Offering products and/or services at premium prices requires tangible differentiation, at least if your goal is to acquire new customers and grow revenue. This applies equally to technology products as it does to sporting events, for example. Differentiating on nuances alone can win niche business from aficionados and experts, but you need very obvious benefits if you are to convince the mass market to pay you a premium over the competition. The great thing about obvious (tangible) differentiation is that it appeals both to laymen as well as aficionados.
Formula 1 Racing’s Differentiation
If you’re not familiar with Formula 1 racing, I’ll summarize it for you: it’s the pinnacle of motorsports, recognized worldwide, where teams spend hundreds of millions of dollars per year to compete for two championships simultaneously. The cars are closer to fighter jets than to even the most expensive sports cars you see on the street. Sponsors pay tens of millions of dollars per year just to have their livery show up on television. TV rights cost tens of millions of dollars (or more) per year in most markets. The sport boasts classic, expensive names like Ferrari, Mercedes Benz, and Lotus. Celebrities and even royalty flock to races in such exotic locales as Monte Carlo. It’s been said that NASCAR drivers watch Formula 1 religiously on TV, even while preparing for their own races. Simply stated, this is not your average racing series – it’s above all others, and it’s global.
There are 3 types of Formula 1 fans:
- Die-hard aficionados, such as the famed Tifosi who follow Ferrari all over the world
- Celebrities, politicians, and royalty who may enjoy the racing, but enjoy the glamour and attention even more
- Average racing fans from all over the world, many of whom already follow some other form of motorsport (e.g. NASCAR, Indy Car, Australian supercars, DTM, etc.)
Can you guess which one is the most important demographic for the growth of Formula 1 as a business? That’s right, average racing fans. This is no different than any other business – consider the customer demographics for any premium technology brand:
- Die-hard enthusiasts and experts who are 100% loyal
- “Fan boys” who don’t fully understand the technology, but know it’s “cool” to own it (and want to be seen with it)
- Average consumers of average competing products
Quite obviously, the revenue growth is in convincing the third demographic to spend more on the premium product. The first group won’t grow nearly as fast, and the second group is likely to grow with an increased customer base anyway. The average consumer is where the explosive growth lies, whether you are selling smart phones or tickets to a race. There are far more potential customers in that third category than in the first two combined.
Formula 1 tickets for the 2014 British Grand Prix in July are advertised as starting at 85 Euros per person. This is general admission, not seats. Parking, transit, and lodging is of course extra and highly inflated during the race weekend. NASCAR Sprint Cup tickets for this year’s race at Talladega start at $45 for grandstand seats, effectively less than half the price of sitting on the grass for Formula 1. No doubt the racing is completely different – but to average race fans, it’s still racing: loud engines in fast cars screaming by each other. Did I mention loud engines?
This year’s Formula 1 regulations effectively muted the cars. Anyone who’d ever attended a race or seen one on TV could instantly recognize the insanely loud, high pitched whine of engines turning twice as fast as even the fastest sports cars on the street, and producing at least 2-3 times the horsepower. It’s a sound that is unmistakable. Imagine a jet engine, but louder and higher pitched, and much more mechanical sounding. That pretty much describes it. I’d bet 9 out of 10 people who ever attended a Formula 1 race would mention the sound of the engines right away if you asked them about the experience, even though they wore ear protection. No other racing series in the world sounds anywhere close to it – tangible differentiation for sure.
Average race fans won’t necessarily understand (nor care) about down force levels, braking efficiency, DRS, KERS, or any of the myriad of other technical differentiators in Formula 1 vis-à-vis other motorsports. But the sound of the cars is unmistakable. If you are watching a Formula 1 race, you know for sure it’s Formula 1 and not Indy Car, for example, even if you know very little about racing, and even if you close your eyes. That is, until 2014.
For this year, the FIA (Formula One’s governing body) decided it was time to go “green”. The cars are hybrid, and feature powerful small displacement turbocharged engines. Let’s not confuse this with an average Toyota Prius – they still get horrible gas mileage compared to even the largest gas guzzling SUV’s on the street. Fuel flow is restricted, but again, it’s still racing. Estimates say they use 30% less fuel on average than they did last year. This is a good thing, of course, but at a terrible cost. The new engine and exhaust regulations have completely muted the engines. They sound more similar to street cars than proper racing cars. Again, they still sound racier than your average family car, but not nearly as racy as they used to. And worse, to the untrained ear, they don’t sound too different from other racing categories – in fact, they are generally quieter. Quiet and nondescript is certainly not desirable, but the series was betting on drawing more fans by impressing them with the myriad of new technologies in the cars. This is an arrogant position that ignores market realities. The one differentiator that was clear as day is now gone, and judging by the overwhelmingly negative response from existing fans, it’s unlikely to attract new fans at the prices it demands. Think of Formula 1 as the richest, most decadent chocolate cake. This year, the slices are smaller, there’s 30% less butter, and it tastes the same as anything an average grocery store sells in its bakery. But it still demands a premium price, and it’s likely to go up, not down.
Premium Chocolate Cake is not Health Food…
…nor should it ever masquerade as that, especially if it comes at the expense of flavor or texture. It’s not enough that sommeliers can smell the difference in your cake and pay extra for it. You must trigger the equivalent of an out of body experience in the average chocolate cake eater to get them to pay more for your treats. Chocolate cake is really good, whether premium or not, especially if you are not a connoisseur. If you like racing cars and are not an expert in racing car technology, Indy Cars and Formula 1 cars are not that different now, so why would you pay the premium?
The 2014 Australian Grand Prix Aftermath
As you might expect, almost all the outrage after the inaugural race of the 2014 Formula 1 calendar is focused on the muted engine sounds. The Australian Grand Prix organizers are considering legal action for breach of contract, claiming the sport has lost sex appeal. Fans are overwhelmingly disgusted and very vocal about it, all over the media and the blogosphere. Formula 1 supremo Bernie Ecclestone himself is leading an effort to improve the sound. Formula 1 politics are complicated, but just appreciate that this billionaire knows a thing or two about making money with racing cars. It’s unlikely that existing fans will turn away, constructors will start a rival series, or television networks will avoid renewing contracts. But far more dangerous is that new fans will take their money elsewhere, meaning stunted revenue growth and very angry investors. 2-3 years from now, it’s quite likely the FIA will change things up again, but by then the sport may have lost too much momentum to continue demanding a premium in all markets. As a very dedicated fan, I am disgusted, but I won’t leave the sport because I appreciate all the other nuances and differentiators. However, I will have a very hard time convincing others to start following it now that the most tangible differentiation is gone. Put another way, being “cool” doesn’t carry you too far if you stop doing the things that made you cool to begin with.
Let the lessons of the 2014 Formula 1 season so far resonate in your premium product development. If you can’t grow your revenue stream because you can’t convince average consumers to buy it, chances are your investors will take their money elsewhere. Tangible differentiation is very important to acquiring new customers, especially if you demand premium prices.