Trello and Siberian Cake Shop Owners

by Krishna on November 17, 2011

I was reading this amusing post on the Fog Creek blog by Rock Hymas illustrating Clayton Christensen’s disruption concept through the story of a cake shop owner in Siberia (!) who has some competition in the form of an ice cream stand. It is a good analogy, but it fails to explain why the cake shop owner makes the mistake in the first place. Let us take the example in the story and work through it.

The value proposition that the cake shop owner is offering is, “People want something sweet to eat after dinner. And this is Siberia. So it cannot be cold.”  But this proposition caters to only a subset of “People want a sweet dessert” because some of them don’t care whether it is hot or cold. So of this market, the cake shop owner is able to satisfy the people who want something sweet and not cold, and the people who want something sweet and can afford the cakes that are being sold. The ice cream vendor has an untapped segment of the market, i.e., the people who want dessert, but cannot afford cake. As long as he can sell ice cream at a cheaper cost, he will have some of those customers.

Here is where the blog post misses the boat a bit. Hymas assumes that the cake shop owner should recognize that many of his customers will like the ice cream because it is so much cheaper. To understand why this is wrong, think of a third vendor opening an M&M store. M&Ms are way cheaper than ice cream and cake. And a fourth vendor opening a Turkish Delight shop, not as cheap as the M&Ms, but cheaper than the cake. The question is, should the cake shop owner also add cakes sprinkled with M&Ms and sell Turkish delight confectionery?

There is no straight answer to that question because we have to ask other questions. First, how many price-conscious customers now decide to have dessert because cheaper options are available? Second, how many existing cake customers will decide not to have cake because some of their friends are now having ice cream? Third, is it profitable to provide ice cream options from within the cake shop? Fourth, will there be new ice cream competition that will undercut you by lowering even cheaper ice cream prices + less expensive cakes?

Or, in other words, why doesn’t every expensive restaurant offer fast food burgers and onion rings?

Courtesy NASA

If you are a business, there are many good reasons why you don’t want to offer an inexpensive product just because you will miss out on some customers. One important reason is that those customers are your least profitable ones. Every product or service has costs associated with developing and maintaining it (including customer service, returns, etc.) With lower-priced products, your margins are wafer-thin and sometimes negative, thus eating into the gains generated by your more expensive products.

Also, the way society works is that people segregate themselves along the fault-lines of product affordability. Some people don’t shop at less expensive places (such as Wal-Mart) because “people like them don’t go there”. Take a look at the charts in this post and ask yourself why if Apple is so profitable, is sitting on tons of cash and is trailing far behind in market share, can they not sell iPhones at a much steeper discount and make huge inroads into Android users? Well, Apple is an exclusive brand because once it ceases to be, Apple products don’t have rabid fans anymore. You don’t hear anyone brag about their iPods anymore, do you?

But the post was about how Trello is meant to disrupt FogBugz. So here are the questions that Fog Creek should ask themselves? Since Trello is free, what is paying for the development of Trello? (Answer: FogBugz/Kiln) If there is a new feature that could be added to both FogBugz and Trello, and you have to choose, which one will get the feature? (Answer: FogBugz) If a developer was previously working on FogBugz and is now working in Trello, what are the chances that he will be disrupted for some FogBugz question? (Answer: High) Vice versa? (Answer: Low) During Fog Creek management meetings for the next one year, what will be the ratio of time spent on discussing FogBugz versus Trello? (Answer: Low, and even lower if Trello doesn’t gain much traction) And finally,

Will Fog Creek introduce any feature in Trello that will make a paying customer of FogBugz abandon it for Trello? (Answer: Not consciously, but the first time they know that has happened, there are going to severe restrictions on what features are going to be introduced in Trello.)

To sum, disrupting yourself is a lot harder than it sounds, especially when it hurts the bank account.

{ 1 comment }

Cantankerous May 12, 2012 at 1:04 am

The premise is faulty. People assume they are in direct competition. The assumption is incorrect.
When all shops are providing useful products, it will draw a larger market share. Especially if they are all providing goods and services that compliment each other. You nearly got it with the question about the M&M’s on the cake. They will keep each other in business. Ice cream AND cake? Isn’t that a classic combination? Yes it is. This is an old world perspective. But it happens all the time. This is the modern problem of this age. One product, one service does not make an economy. Money is worth nothing if it isn’t in circulation.

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