Consumer Electronics: Innovate or Die

Here are four ways the industry can fix what's broken and revamp its business strategies

In May 2008, The Wall Street Journal reported that 11%-20% of all electronics goods are returned. Sony's (SNE) senior vice-president, Mike Abary, explained that defects "aren't even the top three reasons for returns." The top reason? The products "didn't meet expectations." According to the article, an Accenture report shows that it costs the U.S. electronics industry $13.8 billion to rebox, restock, and resell the returned items, eroding the industry's ability to attract and then create loyal customers. Quite a high price to pay for a problem that has a solution.

This becomes especially poignant given the current decrease in spending on consumer electronics (CE). Data from MasterCard Advisor's retail service showed holiday sales for this sector plummeted 26% from 2007. To survive the market shifts long-term, CE companies need to view this extraordinarily challenging period as an opportunity to innovate, to fix what was already broken, and revamp their business strategies. It'll take a lot more than blanketing the media with clever ads. Here are four recommendations to consider:

Know your customer

The problem at the heart of the industry today is that CE companies still design for their original, early adopter geek audience. Tech geeks drove the development of the CE industry when it was new and there was a steep adoption curve. But, now that grade schoolers and hockey moms carry iPhones, consult their GPS for driving directions, bank online, and share family photos on Flickr, CE companies need to do more than rely on consumer curiosity to stay alive. The digital lifestyle is no longer one-size-fits-all, and today's impatient and fickle mass consumer expects more than the complicated, unsatisfying out-of-the box experiences that have become an industry norm.

Create a 360-degree experience

CE brands need to match the right product to the right consumers and then connect with them meaningfully at every point of contact. The "360-degree experience" includes everything from packaging, design, and marketing to after-market support such as programs to help customers discover product benefits, end-of life recycling programs, and user support executed with the care of a concierge service, rather than with the complication and delay of an overwrought bureaucracy.

It's true, we need an example other than Apple (AAPL) to demonstrate a successful 360-degree experience, but Apple nails it every time. They do not try to be everything to everybody. Packaging is elegant. The product is beautifully designed. Set-up is simple. Support is available (though there is room for improvement here). Messaging is consistent and clear at every touch point.

Make meaning: Right now, CE companies start losing before they've even said "hello." Research for our own CE clients, such as Logitech (LOGI), has revealed that consumers are overwhelmed and confused at retail stores like Circuit City (CCTY.Q) (no doubt a contributing factor in its recent bankruptcy filing).

People we tracked on "shop-along" research trips found it impossible to discern the meaningful difference between, say, a $40 mouse and a $70 one, let alone penetrate the chaos that is the flat-screen TV section. Navigating the many dozens of options marketed with buzzwords like "plasma," "digital," or "720p LCD" was daunting, and many potential customers we tracked left the store without making a purchase. So the industry can add "loss of sale" to their return losses as well.

Few of our shoppers visited manufacturer Web sites for information. Rather, they used third party sources such as CNET, customer reviews on Amazon (AMZN) or the advice of their peers. It's no surprise, then, that there is little-to-no brand loyalty. Except, of course, for Apple who has succeeded in translating geekspeak, like "120GB," to terms anyone can understand, like "30,000 songs." The CE industry needs to stop talking techspeak and speak in terms that mean something to the rest of us.

Tell the truth

If products do make it home, many don't make it past the out-of-box experience. Not everyone is an early adopter with an appetite (or tolerance) for splashing around a sea of techspeak to deal with hours-long product set-up guided by confounding directions, little-to-no customer support, and lots and lots of wires.

The Magellan GPS navigation system, for example, begins with a jumble of parts. Setup requires about half a day. Mac users learn late in the process that setup requires a PC. Meanwhile, the Roomba robot cleaner packaging promises it will "clean routinely so you don't have to." The Roomba itself, however, requires cleaning and maintenance after each use, making it more suitable for the gadget freaks who love to endlessly tweak their technology than the suburban housewife to whom it is marketed, who's looking for hassle-free cleaning convenience. CE companies need to clearly communicate what their products are about and who they are for.

As CE firms gear up for the annual CES show in Las Vegas, which kicks off on Jan. 8, the industry stands on the precipice of a great opportunity: to not only survive the short-term economic crisis, but also to create lifelong brand loyalists from a mass of disenfranchised, frustrated consumers—and recoup the current $13.8 billion in losses. One thing is clear: Huge rewards are possible for companies and consumers alike.

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