Cheap and decent trumps quality

Steve Jobs introduced the iPad earlier this year by noting that if a product wasn't "far better" than what was already out there it had "no reason for being." But that thinking flies in the face of how much of the retail world works - that is, selling things that aren't bad and cost less can be preferable to selling things that are good and cost more. The New Yorker's James Surowiecki writes that for many companies the key to success isn't excellence but well-priced adequacy.

In many businesses, high- and low-end producers are taking more and more of the market. In fashion, both H. & M. and Hermès have prospered during the recession. In the auto industry, luxury-car sales, though initially hurt by the downturn, are reemerging as one of the most profitable segments of the market, even as small cars like the Ford Focus are luring consumers into showrooms. And, in the computer business, the Taiwanese company Acer has become a dominant player by making cheap, reasonably good laptops--the reverse of Apple's premium-price approach.

While the high and low ends are thriving, the middle of the market is in trouble. Previously, successful companies tended to gravitate toward what historians of retail have called the Big Middle, because that's where most of the customers were. These days, the Big Middle is looking more like "the mushy middle" (in the formulation of the consultants Al and Laura Ries). The companies there--Sony, Dell, General Motors, and the like--find themselves squeezed from both sides (just as, in a way, middle-class workers do in a time of growing income inequality). The products made by midrange companies are neither exceptional enough to justify premium prices nor cheap enough to win over value-conscious consumers. Furthermore, the squeeze is getting tighter every day.

Thanks to economies of scale, products that start out mediocre often get better without getting much more expensive--the newest Flip, for instance, shoots in high-def and has four times as much memory as the original--so consumers can trade down without a significant drop in quality. Conversely, economies of scale also allow makers of high-end products to reduce prices without skimping on quality. A top-of-the-line iPod now features video and four times as much storage as it did six years ago, but costs a hundred and fifty dollars less.