3 Things to Watch for in Fitbit Q4 Earnings Release

simple.b-cssdisabled-png.h4212c4916dfd03e82a8f54e8eebd5b3c.packFitbit will report its December 2015 quarter earnings coming Monday. It has almost become the “Kleenex” of wearable fitness market but we need to ask if all the hype is worth the very high multiple we pay for the stock. I discussed previously about its weak product strategy,  signs of that weakness will come clearer on its earnings report. What to watch for in the earnings report?

  1. Number of units sold is a big indication of its continued growth. In the previous quarter Fitbit sold 4.08 million units. Given the holiday quarter will engender additional sales from people driven by fitness goals and gifting, we should expect a big bump. Compared to same quarter last year when they sold 5.3 million units,  we should expect 6.9 million units for a YoY growth of 83%. If it is any lower it indicates the accelerated plateauing growth curve.
  2. Average Selling Price – This is simply calculated as reported revenue divided by number of units. Their ASP has been languishing below $90. Their hope is to sell more of their $250 device to bring up the ASP.  Unfortunately that device falls short of customer expectations for a smart watch and product reviews recommend customers are better off sticking with its $149 device.
  3. Gross Margin – With increased volume and with the core technology remaining essentially same we should expect gross margins grow 200 to 300 basis points to get back over 50% watermark.

One thing that will be absolutely critical for investment decision is device abandonment rate – what percentage of customers abandon devices after each milestone? This is more important for the next quarter as the New Year resolutions fall by the wayside and people who get Fitbit as gifts feel less attached to it than those who buy for themselves. Unfortunately we will not see that number even though Fitbit has complete visibility into it.


Perils of Defining Market Share

It is comforting to define what we can see as current spend the market, identify who the competitors are and take solace in the fact that we have a high share of the market. There are two ways we size markets,

  1. We rely on analysts who survey players like us in the market, add up our forecasts and define what the market size should be.
  2. We add up customer spend on the specific product category and model a growth in spend and number of customers.

As long as we maintain share or show growth we are winning. Or so we want to believe. What we miss here is the clear understanding of customer job to be done growth matrix. With these approaches we do not fully understand why customers buy and what will make them buy. In other words, what would the market size be if we add up what all the customers are willing to spend for the job to be done.

This is why disruption happens when a new player from a completely different domain enter the field to compete for the same customers. Successful new players come from customer job to be done perspective with a product that is far better than current players and can bring in new customers who stood on the sidelines because none of current candidates were worth hiring for their job to be done.

Swiss watch makers were happy to define their market as number of luxury watches sold and measured their share of those units. This worked well until smart watches came along. Take a look at this chart of what happened to the market from Q4 of 2014 to Q4 of 2015 (data comes to us from Strategy Analytics).


Before 2014 Smart Watches seemed just a fad but by the end of 2014 they were selling 1.8 million units in 3 months. The 18% share grab alone should have been a concern to Swiss watchmakers. But what happened next is even bigger. The new entrants enabled the unit volume to double and grabbed all of the new sales. As you notice carefully, not only did the Swiss watchmakers did not gain share in new customers but also lost share as their unit sales declined from 8.3 million units in Q4-2014 to 7.9 million units in Q4-2015.

If you are not growing you are dying. This is not failure of product strategy. This is the failure to understand how growth happens. The traditional way of looking at growth has been to sell more of the same, sell to more customers or sell new things (Ansoff growth). The right approach to growth is not making it product centric but defining customer job to be done, the new growth matrix,

Customer Jobs To Be Done Growth Matrix

How do you define market and growth?

Fitbit’s Stack Fallacy

What do you call the belief of a someone lower in the value chain thinking the players higher up in value chain are just “apps” over their platform? Anshu Sharma a VC at Storm Ventures calls it the stack fallacy. The root cause of companies falling for this fallacy is taking an inside-out approach to product management rather than a customer job-to-be-done centric approach.  To use Anshu’s example of database companies wanting to enter SaaS market, the approach should not be to look at SaaS companies as just apps but ask what customer segment and jobs are these customers hiring the SaaS companies for.

