the most important thing I learned, and which I used in both Viaweb and Y Combinator, is that the low end eats the high end: that it’s good to be the “entry level” option, even though that will be less prestigious, because if you’re not, someone else will be, and will squash you against the ceiling. Which in turn means that prestige is a danger sign.
He worked at Interleaf, which produced high-end publishing software. I think that if A serves the high end of the market and B serves the low end of the market, if one of them takes over the other’s market, it is more likely that B will move into the high end.
But prestige brands still have value.
Pointer from Tyler Cowen. Reading Graham’s whole essay is worth your time.
Clayton Christensen’s classic The Innovator’s Dilemma discusses this at book length and comes to the same conclusion. The short version is:
1) Companies tend to try to make their products more and more sophisticated. They do this in the hopes of charging a premium, which allows them to increase their expenses (i.e. grow).
(1a) Growing companies are much more attractive to workers and managers, so companies are always trying to grow.
(2) Competitors at the low end are attacking the low profit margin parts of the business, which seem less valuable to the incumbent.
(3) Eventually the firm’s products are sophisticated enough that consumers are no longer willing to pay a premium for a better one. Meanwhile, the low-end competition, obeying its own incentives, is making its products more sophisticated and targeting more valuable parts of the market.
(4) Even when the firm realizes it’s in trouble, it will avoid shrinking its cost structure (layoffs, including stopping R&D) as long as possible. Instead it will try to offer more and more sophisticated products, but fewer and fewer consumers will be willing to pay a premium for the upgrades.
You have seen the underwear ads
for men and women
so alike but so different
Women’s underwear holds things up
Men’s underwear holds things down
Underwear is one thing
men and women have in common
Underwear is all we have between us
You have seen the three-color pictures
with crotches encircled
to show the areas of extra strength
and three-way stretch
promising full freedom of action
Don’t be deceived
It’s all based on the two-party system
which doesn’t allow much freedom of choice
the way things are set up
America in its Underwear
struggles thru the night
Underwear controls everything in the end
– from Underwear by the recently deceased Lawrence Ferlinghetti, RIP
Perhaps a corollary to Gresham’s Law?
Apple seems the obvious counterexample here, having gone just midmarket enough to get huge volume without losing prestige and while totally ignoring the low end/entry level market segment that Android phones, Chromebooks etc serve. So the needle can be threaded with the right brand strategy.
Thanks for an example, but I don’t think Apple is “midmarket”. Their iPhone is very premium, no general personal computer is better than the MacBook (altho for gaming, many WinTel gaming rigs are better, or far better; tho virus infection risk and hardware blue screens are still far more MS common), who makes more premium tablets that work with iPhones & MacBooks?
Their premium products have long cost 20-40% more than “comparable”, ones, but have become status symbols like Mercedes for cars.
IBM switched to standardizing on MacBooks a few years ago – most CEOs of most Fortune 500 companies are using Macs. But not driving Mercedes, nor Rolls, nor any other single auto.
The middle class has become rich enough, all over the world, to afford the premium price for functionality and status of an Apple.
So does this principle apply to Tesla?
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