Fidelity vs. Convenience: The Trade-Off

It is time to revisit my post of October 29. Tonight, I learned of a new model that explains exactly what I outlined in my earlier entry.

I attended a lecture by Kevin Maney, best selling author and journalist, who writes for Fortune, The Atlantic, and Fast Company. He was recruited by Condé Nast Portfolio magazine and remained contributing editor there until the magazine’s demise. Prior to that he had been a senior technology reporter at USA Today. Maney is the author of The Maverick and His Machine: Thomas Watson Sr. and the Making of IBM (John Wiley & Sons, 2003) but his lecture tonight at Alliance Bernstein was on his most recent book, Trade-off: Why Some Things Catch On and Others Don’t.

            In his book, Maney elaborates a theory according to which successful products accomplish one of two things: either fidelity or convenience. Fidelity is a term that refers to the customer’s willingness to pay a premium for an experience even if that experience involves unpleasant events along the way. For example, a Bono fan will pay a high price for a ticket to a Bono concert, even if it is very hard to find parking, the space is really crowded, and getting back home after the concert takes for ever. The other end of the spectrum would be listening to Bono singing on one’s MP3 player. That would be highly convenient. Unfortunately, the sound does not compare to that of a concert and Bono does not come run errands with the listener. Both products, the extremely expensive and highly inconvenient as well as the inexpensive and highly convenient have a steady and specific following and generate substantial revenues in their category. In addition, both can grow. To illustrate how, one may place fidelity on the y (vertical) axis and convenience on the x (horizontal) axis and picture the two growing either up (higher fidelity can bring larger margins) or to the right (higher convenience can bring greater market share and greater returns).

Problems arise when companies want to achieve both at the same time. They want to have a large following of loyal customers who recognize the coolness of the brand and are willing to pay the price for it, while they also target a large market share for whom the product is appealing because it is accessible. The perfect example would be Starbucks during its period of aggressive growth. In fact, what Starbucks proves is that the combination of both high fidelity and high convenience is disastrous for the brand. The contradictory powers fight each other and usually demote the brand to a zone close to the bottom left of the previous illustration. That zone is called the fidelity belly. Brands that fall into the fidelity belly usually have a very hard time coming out of it. This is because companies within that space cannot make up their minds as to whether they would like to pursue the fidelity axis or the convenience axis. The author presented several examples of companies who have succeeded in that endeavor by clearly choosing a path for growth and only in one direction.

This is exactly why Maney’s presentation reminded me of the discussion of Gilt’s acquisition of Bergine. In my mind, Gilt is moving along the convenience axis, expanding geographically and making discounts available to a broader geographic region. This does not mean that Gilt itself is a luxury retailer. It has now become a discount retailer and it so happens that the discounts it sells are of products within the high-end sector of the lifestyle industry. The products themselves originally belong to the fidelity zone but when they are marketed through Gilt or Groupon they temporarily shift to the convenience zone. But e-commerce does not necessarily have to be a shift toward convenience. Within the luxury sector, I distinguish Portero.com, a company that sells premium, pre-owned, prized luxury goods while maintaining a very clear definition of its own brand within the domain of exclusivity (fidelity, experience, coolness) that both it and the brands it markets occupy.

While I had thought about these issues before, I gained a new perspective on things tonight. I think Maney’s model is a very handy tool both for established firms that are re-examining their own strategy for growth or start-ups that are in the process of defining which segment of the market they serve.

Luxury re-defined

Gilt’s first acquisition of Bergine, a San Francisco based company, stirred quite a discussion within the e-commerce sector, particularly as it pertains to the luxury goods and services industry. The best place to get the specifics of the deal (which, after all, was between two private companies so don’t expect to find any numbers) is in Geoffrey Fowler’s WSJ Blog of October 26, 2010 (http://blogs.wsj.com/digits/2010/10/26/gilt-makes-its-first-acquisition-bergine/). Mr. Fowler thoroughly covers what has grown to be a very competitive landscape of online discount retailers on luxury deals, for example discounts on five-star restaurants, wedding planning consultations, or high-end flower design. The deals have an expiration date, are good for one use only (this could however include a package of services), and allow the masses or financially mindful to partake in the luxury lifestyle industry.

All this is very nice. It seems however that the idea of luxury for such type of operation is a fleeting one. While Gilt City (which launched in New York last May and quickly expanded to Boston, Chicago, Miami, and Los Angeles) is gaining market share against competitor Groupon, (which controls a considerable percentage of the market and has been growing thanks to a strategy of determined acquisitions of small, local businesses that keep cropping up), the question of how is luxury doing online remains unanswered.

Technology has changed the way people think and has contributed to educating them on various topics and industries. The masses are suddenly aware of the unique and highly exclusive restaurant where a dinner for two may easily cost their weekly wages, if not more. They are able to taste that extravagant dinner once thanks to the online discounts (purchased on Gilt City or Groupon). Do they become permanent clients at this establishment? Probably not, but according to the analytics of traffic, sales, and return customers, one who has bought a discount dinner may be on the look out for another discount at the same restaurant. The restaurant, on the other hand, remains open thanks to the people who pay full-price for their meal. Most importantly, the restaurant maintains its status within the luxury world because it is not accessible to everyone.

I find the current developments within the particular segment of the online luxury market very interesting. The phenomenon will certainly continue for a few years and until all regional markets are covered. But once this has been achieved, it will also spur a leap in prices within the luxury lifestyle sector. This is because our culture prizes excess. The people who can own excess demand exclusivity and those who admire excess desire both the product and the privilege of exclusivity.  This is how human psychology operates.

Consequently, I cannot agree with the generalizations online retailers of discounted luxury goods project. Who do we group under the “online luxury” label? More importantly, which product and service do we specifically distinguish and denote as luxury? While the online market will be consolidated in a greater degree, so will the luxury lifestyle sector. When cards are reshuffled, they are reshuffled in all directions, albeit not at the same time. The more prolific the online discount deals on the so-called luxury goods, the greater the spike in the prices of exclusive products. This is how the economy works, either on paper or online.