You see this failure to start with customers prevalent across the entire spectrum, not just the enterprise space. Since I have been looking closely at Fitbit and its products in the recent weeks I can see clearly this stack fallacy at play in their move to smart watches from fitness bands. Let me refresh you the product landscape mapping



Fitbit started in lower left quadrant and is trying to move up the stack with its newer devices. Recently it introduced $200 Fitbit Blaze to be one such ‘full stack’ player. If you look closely at the numbers you can see the internal business driver for this product strategy. Here are the Q4 numbers of Fitbit, its high end competitor Apple and its low end competitor Xiaomi.


Fitbit’s average selling price (ASP) is stuck at below $90 levels. They could increase total revenue and profit by increasing volume but there is considerable TAM compression due to Xiaomi’s Mi bands that retail for $14-$16. In shortest period since its introduction Mi Bands grabbed as much as 80% of volume of Fitbit. Any growth in that low end of the market is going to be created and captured by Xiaomi.

A moment’s reflection will show you a $16 device will bring in even the most skeptical customer to try out a fitness band. For those who are already sold on wearable fitness its low price point is a huge temptation. And the device indeed packs value with its heart rate monitoring and excellent battery life.

So Fitbit is looking to move “up stack”, where the ASPs are 4X its current levels and likely much higher unit gross margin. After all if they built core fitness band, isn’t adding smart watch functions just adding apps? Stack fallacy.  As proof of failure of this fallacy driven product strategy, its smartwatch Blaze was panned by The Wall Street Journal’s tech reviewer Joanna Stern who calls it, “ugly, barely better at fitness metrics and offers far less value than Apple watch”.

The question is not how we can increase our ASP and margin by adding smartwatch features to fitness band. The right questions are,

  1. Who buys smart watches?
  2. Why does this customer buys smartwatch? (See here and here)
  3. How do they pay for it – as in what  budget do these customers pay from for splurging on a smart watch?
  4. What value do they apportion to fitness metrics collected by a smartwatch?

Failure to ask these key questions is Fitbit’s stack fallacy. Not blazing new trails or step in the right direction.

Do you really need 10,000 steps a day?

10000-stepsVery meticulous data analysis by data science folks at Cardiogram. They test the hypothesis if 10,000 steps touted by Fitbit has any effect on resting heart rate.
They used data on steps and heart rate from their App user base. Their first cut of the analysis treated users as one aggregate and found some correlation. Recognizing groups within the data they split the data into three categories and find there is no correlation between steps taken and lowering resting heart rate.
Fitbit indeed has access to same data from its user base, you wonder why they did not do this hypothesis testing or publish the results.

Cardiogram: What's your ♡ telling you?

We’re often told to walk
10,000 steps per day, but what is the science behind that? Why not 20,000? 5,000? Why step count, and not the type of exercise, intensity, or total minutes?

With the advent of Apple Watch and Android Wear, millions of people now have heart rate sensors strapped to their wrist. To answer the questions above, we analyzed 458,000,000 distinct data points from Cardiogram for Apple Watch.

Origin of 10,000 Steps

Screen Shot 2016-02-11 at 8.57.12 PM Manpo-Kei, or “10,000 step meter”

The idea of 10,000 steps originated as a marketing slogan during the 1964 Tokyo Olympics, when an athletic company released a pedometer named manpo-kei, which means “10,000 step meter”. Unfortunately, the clinical evidence is scant: while there is some work correlating step count with outcomes like BMI and blood pressure, and a set of official activity guidelines, “no study to date has systematically evaluated dose-response effects of different steps/day…

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Apple’s Focus- Market Share? Profit? or Price?

iPad-3-to-Change-Tablet-Pricing-Analysts-Say-2For a while I have been writing in depth, with supporting data, on Apple’s pricing excellence and price leadership. Apple has been seeing growth deceleration and sales decline in its unit sales. This week there was a piece in Fortune on Apple’s approach to business when it faces drop in volume.  That article correctly points out Apple never chased market share and was more than willing to let others fight for the low end of the market.

Apple with just around 15% market share has 90% of profit share of the market. It does that by a very well aligned mix of segmentation, product strategy, and multiple product versions. For instance take the case of  capacity of flash storage in iPhones. Apple made a simple decision to make 16GB, 64GB and 128GB versions that resulted in close to $4 billion a year in incremental profits.

