Simplicity is at the essence of Apple. So it was all the more surprising when Apple announced on October 16th that it would be offering five distinct iPad product lines this Holiday season.
With the introduction of the iPad Air 2 and the iPad Mini 3 to an existing lineup of iPads, Apple drifted further away from its ethos of simplicity and reached a new milestone: 66 unique permutations (SKUs) of the iPad product.
Although this rise in product complexity has had no discernable impact to Apple’s bottom line—Apple released its best ever Q4 financial results last week—a deeper dive into the financial fine print reveals a 12.6% decline in year-over-year iPad sales and shrinking margins , both disturbing trends.
So, is it time for Apple to rethink its iPad strategy and re-embrace simplicity?
A History of Simplicity:
When Jobs returned to Apple in 1997, it was producing a random array of computers and peripherals, including a dozen different versions of the Macintosh. After a few weeks of product review sessions, he’d finally had enough. ‘Stop!’ he shouted. ‘This is crazy.’ He grabbed a Magic Marker, padded in his bare feet to a whiteboard, and drew a two-by-two grid. ‘Here’s what we need,’ he declared. Atop the two columns, he wrote ‘Consumer’ and ‘Pro.’ He labeled the two rows ‘Desktop’ and ‘Portable.’ Their job, he told his team members, was to focus on four great products, one for each quadrant. All other products should be canceled. There was a stunned silence. But by getting Apple to focus on making just four computers, he saved the company. ‘Deciding what not to do is as important as deciding what to do,’ he told me. ‘That’s true for companies, and it’s true for products.’
From 1997 to today, Apple embodied the Steve Jobs mantra of simplicity. Apple’s hardware designs, software interfaces, marketing campaigns and even its retail store layouts told a single, understandable story.
Simplicity even carried over into Apple’s supply chain. By consolidating product offerings into the 2×2 matrix and partnering with a small number of dedicated suppliers, Apple delivered inventory turnover ratios averaging between 50 and 75, a staggering 5-10x better than industry peers.
When the iPad was released in 2010, with 6 total SKUs (one color option, three storage options, and two cellular options), it struck the right balance between matching consumer needs and simplicity.
More and More iPads
Due to a steady progression of new features and new models, the iPad product family slowly ballooned from 6 to 66 SKUs. Although each individual update seemed innocuous, the combinative nature of these product options resulted in a rapid proliferation of SKUs.
Specifically, Apple expanded their iPad product family along the following dimensions from 2010 – 2014:
|1)||Physical Size:||iPad, iPad Mini|
|2)||Color:||Silver, Gold, Space Gray|
|3)||Storage Space:||16GB, 32GB, 64GB, 128GB|
|4)||Cellular Carrier:||Wifi Only, Wifi + Cellular*|
|5)||Legacy Models:||One iPad Air and two iPad Mini|
*Different SKUs to accommodate different carriers
To help understand all the nuances of the iPad’s history, the following timeline visualizes product line releases and discontinuations as well as numerous other product options (click to expand):
Although fascinating to see the detailed iPad release schedule highlighting the design choices Apple made over the last 4.5 years, the key takeaway can be summarized into the following SKU growth chart:
It is immediately clear that no single event is to blame for the jump from 6 to 66 SKUs. Instead, it was the combination of decisions to introduce new sizes, colors, storage sizes, cellular carriers, and lower-price legacy models that led Apple to its current state.
Although the market for tablets is still wrought with uncertainty, is it truly necessary for Apple to offer 66 unique SKUs across 22 price points to be competitive? Or rather, do the benefits of consumer choice and hedging against a potentially missed trend outweigh the costs of complexity?
The Costs of 66 iPads
To answer the question about the costs of complexity, we can break down the costs incurred by Apple into two categories: tangible and hidden costs.
Let’s start with the tangible costs of adding SKUs to the iPad product family:
- Organizational Cost – Developing and supporting each additional iPad SKU requires additional internal resources from Apple across all functions: engineering, supply chain, sales, and marketing.
- Financial Cost – With the introduction of lower end offerings, Apple saw the Average Sales Price drop from $665 in FY10 to $530 in FY12 to $445 in FY14. This directly impacts Apple’s gross margin as lower price point iPads sell at lower margins.
- Inventory Holding Cost – With 11x growth in the number of SKUs offered, inventory theory states that safety stock should increase on the order of 3.3x (√11). Although iPad sales across SKUs are certainly not independent and 3.3x is a high estimate, even a 2x change in safety stock inventory can have a large impact on the balance sheet.
While these tangible costs are easier to assign dollar values, the following hidden costs of additional SKUs must also be weighed:
- Software Development Cost – Writing software to support multiple devices is challenging. Developers are required to design interfaces to work across multiple screen resolutions. This slows down innovation in the App Store and could hurt the user experience.
- Paradox of Choice – In Barry Schwartz’s research findings he states that, “There can be too much choice; when there is, consumers are less likely to buy anything at all, and if they do buy, they are less satisfied with their selection.” Evidence of this phenomenon at Apple can be seen in two forms:
- Renaming SKUs – The iPad with Retina Display was renamed to the iPad 4 when the iPad Air was released to avoid consumer confusion. A confused customer buys less, not more.
- Apple Store Retail Efficiency – Apple store employees have been spending increasing amounts of time with consumers during the average transaction, a sign of growing uncertainty around what to purchase from consumers.
Analyzing only the costs paints a grave picture for the iPad and perhaps unfairly. Apple still has a trimmer product family than its Android competition, its supply chain is best-in-class, and customers are lining up to buy newly released products.
While the current state of iPad sales may continue to be highly lucrative for Apple, the negative growth of iPad sales and the costs associated with SKU proliferation should be raising a lot of red flags. So how does Apple get back to simplicity?
Deciding What Not to Do, Take II
Designing, managing, and marketing 66 SKUs for one product family isn’t simple.
In order for Apple to stay true to the 2×2 matrix of 1997 and its ethos of simplicity, it needs to carefully rationalize each SKU being offered. A SKU must either demonstrate strong sales or fulfill a strategic goal.
A needs based segmentation of the consumer tablet market can help identify specific profiles Apple should be serving. Any SKU that is not addressing one of these specific market segments should be jettisoned from the lineup.
For instance, does a market for low-end iPads with high-end features exist? If someone purchases the cheapest legacy iPad Mini starting at $249, are they willing to pay $50 more for 32GB of storage, $130 more for cellular capability, and the ongoing $10/month required for cellular carrier service? It seems unlikely. Sales data and consumer segmentation can tell us if hypotheses like these are true.
By starting with the consumer needs, Apple should be able to re-find that perfect blend of features and simplicity. Just don’t expect it to be easy.
“Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple.” – Steve Jobs