Storytelling is the new real estate super skill - Follow up

Bayeux - 11th Century

In yesterdays post I wrote ‘It will be hard to wean a customer off a competitor who knows them much much better than you do. It’ll be like trying to get an iPhone user to switch to Android, or vice versa. The switching cost will just be too high.’

Someone has since asked if I could elaborate on the iPhone vs Android analogy, and how high switching costs might apply in a real estate context.

So here goes.

Within the smartphone market 70% of users run the Android operating system and 29% run iOS, the iPhone’s operating system. Just 1% use something else. This has been constant for many years, as very few people swap from Android to iPhone, or vice versa. Both operating systems have very high ‘lock-in’, meaning that once a customer makes an initial decision that tends to be it. They will be a customer for life.

The reasons for this follow a pattern in the tech industry where the ‘switching costs’ for a consumer to move from one technology to another rise over time. The more a technology becomes tuned to the specific needs of individuals the harder, or more painful, it becomes for them to cast what they know aside and learn, and teach, another technology what works for them. This function of lock-in explains why companies can afford a high ‘customer acquisition cost’, because once a customer, their ‘lifetime value’ will be very high. 

What is really instructive within the smartphone market though is that despite the much smaller market share, Apple, via the iPhone, make easily the most profit. For example, in Q2 2021, only 13% of global handset shipments were iPhones but these generated 40% of total revenue and an extraordinary 75% of operating profit.

Why is is? It is because the iPhone is a much more tightly integrated package of hardware, software and services than any Android phone. Apple ruthlessly control the user experience of their devices. Indeed it is the user experience offered by the iPhone that gives Apple so much pricing power. They have spent years creating and curating this user experience and it is this which most customers buy in to. An iPhone is an emotional rather than functional purchase, and this has allowed Apple to pretty much own the high end of the market. In Q4 2020 the iPhone had 65% market share in the US. Most of the expensive, high margin smartphones purchased globally are iPhones.

Which explains why I advocate so strongly for real estate people to think of ‘Office as iPhone’. Where instead of just thinking about the ‘hardware’ of real estate, one thinks about the overall user experience of space that can be delivered if one controls the hardware, software and services of any space, or place. Where one designs ‘workplace as software’ that is never finished but is constantly being iterated based around the mantra of build, measure, learn. You build something, you measure how well it performs against specific criteria, you learn from this data, and then you re-build. And you repeat this constantly. A tweak here, a tweak there, on a rolling basis, based on feedback from users, and from the building itself.

The UX, or user experience of real estate is a function of qualitative and quantitative factors. And there are many of these that need to be tracked. But in essence it is a matter of understanding how individuals ‘feel’ that their workspace is enabling them to perform as best they can (the qualitative factors) and how the workplace is performing in environmental terms (the quantitative factors). Critical amongst these are temperature, noise, lighting, and air quality. To what extent are these perfectly optimised to allow every individual the opportunity to perform their ‘jobs to be done’ with their maximum cognitive firepower? Put simply, the environment we are in impacts on our cognitive function. If we can put our customers in environmental conditions that have no detrimental impact on their cognitive function, then we are enabling them to be as productive as they are capable of being.

With our real estate hats on we cannot make a badly managed company better, but we can at least not make things worse. For a well managed company we definitely can help them be their best. The key point is that no company actually wants an office; what they want is a productive workforce. Our job in real estate is to help make this happen.

So, returning to the original question of how switching costs might manifest themselves in a real estate context, the answer is that by thinking of real estate as hardware, software and services, by continually monitoring defined KPIs, and then on an ongoing basis optimising the space based on this data, we can provide our customers with workplaces that are finely attuned to their specific needs. We can provide demonstrably better working environments than if we did not operate in this way. And over time, this knowledge will act as a ‘lock-in’ to our customers. They could go elsewhere, but then they’d need to start again in training the space to function in an optimal fashion.

Put simply, space that is optimised for you, is hard for you to give up.