Market share is simply the wrong business metric to chase as I have written several times before. Businesses exist to create value for all stakeholders – customers, investors, partners and employees. Businesses must take actions that maximize this value pie so everyone’s share, however small the ratio is, is better than it would have been otherwise. The question of chasing market share does not come into play at all in this quest unless it is a side effect of increasing value pie.

However Fortune back tracks on its own statement of Apple’s focus on value creation to accept an incorrect view extended by Asymco’s Horace Dediu.  Mr. Deidu rejects the notion that Apple is concerned with profits and instead posits that its focus is on pricing.

“Apple is not concerned with keeping profits. It’s concerned with prices. Within the price is perception. Apple chooses deliberately to ‘own’ a price point and will never move from it. For 30 years the ASP of a Mac hardly changed. Same with iPod and same for iPhone.”

If you are a regular reader of this blog or a practicing product manager you will quickly recognize the error in this view. Price is not a goal, it is not something you optimize for. it is not something your product deserves. It is not an invariant that must be adhered to. Price is a lever you have under control to maximize your share of value created.  You do not fix a price point to maintain perception rather you ensure the price point is aligned with the segment you choose to target and its needs.

Religiously fixing a price point is an assured way to destroy value for customers and investors. In fact Apple has let the ASP fluctuate by changing the product mix. While Deidu states Mac’s ASP has not changed, if you look at the complete product family including MacBook Air the ASP did change due to a mix of products at different price points.

Customers come first. We win customers by creating net new value to customers that is far more than other alternatives. We maximize the value to customers we become the preferred product and hence maximize our share of this value pie. Price is a way for us to get our fair share of that value created. Price is not the end, it is the means.

Carving out Market Share – Fitbit Scenario

In my last article I showed a mapping of Fitbit’s different product versions and why they are getting disrupted from all sides. A specific point in that article is worth expanding on – it is the number quoted by Fitbit CFO on its 90% market share. Before discussing the implications of this high level of share let us do the numbers.

Fitbit’s annual revenue is expected to be around $2.15 billion, they report Q4 earnings next week. If that is 90% share of the market it means the market size is $2.39 billion. Fitbit may be defining what the market is in a very specific way to just include spend on wearable fitness devices, as I show below


From this perspective they exclude considerable swath of customer spend. More importantly they do not include a large portion of the top right quadrant, the premium sector, where lots of market value is created. In this part of the market Apple watch dominates customer preference. In the last quarter Apple likely made $1.5 billion to $2.3 billion in Apple Watch sales*.   That is just one quarter. So to say Fitbit has 90% share of $2.38 billion market does not fit the math.

They have stated several times that they do not see Apple watch as a competition. So those numbers are completely left out of any market sizing estimates. Unfortunately we do not get to decide what our competition is, customers do. Products exist to fill a  customer job to be done. Customers pay for those jobs from a budget. If they pay for Fitbit from the same budget as they would for Apple watch then it is a competition whether you like it or not.

Even if we completely leave out Apple watch revenues, 90% share of any market does not bode well for any business unless it somehow has the magic to break it open 10X-20X because of its products.  As I discussed in my previous article Fitbit is getting disrupted even in its narrow definition byproducts like Mi Pulse.

Where does it growth come from when it already has 90% share unless the market grows and even if it did, can they defend their position? Rob Cihra, a stock analyst, mirrors my 2X2 product map and states that they should build more products to the far right side – build devices with more advanced metrics collection. That side of the market is dominated by Apple with $6-$8 billion annual revenue vs. Fitbit’s $2.15 billion.

As it gets boxed in, despite its sensor reminding it to move, Fitbit will find it can only walk in place to get its counter to move.


*Note on Apple Watch Revenue: Apple does not break out revenue of Apple Watch. It reports Other Hardware category revenue that includes iPod, TV, accessories and Watch. I recently did a break down of this Other Hardware revenue to estimate Apple Watch revenue. Last quarter Apple reported $4 billion in this category which points to the $1.5 to $2.2 billion range for Apple Watch.