Industry Analysis of the Premium Headphones Market

Date: Dec 20, 2018

Executive Summary

This business report provides an industry analysis of the premium headphones market using Porter five forces analysis. Then, it explores the marketing and growth strategies used by Beats by Dre in its expansion and survival. Porter five forces analysis is a crucial tool that enables to evaluate the attractiveness of an industry; hence, it can be used in the development of a business strategy. The premium headphones market reported a high intensity of rivalry, high buyer power, low supplier power, low threat of substitute products, and medium threat of new entrants. Therefore, it can be inferred that the premium headphones industry is averagely attractive. Despite the fact that the premium headphones industry is averagely attractive, Beats by Dre has managed to achieve an exceptional growth that is above the industry average. This is because of its marketing efforts such as multiple distribution channels, premium pricing, and promotional strategies, like celebrity endorsements. In addition, market growth strategies such as diversification of its product portfolio have also contributed significantly to the expansion and survival of Beats by Dre.

Introduction and Background

During the period 2010-2012, Beats by Dre reported a fivefold increase in its revenues, reaching at least $ 1 billion (Sanburn 2013). As for 2013, Beats by Dre had an estimated market share of 64 percent in the United States, which has been attributed to its effective marketing and association with pop culture (Sanburn 2013). Given the unprecedented growth reported in the premium headphones market, the goal of this paper is to perform an industry analysis of the premium headphones market using Porter five forces method and then to narrow down to the marketing strategies adopted by Beats by Dre in ensuring its expansion and survival.

Findings

Porter Five Forces Analysis, its Purpose and Business Benefit

Porter five forces analysis refers to a tool that is used in assessing the degree of competition in an industry. As a result, it plays a crucial role with regard to the development of a business strategy. Porter five forces uses industrial economics in order to ascertain the five forces shaping the competitive intensity as well as the attractiveness (overall profitability) of a particular industry. The five forces framework includes supplier power, buyer power, competitive rivalry, threat of substitute products, and threat of new entrants. Supplier power refers to the relative ease with which suppliers are in a position to influence prices upwards; this depends on the number of suppliers, the costs associated with switching suppliers, the uniqueness of the products of suppliers, and competition for the suppliers input from other industries (Porter 2008). Buyer power refers to the relative ease with which buyers are capable of influencing prices downwards; this depends on the number of customers, importance of each customer to the business, costs to customers associated with switching brands, and sensitivity to price among others. Competitive rivalry denotes the capability and a number of competitors and is determined by factors such as the costs associated with leaving the market, loyalty from the customers, differences in products/services quality, and capacity of utilization among others. A threat of substitute products denotes the customers’ ability to find an alternative to the products/services being offered. The threat of new entrants denotes the ability of potential businesses to gain entry into the market, which depends on a number of factors such as cost advantages, cost and time of entry, barriers to gaining entry, economies of scale, access to the channels of distribution and suppliers, and any legal and regulatory restrictions that govern businesses operating in the industry (Porter 2008).

Porter Five Forces Analysis of the Premium Headphones Market

With respect to the competitive intensity, the premium headphones industry has a high intensity of rivalry. This can be attributed to a number of factors such as a highly saturated market with many competitors including Koss, Bose, Street by 50 Cent, Matador from Aerial 7, Beats by Dre, Sol Republic, Creative, Skull Candy, and Harman/Kardon among many others (Sanburn 2013). In addition, despite the fact that there are many competitors, Beats by Dre controls about 70% of the global premium headphones market share. The intensity of rivalry is also high because of the fact that tech industries usually have low entry barriers, which spurs up the level of competition in the industry.

With respect to the bargaining power of buyers, the premium headphones industry is characterized by the buyers who are overly sensitive to price, low dependency on a product, a relatively low buyer to firm ratio, no costs incurred with switching brands, having buyers presented with multiple alternatives, and great warranty. It is evident that the buyer power in the premium headphones market is high (Sanburn 2013).

With respect to the suppliers bargaining power, the premium headphones industry is characterized by several suppliers and economies of scale, owing to the fact that there is no customization of products, and besides, cheap materials are being used. In addition, there is the possibility of outsourcing some production functions. Therefore, suppliers have a low bargaining power in the premium headphones market (Sanburn 2013).

Regarding the threat of substitutes, there are relatively few substitutes for premium headphones. Essentially, the only substitute for premium headphones is low cost headphones. Premium headphones manufacturers only face competition from low cost headphones. Nevertheless, there are low switching costs when changing premium headphones brands. Overall, it is evident that the premium headphones market has a low threat of substitute products.

Concerning the threat of new entrants, the premium headphones industry is characterized by market saturation, extremely competitive constant technological advancements, decreasing manufacturing costs, growing sales in premium headphones, and average growth and sales. In addition, firms operating in other industries, such as mobile phone manufacturers, sports shoes manufacturers, and car manufacturers are diversifying their products portfolio to include premium headphones. Therefore, it can be inferred that the premium headphones industry has a medium threat of new entrants. The figure below summarizes the Porter five forces analysis for the premium headphones industry (Sanburn 2013).

Marketing Mix Adopted by Beats by Dre

The marketing mix refers to a planned mix comprising the controllable aspects associated with the marketing plan of a product, including description of the product, price, place, and promotion, which are usually referred to as 4P’s. When developing the marketing mix, marketers usually adjust the four components in order to come up with a right combination that addresses the customers’ needs. The marketing mix adopted by Beats by Dre will be analysed in light of the 4Ps.

