Monday, May 08, 2006

ROCI #3: Tiered Excellence (Leatherman)

I used to be a Swiss Army man. I didn't go anywhere without my Swiss Army knife in my pocket.

As a scout camp staffer, this served me relatively well, except for two things: 1) I always ended up losing my knife, and 2) pliers were always a problem.

I lost two nice Victorinox knives on my mission, and shortly after I came home, I found myself looking for something better. I still remember standing at Gart's Sports poring over all the potential knife selections.

I finally found a Leatherman that I liked. The price was close to what I would have paid for a new Victorinox (the finer Swiss Army brand, in my opinion), the tool seemed well-milled, and I felt that it would end up more useful than my previous choices had.

Since then, I've bought four or five new Leatherman tools. I like them. I use them hard. I wear mine everywhere but church and bed. I currently carry Leatherman's premium offering, a Leatherman Charge XTi. I won't go into the features here, but I think it suffices to say; this tool does more than grab stuff and cut stuff.

What I really want to talk about here is Leatherman's use of tiering. All of Leatherman's tools are made of basically the same stuff. Sure, some titanium handles here and some really hard steel there make for small differences, but by and large, it's all just plain old stamped steel.

When I bought my Charge XTi, I gave my Leatherman Wave, their former premium product, to my Dad. I love my Dad, and I was proud to give him such a fine tool.

The Leatherman Charge and the Leatherman Wave are almost exactly the same tool. The main difference between them is that the Charge has about 1.5 ounces of titanium that makes up the handles instead of the standard steel that they normally use. I just checked, and titanium runs about $11.00 a pound, which translates to about $1.03 for 1.5 ounces. The blades and bit options are a little fancier on the Charge, and I'm guessing that the extra fanciness raises production costs by $5 or so, at the maximum, per tool.

So, at the outside, we're talking a $6 difference in actual cost between these two tools. Take a moment to guess the price difference between them on Amazon. Go ahead; you'll probably be pretty close!

It's about $25. I was willing to pay the extra $25 (actually more because the tool was new at the time) for the updated premium product because of fancier blades, titanium handles, and gee whiz factor.

Now, please observe the humble Leatherman Kick . It has the same Leatherman plier jaws as almost every other Leatherman model. It's made of the same steel. The knife blade is every bit as sharp as the factory-new edge on a Wave or Charge. And yet, it only costs $30.

It costs $70 less than my current Leatherman, and I'm confident that the company still makes a pretty generous margin on this item. And the Charge can't possibly cost $70 more to produce.

Likewise, the Leatherman Micra (pictured below), Pulse, and Core lines provide different features, price points, and similar build materials and quality.

You see, Leatherman wants you for a customer no matter how much you want to spend. If I only want to blow $25 on a knife that will jet around on my keychain, Leatherman has me covered. If I just want to buy someone a functional gift for under $50 that won't get scoffed at, Leatherman has a place for me. If you happen to be a MythBuster, you tote a Leatherman Wave. If you're an alpha geek and you pack a Leatherman Charge XTi, you paid $100 or more for your you-can't-get-this-at-Wal*Mart grin.

And tiered products are everywhere:
  • Dell wants you to spend money with them whether you're looking for an entry-level laptop for $450 or a fully-loaded XPS gaming laptop for $4832. (I pulled this price directly off of just now.)
  • The movie theater charges you for a tiered experience. Want to see the movie on opening day rather than in a dollar theater? Want popcorn? Soda? Video games? These are all experiential add-ons that the theater knows some people are willing to pay for and some aren't.
  • Why do some MagLights take six "C" cell batteries while others only need two of them? Product tiering.
  • Why does Sony offer me 150 TV models between the 1.5" portable LCD TV for $75 and the 52" DLP High-Def set for $7500?
  • Why are there so many different Nintendo GameBoy models?
  • Why are there about 8 different kinds of Coke at the supermarket?
  • Why is there a big Wal*Mart in my city that's a couple of miles away and a little Wal*Mart that's only two blocks from my house? (Hint: Prices are not always the same at these two Wal*Marts.)
  • Why do private schools exist at all? (Sometimes a whole business is a single tier.)
What I left out above about Leatherman is that I have used their warranty. Did you know that Leatherman's standard warranty is 25 years? 25 YEARS! If my son breaks my Charge in 15 years when he's 19 years old, Leatherman will replace it for free.

Again, if the kind of business insight you need is "Offer an excellent product and give really good warranty service," then this is not the place for you. Clearly, running a market-leading business must involve the concepts embodied above. But to really kick some proverbial ass in the marketplace, it will sure help to have a firm grasp on this:

Jake's third rule of customer interaction:

Tier your product in such a way that you will serve budget, mainstream, and premium users. This will keep customers on the premium end from going to a competitor for features and quality, and it will keep customers on the budget end from looking to competitors for a better deal. It will also establish brand loyalty because it encourages customers to buy more products for different locations and tasks, complete collections, and transition to different product tiers.

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