Being the best doesn’t make you the market leader. Being cheapest doesn’t either. What I’ve heard is that it’s usually the cheap enough, good enough solution that wins. But even that is an oversimplification. Here’s how market penetration can be achieved.
I’ll speak to the computer market, since that’s what I’m most familiar with. But generally any product follows the same principle. The computer market just happens to be a complex example.
Being first doesn’t ensure you achieve market penetration
Who made the first home computer? It’s debatable, so that should prove being first doesn’t ensure survival and dominance. The overwhelming majority of computers in use today are descended from IBM’s 1981 design, and IBM wasn’t first. I think I could get a plurality of historians to agree the first was the MITS Altair 8800, a kit computer from 1974 that led to the first Microsoft product. But MITS is long gone. A company called Pertec bought them in 1977 and you’ve probably never heard of them.
In 1977, a trio of companies released products that were much more consumer accessible, because they came pre-assembled. Between Apple, Commodore, and Radio Shack, it’s not clear which of them actually got their product into consumer hands first. But none of those products is on the market anymore either. And of the three, only Apple still makes computers, and the computers it sells now are derived from a later design.
Of course, Apple did really well for itself. But the Apple II was just one of many competitors in the early computer market. Apple’s raging success came much later. It sold around 5 million units. And someone else you’ve probably never heard of, unless you’re British, came along a couple of years later and sold about that many units too. And they didn’t survive.
Being cheap doesn’t ensure you achieve market penetration
The home computer market is the perfect example of how you can’t dominate a market just by selling the cheapest product. The computer market in 1982 was looking like a race to the bottom. In 1980, Radio Shack released a color computer for less than $400. The same year, Commodore announced it was working on a color computer that would sell for less than $300. And then along came Timex. The watch company. Timex manufactured a computer for Clive Sinclair in the UK, perhaps the most blatant example of a minimum viable product the computer market ever saw. Timex brought that machine to the United States and undercut everyone, selling it for $99. When everyone else either lowered prices or released a cut-down machine to compete, Timex lowered its price to as little as $49.
Sinclair’s computers sold well in the UK and in parts of Europe, but the Timex versions flopped in the States. Timex did manage to ship around 600,000 units at a time when it was difficult to sell a million, but its closest competitors did all ship a million units.
Sinclair did better in the European market, but was bought out by rival Amstrad in 1986. The Spectrum line sold about 5 million units from 1982 to 1992, making it a moderate success, but not enough to ensure continued survival. The computer you use today isn’t descended from it.
Being innovative doesn’t ensure market penetration
The capitalist mantra is that innovation ensures success and market penetration. But that’s not enough either, at least on its own. In 1985, a company that had controlled 30 percent of the computer market on its own released a long awaited machine that was revolutionary. It had stereo sound and color graphics with up to 4,096 colors at a time, in an era when mono sound and 16-color graphics was the norm. It had a 32-bit CPU and a fully pre-emptive multitasking operating system that took full advantage of that 32-bit chip. Oh, and it had icons and pull-down menus and used a mouse. And it was so efficient, it ran well in 512 kilobytes of RAM.
It was Windows 95, essentially, but 10 years earlier. The base machine sold for $1,295, but admittedly, a viable setup with a monitor, second disk drive, and 512K of RAM cost more like $2,200. Still, that wasn’t an outrageous sum. Apple’s best computer sold for $2,495, and you just got a 9-inch black and white display at that price. It didn’t multitask, either. And in 1985 an IBM or IBM-compatible setup with a color monitor, two disk drives and 512K of RAM cost almost $2,000.
Prices did come down. By 1987, you could get a redesigned model with 512K of RAM, two drives and a monitor for closer to $1,200. But ultimately, this innovative machine ended up selling around 3 million units and the company who made it went bankrupt in 1994. And today when I say the product’s name, “Amiga,” I can’t count on anyone knowing what it is without having to explain it. It’s a footnote in history, like the Sinclair Spectrum.
Building the best computer you could muster with 1985 technology sold even worse than the minimum viable product of the same era. It was like Bo Jackson, the superhuman two-sport athlete who took the sports world by storm around the same time. The stories are unbelievable, but the people who saw it happen swear they were true. And in a flash, it was over.
Here’s a more in-depth look at why Amiga failed.