The product refers to the item that the company is offering in order to meet the needs of consumers (Dess, Lumpkin & Eisner 2006). With respect to the product component of the marketing mix, Beats by Dre comprises a variety of premium accessories and products, including speakers and headphones. An advantage associated with Beats by Dre is that they are wireless and available in diverse colours and styles. Beats by Dre are offered in various sizes and styles as well as unique colours, such as white, blue, red and black among other colours.

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Price refers to the amount that customers pay to buy the product. With respect to price, Beats by Dre makes use of a premium pricing strategy, which is a pricing strategy characterized by pricing near or at the possible highest end price with the primary objective of attracting consumers that are status-conscious (Sanburn 2013). In addition, high pricing is used for reinforcing and enhancing the image of the product as a luxury commodity in the eyes of consumers. The price range of Beats by Dre is $99-400. Beats by Dre makes use of its high price in order to ensure that it propels “a high quality” image among the consumers.

Promotion refers to the communication methods that a company uses in providing information regarding the product to the consumers (Dess, Lumpkin & Eisner 2006). Beats by Dre makes use of a number of promotional strategies such as celebrity endorsements, whereby a number of high profile celebrities, including Robin Thicke, Lebron James, Justin Bieber, and Dr. Dre, have endorsed the product. Beats by Dre is also continuously advertised through avenues, such as music videos, advertisements in magazines, advertisements at websites, and television advertisements.

The distribution/place aspect of the marketing mix entails ensuring that the consumers can access the product in a manner that is convenient (Danneels 2002). In this regard, Beats by Dre makes use of a number of strategies, including retail distribution, electronic commerce, and product integration. With regard to retail distribution, Beats by Dre are stocked and sold by the authorized retailers, such as Apple’s stores and selective distribution stores across the globe. Beats by Dre has authorized retailers in Latin America, North America, and Europe, which comprise the company’s main markets. With respect to e-commerce distribution, Beats by Dre products are sold via large e-commerce websites, such as e-bay and amazon. In addition, consumers can make a direct purchase through the company’s website. With respect to product integration, Beats by Dre products are integrated into products of other partner companies, like Chrysler, HTC, and HP (Leopold 2014).

Ansoff Growth Matrix, its Purpose and Business Benefit

The Ansoff growth matrix refers to a planning tool that assists organizations to ascertain their market and product growth strategies. According to the Ansoff’s growth matrix, organizations try to grow by either marketing existing or new products, in either existing or new markets. The Ansoff’s growth matrix produces growth strategies that an organization can adopt in accordance with its business strategy (Danneels 2002). The growth strategies include market penetration, market development, product development, and diversification. Market penetration strategy involves the company trying to grow by utilizing its existing products/services in the existing markets. Namely, the organization attempts to boost its market share from the existing market share. Market development strategy is characterized by an organization trying to expand its operations into new markets using its current products/services offering. Product development strategy is characterized by an organization trying to expand its product portfolio by developing new products/services for its current market (Danneels 2002). Lastly, diversification is characterized by an organization trying to achieve growth through the introduction of new products/services in the new markets.

Strategies Adopted by Beats by Dre to Expand and Survive, Based on Ansoff Matrix

With respect to market penetration, Beats by Dre uses a large variety of products that emphasize quality and design in order to increase its current market share. Beats by Dre currently targets at the young, fun, and serious music listeners under the age of 18-34 years (Sanburn 2013). In addition, Beats by Dre has relied on marketing and innovation in order to acquire and expand its market share. In this regard, Beats by Dre has been positioned to be different from other headphones in the sense that it allows people to hear all kinds of music as perfected in the studio. Beats by Dre has been marketed as being capable of handling the detail, basis, and dynamics associated with the studio quality music. This positioning has played a significant role in helping Beats by Dre to acquire, maintain, and expand its market share.

With respect to market development, Beats by Dre does not have a strategy to expand its market beyond its current target market, at least in terms of demographic segmentation. Since its inception, the target market of Beats by Dre was clear, and the company has not adopted any measures to expand the scope of its target market demographically.

With respect to the product development, it is evident that Beats by Dre has tried to expand its product portfolio to include personal audio, Beats Audio, and Beats Music. Personal audio comprises the Beats by Dre premium headphones, which is its main product line. Beats Audio entails the company partnering with HP to provide personal computers having Beats Audio systems; an example is the HP Envy product line. In addition, HTC smartphones are currently being produced with Beats Audio Software. Another product developed by Beats by Dre is the Beats Music, which is an online digital music subscription service that streams music (Leopold 2014).

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Regarding the diversification, Beats by Dre diversified its product portfolio to include car audio, where Beats entered into a deal with Chrysler LLC to produce audio-systems that are Beats-branded for its vehicles. It is evident that this product did not target the same customers as in the case of premium headphones market.

Conclusion

From the discussion, it is evident that Beats by Dre has managed to successfully position itself in the premium headphones market. Porter five forces analysis reveals that the premium headphones industry is averagely attractive. However, Beats by Dre has managed to achieve an exceptional growth that is above the industry average, which can be attributed to its marketing efforts, such as multiple distribution channels, premium pricing, and promotional strategies like celebrity endorsements. In addition, market growth strategies, such as diversification of its product portfolio, has also contributed significantly to the expansion and survival of Beats by Dre.

 

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