GPS Maker TomTom Beats Out a New Rhythym

Interesting story in the July 7th New York Times about how smart phones seem to be taking share away from the makers of dedicated GPS devices (“Move Over GPS, Here Comes the Smartphone”.) Some 40% of all smartphone users and 80% of iPhone owners use their phones for turn-by-turn directions.  What’s more sales of stand alone GPS units are suffering.  TomTom saw first quarter sales plunge 29% compared to a year ago and Garmin saw a drop in Q1 of 13% compared to last year.

What is happening is that makers of dedicated products and services are seeing their market positions come under attack from providers of platforms that can add similar capabilities for relatively low incremental costs.  This is a phenomena that is repeating itself in other markets as well.  For example, dedicated job posting sites such as Monster.com are losing share to platform providers such as LinkedIn and Twitter.  This seems to be the toughest kind of competition – a firm that managers never really viewed as a direct competitor uses their platform to make an adjacent move into your business.  And because it is an incremental play, they are often able to do so with lower costs and prices that are much lower than what the providers of dedicated products and services are charging.  It’s at times like this that the great pricing strategists earn their keep.  While many firms would respond with desperation price cuts to hold share, pricing leaders play a different game.

In Pricing With Confidence we come out pretty strongly against using price to drive market share.  Simply using price to try grab customers inevitably leads to increased price competition and the destruction of industry profits.  We do make an allowance for one related but very important exception – when a change in pricing (and likely offering) strategy will enable a firm to dramatically change its footprint.  There is one caveat here – that change in footprint must lead to increased revenues and profits.

Makers of GPS devices are currently facing such a decision and one of them, TomTom seems to be playing the game the right way.  Their plan is to introduce a TomTom branded GPS application for the iPhone and support it with simple mounting hardware to make it easier to use the iPhone as an in-car GPS device.  While exact pricing hasn’t been released, TomTom will charge a one-time fee for the application – and you can bet that the price will be lower than it is for some of their dedicated GPS units.  Many firms would shy away from such an approach for fear of cannibalizing existing revenue streams.  The leadership at TomTom is wise enough to understand that those revenue streams are going to get cannibalized anyway and that the best way to view the firm’s capabilities is not as a maker of GPS devices but a provider of navigational capabilities.  Making this jump enables TomTom to deploy an ever-widening range of high to low-value solutions configured in the way that customers want to use them.

We have a favorite little saying that we use frequently:  Pricing problems are almost never about price.  Pricing problems usually arise when companies miss the mark on what customers value and fail provide offerings that customers really want to buy.  Incumbent competitors can be particularly susceptible when customer needs or tastes change.  Reacting with price cuts will only make the situation worse.  Rethinking what you do to provide customers value and then creating new offerings- even if it puts the existing ones at risk – is the right way to go.  The folks at TomTom clearly get this and have shown the courage to act on it.

---

Possibly related posts: (automatically generated)

• It’s About the Strategy Stupid!
• The Diaper Economy
• How to Keep Your Pricing Dignity