Why you’re not reading this on a Spectrum or an Amiga
Some of the ideas from the Spectrum and Amiga survive in today’s computers, but the companies who made them went out of business decades ago. There’s about a 99% chance you’re reading this on a phone or tablet with an ARM CPU running an operating system from Google or Apple, or a computer with an Intel CPU running an operating system from Microsoft or Apple.
Ultimately it was souped-up clones of the IBM PC running Microsoft Windows that won out. IBM’s product wasn’t cheap, and soon after its release, there were better products available for a comparable amount of money. So why did they win?
Defining a market
You can divide markets up into five segments: Pioneers, early adopters, the early majority, the late majority, and laggards. They fall along a bell curve. The pioneers and early adopters make up the left side of the curve. Laggards make up the right side. Most people fall into either the early majority or late majority.
Anyone buying a computer in the 1980s was a pioneer or early adopter. And they were all zealots. No, we were all zealots. I was one too. That Apple fanboy you know who worships either Steve Jobs or Steve Wozniak as a god? We were all like that back then. My heroes were Jay Miner and Dave Haynie. Bill Gates had fanboys too. Really.
The market divides itself fairly neatly into thirds. The early and late majority are about 33% each. The laggards are around 16%. Pioneers are a single-digit percentage, around 3-4 percent, and the early adopters are what’s left, 12-13 percent.
Pioneers are the people who buy technology for technology’s sake. The kind of people who paid full retail for a Laserdisc player. On the other extreme, laggards are the people who lament that they can’t buy a new black and white CRT TV anymore.
Once you identify your market, you multiply it by those numbers to find the segments. Critical mass happens when you start selling into that early majority market. If you can hold onto 16 percent of the market, your product will survive for as long as that market does. That’s market penetration.
Your marketing sells the product, but so do your customers. The pioneers and early adopters help convince the early majority it’s time to buy. And once you start selling into the early majority, momentum causes sales to boom until the market gets saturated. Eventually you can even sell to some laggards, but the boom times are over at that point.
How many standards can a market sustain?
Markets can be a funny thing. The computer market is a collection of duopolies. Intel and AMD. Microsoft and Apple. Microsoft and Linux. Western Digital and Seagate. AMD and Nvidia. And basically you have Microsoft and Apple on the desktop, Microsoft and Linux in servers, and Apple and Android in phones and tablets.
The game console market has three players. So why the difference?
The computer market had lots of contenders in the early 1980s. But critical mass, the number required to achieve market penetration in the United States, was somewhere around 13 million units in the 1980s. You don’t have to sell that many units in a single year. That’s the number of units you have to sell into the market and have in use at any given time. Europe would have had its own magic number, and so would Japan. If you could sell enough units in one market, you could be a total flop in another and still be successful. Sinclair sold enough machines in Europe to be viable in spite of flaming out early in the United States.
No single entity sold 13 million computers in the United States during the 1980s. Commodore sold more than that worldwide, but not in any single market. But by the mid 1980s, probably sometime in 1986, and certainly by the end of 1987, a coalition had. IBM and its compatibles reached critical mass and achieved about 50 percent market share, leaving several offerings, all incompatible with IBM and with one another, dividing up the other half.
No competitor reached that critical 16 percent market penetration, so they fell away, one by one, in the early 1990s. Apple survived because Microsoft couldn’t afford what would happen if it became a true monopoly.
Why the PC was the one to achieve market penetration
The PC sure didn’t start out as a cheap-enough, good-enough solution. Good enough, sure. But the price was like Apple. A usable IBM PC setup in the early 1980s cost around $4,000 in today’s dollars. Probably more, since you probably put it on a nice desk, and probably wanted a printer and some other stuff. You had to be pretty wealthy to afford one. The early clones were cheaper, but still a significant outlay. You didn’t save 80 percent by buying a clone, at least not at first. You saved more like 20 percent.
The price did come down in the mid 1980s. Cheaper, more tightly-integrated clones designed and built in the Far East helped drive prices down in the mid 1980s. Arguably by around 1986 or 87, an IBM PC clone was the cheap enough, good enough solution, at least if you were buying something like a Tandy 1000 or Leading Edge Model D. But without faster, backward-compatible processors from Intel, and upgraded graphics and sound, the PC would have fallen away like the others.
IBM lost control over the standard in the 1980s and ironically no longer makes PCs. But it’s an interesting market study.