By licensing companies like Griffin and InCase to sell compatible accessories, Apple generated a high-margin, incremental revenue stream.⁶ This stream required low investment and sat on top of the margin made on the core product. It was also low risk for Apple; allowing additional features like the FM transmitter to be sold as a third-party add-on meant that, if and when the technology becomes obsolete, Apple’s core offer would be unaffected. But this was only the beginning of Apple’s product edge strategy.

Apple has always been a hardware company. As figure 2-4 shows, approximately 90 percent of its revenue comes from its devices. With this perspective, Apple’s music and video download service, iTunes, is another illustration of an outside product edge strategy in support of the core device offering.⁷

Apple generates about $13 per year in iTunes downloads per customer account.⁸ The brilliance of iTunes is that it is a platform for product edges, allowing Apple’s customers to continuously buy add-ons that make the original product better. Every download is effectively an optional improvement to the original device purchase.

As Jobs explained, Apple gives the customer the ability to purchase optional add-ons to the original product that make it better. Customers respond by continuing to open their wallets again and again to recalibrate with their evolving needs. This is the essence of outside product edges; they consistently fulfill the following criteria:

• The add-on product (in this example, media content) is sold à la carte.
• The incremental effort for Apple is low (Apple has never ventured into producing music content; it merely acts as a channel).
• The leverage comes from foundational assets (in this case, the iTunes software platform and technology to load content onto its core devices).
• The return on investment from the above factors is substantial (for example, analysts estimate the operating margin on iTunes music and content is approximately 15 percent).⁹

Launched in July 2008, the App Store introduced yet another layer to Apple’s edge story, and an even more powerful illustration: “apps.”¹⁰ Apple allows third parties to develop edge products for its core iPhone or iPad offerings and makes them available for purchase by its customers in the App Store. In exchange, Apple takes a percentage of all revenues.¹¹ Again, the apps in the store are optional add-ons to the mobile device, all of which provide incremental utility to a subset of customers for incremental charges.

While in iTunes the add-ons are content sourced from media companies, in the App Store the add-ons are often real functionality enhancements to the core product. They use the innovation and the creativity of others, catapulting the scale of options they can offer their customers. In both cases, the App Store and iTunes, Apple leverages the work of others to reduce its risk. If an app or song fails to gain traction, the cost to Apple is negligible. Again, Apple participates in every transaction in the App Store; this time the operating margin is estimated to be 46 percent.¹²

Even within the App Store itself, we find examples of product edges. If you were one of the more than five million daily players in 2014 to download the hugely successful “Clash of the Clans” game, you would find a typical feature of iOS games known as “in-app purchases.”¹³ The game is one in which players attempt to build a community, train troops, and attack other players to earn virtual gold, elixirs, and gems.¹⁴ The game also allows players to pay real money (for example, $4.99 buys five hundred gems) to increase their virtual stockpiles while playing the game; these are in-app purchases and are unlimited.¹⁵ This ability to buy add-ons and special features within an app is a standard model in the App Store. It is also the developer’s outside product edge strategy. The core offering (an app) is sold or even given away for free in the App Store, but once the customer owns it, she is motivated to buy enhancements to better calibrate to her needs or permission set. Of course, Apple also has a role in provisioning this product edge, and it captures a percentage of these transactions as well.

In all these examples of Apple’s outside product edges, we find the same pattern:

• There is an optional enhancement offered to a core product (add-on).
• The add-ons typically leverage foundational assets of the core business.
• The incremental effort and investment required to present and fulfill the enhancement is typically low.
• Incremental consideration is paid (extra charge) for this add-on.

Apple’s many successes go well beyond edge strategy: there are, of course, many aspects to all winning market positions. What is clear is that the hallmarks of an edge mindset are present in nearly everything the company does.

The Inside Alternative

Thus far, we have explored how the misalignment of your core offering and a customer’s permission set often creates enhancement opportunities. But this misalignment can also go in the opposite direction. Specifically, the misalignment might result not because the core offering is missing something, but rather because some customers do not universally value some elements of the core offering. While important for some customers, and perhaps even target customers, certain elements may not be valued by all customers. This is where we can find opportunities on the inside edge of the product (see figure 2-5).

If this type of inside edge exists in your business, you have an opportunity to do one of two things. First, you can unbundle the elements of your standard offer that are extraneous to some customer segments and sell them for an incremental fee only to those who value them. Second, you can redefine the minimum standard product by shrinking or “de-contenting” it for everyone. Let’s examine each in turn.

Unbundling the Product

With inside edge unbundling, you take an element of your offering that all customers do not value and parse it out as a separate option for an incremental charge. By doing this, you capture the value provided to the customers who do have a need for that element, while at the same time reducing the cost of providing it to those customers who don’t value it.

Unbundling as a strategic concept is not new and has been applied in many industries. Some examples include unbundling legal services (when a lawyer provides support only for a discrete task such as reviewing a contract, instead of full representation) or unbundling software from computer systems (rather than selling a computer with an operating system installed, selling just the hardware).¹⁶ The most typical form is disassembly, where the core offer is fundamentally broken down from a single offer into a new set of separate offers. When iTunes started selling all songs individually, it disassembled the previous core offer, the album (and changed how the industry operated).¹⁷ This core strategy is not the subject of inside edges. Inside product edges rely on viable core offers but create opportunities to unbundle certain elements and offer them back to select customer sets as add-ons.

In 2008, US airlines realized that some people didn’t need everything that they included in the sale of a standard airline ticket; this opened the door to unbundling elements of the “one size fits all” offer. Many travelers never check a bag, but historically their tickets subsidized the substantial cost for other travelers who often checked multiple bags. The airlines unbundled this element at the edge of their core offer, so today those who need the option pay for it.

“De-contenting:” When Less Is More

Inside edge de-contenting is the second way to exploit this phenomenon. Sometimes, the balance can tip so far that more of your customers are in the camp that doesn’t value an element. In these cases, the best option might be to just do less.

In certain circumstances, customers can accept, if not welcome, simply removing or de-contenting the inside edge of your core offer. Usually, in the following situations, we see companies find success with this strategy:

• A majority of customers do not value the element.
• De-contenting can be positioned as a convenience, such as self-service.
• Some of the cost savings is shared in the form of a price reduction.

Familiar examples of this strategy in action are gas stations and retailers that have de-contented their labor models at the point of transaction to offer self-service versions of their core propositions. At one level, this gives customers the convenience of self-service and, in the case of gas stations, even some share of the cost savings.

More recently, companies have used de-contented offers in the health-care sector. Smith & Nephew and other medical device companies have responded to cost challenges in the US health-care industry with de-contented options. Smith & Nephew offers “rep-less” orthopedic implants; a hospital can purchase (for a reduced fee) a replacement knee or hip as a device-only option, without the support of a sales representative. As with gas station self-service, this solution appeals to a subset of customers who are comfortable with reduced service. Like gas stations, the rep-less implant customer also shares in some of the cost savings through a reduced overall price.

A common theme among examples of inside edges, both unbundling and de-contenting, is that both are useful in combating various types of pressure on profit margins. They are often manifested during structural discontinuities at an industry level. Unavoidable challenges such as escalating oil prices, a collapse in overall demand, or structural changes to reimbursement models are all examples where companies have been prompted to explore opportunities at the inside edge of their products. In chapter 6, we will explore these examples in further detail to understand the effectiveness of this approach.

Next, we describe the second type of edge strategy: the journey edge.