It is obvious to us now that Henry Ford should have allowed color choice and he would have sold lot more cars. He could have likely charged higher prices over black Model Ts as well. Was this not obvious to him?
Take a look at a present day product that we all consume almost everyday – Bananas. Unless you are a customer of Berkeley Bowl, it is likely you have bought just one variety of bananas. The brands could be Chiquita or Dole but there is only one kind of bananas.
Science Friday has an explanation for this dearth of choice,
… imagine a pipe from Ecuador to your supermarket that can only fit one variety of the world’s 1,000 banana varieties, and that’s basically the way it works.
In order to bring new bananas, you have to build entirely new infrastructure, ranging from plantation to shipping to packing methods and to ways to tell consumers about it.
So why not do it? The old hands at Chiquita and Dole know only one way of doing things. They are not going to do it. Why not some entrepreneur disrupt the market and import new varieties?
The answer lies in the price we are willing to pay for bananas.
The banana is the cheapest fruit in the supermarket
They are cheap because the suppliers made a choice to focus their limited resources. They decided to focus their investments and marketing muscles on just one variety.
It is an extremely high fixed cost business – building that virtual pipeline from Ecuador for handling another variety. The result? A split market unless the disruptors can grow the market enough (which is not really disruption).
But can’t they recoup the fixed costs through higher prices for the new varieties
Unfortunately no. In any new product investment decision, pricing comes first. Given the low reference price set by current bananas how likely will the customer be willing to pay a higher price premium just for the variety? How big will the market be that is truly incremental?
Will the value from variety be clear to customer that they will pay premium for it? What is the additional marketing investment needed to convey the value message?
Even if the value is clear, is there value leakage that bring the value down? For instance, are their customer behavior changes needed like
One of the reasons is that educational component in bringing the new variety. Baby bananas need to be served much more brown than a traditional Cavendish to taste right. But most people are used to that visual cue the Cavendish gives and so don’t allow them to go brown, and that’s been a real problem in getting people to actually like this variety.
All this capital and resources have opportunity costs – other fruits that can be profitably introduced or other business line altogether. There is no need to disrupt for the sake of disruption if there is no incremental profit.
When is not giving choice to customers is not all bad? When providing choice fail to deliver incremental profit.