Does Planned Obsolescence Destroy Brand Loyalty?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I absolutely love businesses with recurring revenue models, whether it be a blade-and-razor or a subscription-based model. When customers keep coming back it's certainly a recipe for financial success. However, when a company’s business line is such that it has to keep winning new customers to maintain and grow sales, it makes it much harder to keep growing. These businesses tend to be more cyclical with lumpier cash flows.
What we’ve been seeing for years in customer-facing industries is something called planned obsolesce, where a company develops a product with a limited useful life so it will become obsolete or unfashionable or no longer useful after a certain period. The basic premise is that a consumer has no choice but to purchase a newer model, thus driving future revenue. What I’ve noticed however, at least personally, is that I’ve actually never bought another product from a company that planned to make my life miserable at a future date as my electronic gadget became obsolete.
Take the personal computer industry. When I bought my HP (NYSE: HPQ) laptop about five years ago it was the latest and greatest model that would fit into my budget at the time. Not less than five years before that I bought a Dell (NASDAQ: DELL), which again was the latest and greatest. When my HP recently started to slow down to the point where it was virtually unusable, I bought a Toshiba (OTN: TOSYY) not less than six months ago. As my Toshiba recently went kaput due to hardware problems and had to be shipped off to the repair shop it made me take a step back and think about why I made my purchases in the first place. Each time I spent countless hours researching the available products while consulting any expert I could find to ensure that I was buying the best machine for the money. Brand loyalty played no role in my decision; in fact the brand was so tarnished in my mind thanks to the aging machine I needed to replace that I went out of my way to find something better.
When I bought the Dell it was the cool thing to do, I mean, Dude, I was getting a Dell! However, the brand never really lived up to the hype and I, like most people, moved on to something that I hoped would last longer or work better when the time came for an upgrade. In my last upgrade I sought the advice of a tech expert who led me to my Toshiba, again hoping for a better machine that would provide me much more than my money’s worth. Again, there was no way I was going to buy another Dell or an HP, they were bad experiences as they seemed to turn obsolete not long after I first turned them on. I wasn’t lining up for the latest model upgrade; I was looking the other way and hoping for better luck this next time.
Contrast this to Apple (NASDAQ: AAPL); they seem to plan their products to be obsolete in about a year but not in usefulness but in fashionablity. In a stunning reversal of fortunes, instead of driving customers nuts as their products go out of date, customers instead are clamoring for the latest model that has even more bells and whistles. Whether through clever marketing or through true innovation, they have their ever-growing list of customers believing that each new product is a further step toward perfection. Instead of a customer using a product past its useful life, an Apple customer uses a product until its no longer fashionable because something so much cooler is now available. This subtle switch in how they plan obsolescence has created very sticky and enthusiastic customers. Apple can plan an event completely around making one product obsolete by introducing its replacement. They are using planned obsolescence to drive revenue in a way like no other company I’ve seen.
While most consumer-facing electronic companies are planning their own obsolescence as they go about destroying brand loyalty and therefore shareholder value, Apple is using the concept and building both brand loyalty and value. They are clearly showing that planned obsolescence doesn’t have to destroy brand loyalty; it just has to be used in the right way. Apple will continue to outperform their peers until they catch on to this key to their success.
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