#022 - PM Lessons by Meituan Co-Founder - Pt 17: Strategy for Operation - Tiering
9 mins read - deliver the right value to the right people; high-end vs. low-end disruption; choosing the right clients for B2B software
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Apologies that this issue came a bit later in the week. Hope you enjoyed the Genki Forest series. Back to Wang Huiwen's course. This is one of the harder sections to translate. Some pondering and appreciation are required on your part. I chose the word "tiering" to denote it's a verb, an action. Some related language for the concepts described here includes market segmentation, high-end vs. low-end / brand hierarchy, product mix, etc. It's slightly different from the segmenting, positioning described in STP. Tiering might connote it's one-dimensional, but as you'll see, it can be more dimensions. In essence, it’s dividing any distribution of users, clients, product value, etc. into several chunks according to some attribute.
The important things to note are a) it's an act, practiced in actual operations (not just strategizing) and b) we only know the truths from actual practice.
Also important to note is that in China's tech parlance, there is a dichotomy between product (tech, product, design), and “operation”, which is a catch-all for everything else. No less attention is paid to operation.
Tiering
Why do we need to use tiering in our operation? It's related to the STP. No single product can satisfy all the needs in its category.
If it's still not obvious to you, try changing how you define the category.
Use chewing gum as an example. You may think chewing gum is a solution for bad breath. For most people, the cause of bad breath is tooth decay. If the cause for bad breath for most people is tooth decay, then dentists and chewing gum belong to the same category.
It all depends on whether you're looking at it from the demand (problem) or the supply (solution) point of view.
Let's look at another example. In most places, the railway is a state-run monopoly and it seems there are no competitors. However, trains solve the problem of transportation. So airplanes are one of the competitors to trains. Even within trains, we also have:
high-speed rail and conventional rail (speed)
business class, premium class, and economy class seats (comfort)
soft sleeper and hard sleeper (long-distance, comfort)
No single product can satisfy all the needs in its category, and no single tiering (i.e. product mix) can satisfy all the needs.
Different tiering can have vast differences. If you didn't tier your operation but your competitor did, it would result in you being uncompetitive in their tiering. (My understanding: it's up to you to define but there may be some consensus in the industry.)
Tiering is hard. The challenge of operational tiering is great at both the cognitive and organizational levels.
For example, in the Group Buying business, if the company feels that they have too few users and they want to have more, the simplest way is to engage the top merchants ("head") because they are the most attractive brands to consumers.
On the other hand, if the team feels there are too few merchants, they would engage the bottom merchants ("tail") because they are the greatest in number. As a result, the middle merchants ("waist") get ignored.
Why tiering is so hard is because it's not just testing the company's operating logic, it's also a test on the company's organizational capabilities. Using just one KPI to evaluate the performance would result in errors.
Types of Tiering
There are two types of tiering. The first is tiering with different products. The second is tiering with one product.
One Product, One Tier
For example, the x-axis is usage/capability (from personal on the left to business/enterprise on the right), and the y-axis is price.
On the top-right quadrant is IBM in the 1980s and on the left-bottom quadrant is PC (personal computer). On the surface, the two don't belong in the same market, as such, IBM didn't pay much attention to PC. However, as quantity, cost, experience, and performance change in one market, the relationship between the different tiers may also change. The gap between IBM's business computer and PC was getting smaller and smaller.
If this is a gif (you’re welcome), you can imagine at first the top-right quadrant is a very big area, so big that IBM ignored the PC segment, which is a very small area. As the bottom-right quadrant gets bigger, IBM also dedicated a small team to work on PC. Since it's a small team, they couldn't manage the whole value chain of PC so they came up with a standard to consolidate all the suppliers. Even for the PCs that we use today, aside from Apple's Macs, they still use IBM's standards.
As time passes by, the PC market grew bigger, the cost got lower and the experience got better, and it started to eat into the business computer's market.
It's a similar situation for Alibaba to de-IOE (Note: midrange computers from IBM, database from Oracle, storage systems from EMC Corp - a staple backend stack for some big tech companies. One of the reasons to reduce reliance on IOE is because the quality of open source projects got better.).
Therefore, the seemingly unrelated two industries may come into conflict as time passes. If you started out in a market that will be squeezed by others, then your hard work in that market may just be a fool's errand.
Multiple Products In One Tier
There is another terrible scenario with the tiering. If a company operates products belonging to two different tiers simultaneously, like P&G, which operates many shampoo products, there is a danger to mess up the positioning of different products during the process.
Rejoice or Header & Shoulders, which one is more high-end?
If people have different answers to it, it means the tiering has failed. They must have done something that destroys the tiering to cause such a chaotic product positioning.
Let's start with the answer first. Head & Shoulders (anti-dandruff) is the lowest, followed by Rejoice (smooth hair), and the highest tier is Vidal Sassoon (styling). But today, we're not sure about the relationship between Head & Shoulders and Rejoice.
That's because, no matter how great the business, one day the market will be saturated.
If the Head & Shoulders team found out that their market has saturated, what would they do? They'd quietly raise the price of the product, and to match with the increased price, they'd have to position the product slightly more premium in their advertisements.
