Parametric analysis and the iPod

I came across a great video covering Steve Jobs' introduction of the first iPod. It's an interesting watch because it tackles the assumption that Apple are unique in their abilities to predict new products.

I'm not taking anything away from Apple - they're smart enough to use these tools, so they deserve full credit. In this instance the tool is parametric analysis, which is a way of spotting innovative opportunities.

All you have to do is compile a bunch of data about competing products and technologies, and display them on a chart. An example is hard drive capacity - if I plot storage capacity against price for 50 competing products then I'll quickly get an idea of where the norm lies. This provides the benchmark against which my product will be measured.

As in any chart there'll be seeming anomalies (for instance, a drive with 2 terabytes of storage, or which only costs £20). These indicate market niches, and can represent innovative opportunities. I can then make the assertion that hard drives are likely to get bigger, and start marketing a 3 terabyte drive. Conversely, I could market a drive for £10 if I thought that price was the leading factor. Sometimes a certain segment of the market won't be catered for (perhaps there's no 750 gigabyte drives) which also represents an opportunity.

Obviously price and capacity aren't the only criteria worth comparing - speed, size etc. are also very important, and can be plotted separately. Some of these charts will be useless, but one or two of them should provide real insight.

In the case of the iPod, by plotting the number of songs which can be stored on each kind of storage medium the market opportunity was obvious. Why? Because there was an order of magnitude difference between existing systems and the iPod.

When marketing a product the rule of 10 applies. Consumers don't get excited when something is just a few percent better, but when something is ten times better then that's revolutionary. For instance, Amazon didn't just stock the same number of books as a local book store - it stocked 10 or 100 times more. These opportunities don't come along every day. In fact, they're incredibly rare, and usually represent a step change in technology. But when they do occur they're huge opportunities because the resulting product is markedly better.

So Apple knew that having 1000 songs was significantly better than having 10 songs. What did they do next? They outsourced a lot of the hardware development, got the Apple Design team to make it as attractive as possible, and purchased what was to become iTunes. Apple could have developed all of the hardware and software in house, but they decided not too. Instead they captured the innovative opportunity as quickly as possible, and the rest is history.

I don't propose that entrepreneurs sit around drawing graphs all day, but if you are considering a new venture, then parametric analysis is a useful way of analyzing a market. You never know - it might just lead to the next iPod.