Alternatively, the Rejoice team might have to lower the price, lower the cost and lower the brand positioning in their advertisement accordingly, if their segment became saturated. Gradually, the consumer perception changed and the two brands converged in their minds.
Tiering & Consumer Perception
I'll give you another example on consumer perception. I'm a loyal customer for mineral water and soda water, and I always go for one brand. Because, for the other brands, their bottles would become flattened as you drink. As a business person, it'd be quite awkward that my bottle gets deflated when I'm in meetings.
In the supermarket, the hardness of the water bottles is positively correlated with the price. A common practice among beverage makers, when faced with profitability pressures, is to make the plastic bottles thinner since most people won't notice it.
It's a subtle change but it's also very core. When a brand doesn't form a sharp impression in consumers' minds, the consumer recognition of that brand would also go down. That declined recognition would slowly make room in the STP segment and let a more sharply defined company occupy that space.
Tiering & Brand
Every company has some product lines and one or two flagship best-selling products. Each product has its own marketing team. As the flagship product has a higher total profit, the team would be given higher flexibility on how to spend money and they are more likely to spend money in all sorts of places.
General Motors used to hire Tiger Woods to endorse its mass-market car brand, Buick. But if Buick is represented by Tiger Woods, who can represent Cadillac?
There might be positive feedback in the short term, but it's gonna be negative in the long term. This is one of the tricky things in a company's operation.
More Subtle Tiering
Coupons
Yet another type is you don't realize consciously that they're tiering. A typical example is McDonald's discount coupons. This coupon is not easy to use. It requires various combinations to save a few dollars or get a gift. This is actually a tiering method (i.e. price differentiation) for McDonald's to expand its user base.
This is an example that illustrates the importance to understand the 4P theory and STP theory well.
There is a mantra in the Internet industry which is to create the best user experience possible. However, the McDonald’s coupon experience is clearly very troublesome. This is because this experience is a filtering mechanism to create a tier for the price-sensitive but time-insensitive customers. If you don’t create the coupons, you miss out on a customer tier and it's bad operation.
Many Internet people pursue the ultimate user experience. It's because the zero product replication cost and the large enough user base make the user experience the biggest value creator. But in some industries, those bad user experiences are sometimes part of the product design.
Membership
Costco has been very successful with its membership model, and Amazon Prime is also doing very well. As a result, creating a membership model became a fascination in the Chinese Internet circle.
However, creating a successful membership model is an advanced operational technique and not all companies can master. For example, McDonald's certainly took the coupons into consideration in Pricing. Same for Costco, it also took the membership into consideration when it set product prices.
Low-end Disruption or High-end Disruption
In the past, investors always said that Meituan Delivery which started with the campus market is too low-end and can’t make money. Dajia is more high-end targetting the white-collar market.
To explain the outcomes that we see today, we need to think about how we do tiering in the Internet industry.
Intuitively, everyone thinks that targetting high-end is more profitable. Baidu Waimai seemed to be more high-end than Meituan - in the early days, they had more neat rider uniforms, more premium advertising, and sleeker App design. The question on everyone's mind was - so in the future, will it be…
high-end and low-end delivery platforms co-exist
high-end disrupts the low-end
low-end disrupts the high-end
(like many cases in the book "The Innovator's Dilemma").
Regardless of which view you hold, there are supporting examples from the past. For high-end disrupts low-end, there are Tesla, Porsche, Ctrip vs. Qunar. For low-end disrupts high-end, there is the hard-disk industry. There is also WeChat which disregards the high-end/low-end dichotomy and is used by everyone.
In the delivery business, the most likely scenarios are ii) high-end disrupts low-end, followed by i) high-end and low-end co-exist. (Note: He didn't explain why, but you can think about it yourself.) The reason why Baidu Waimin failed is that they're fake high-end - they have neat uniforms and premium advertising and but their average order value is even lower than Meituan's.
Clients Tiering for Software Companies
When Meituan was acquiring an F&B management software company, our strategic investment team did a tiering based on the relevant companies in the market - the company that is chosen by the top F&B companies must be the one who's most competitive.
This logic is correct at first glance. There were two biggest companies in this space, TzxStar and "Choice", and Meituan made an offer to both companies. We made the offer to "Choice“ first, but "Choice" went with Alibaba, so we acquired TzxStar.
After the acquisition, we discovered that TzxStar had very bad financials. After some research in the industry, we found that companies with good financials are those with a low share of top F&B clients in their revenues.
The top clients would have a strong negotiation power, and they would also a lot of customization requests. Doing customization is a black hole for software makers.
Additionally, there are still new entrants in the F&B management software space. What a software company would do is to work with a few top F&B brands on some friendly-priced, customization-laden projects to establish credibility, then serve the mid-tier ("waist") brands. The software companies that work only for top brands are very hard to make money.
One of the reasons why B2B software has progressed so slowly in China is because right now, China has a big "head" and a fat “tail”, but not many “waist” businesses. This makes it extremely hard for business software makers to find a suitable customer group to productize.
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