Cherry-picking

tauringhuang.

Jul 21st 2008
From Economist.com

The idea of cherry-picking applies in a number of business contexts. It refers, for example, to customers who ignore products that are bundled together by a manufacturer (who in the process may disguise cross-subsidies between high-margin and low-margin components of the bundle). Such customers prefer to bundle their products together for themselves, selecting the best value (that is, cherry-picking) from each category of component.

An obvious example is the purchase of music systems. Manufacturers sell music sets, made up of an amplifier, a tuner, an iPod docking station, a CD player and speakers. But many music enthusiasts choose to assemble their own sets, buying their amplifier, CD player, speakers and so on, each from a different producer. Manufacturers try to discourage this by making the price of the complete set competitive. But earnest cherry-pickers can usually find discounted components that enable them to assemble something cheaper.

The term cherry-picking is also applied to the behaviour of new entrants into old industries, firms which try to choose their customers carefully. By calculating which consumers are profitable (and appealing to them while ignoring those who are not) such a firm can sometimes rapidly gain market share. In some cases, cherry-pickers are successful only because traditional firms in the industry do not actually know who their profitable customers are.

Service industries are particularly vulnerable. It is more difficult for them to measure the profitability of individual customers and customer segments. So they are never quite sure which they want to keep and which they want to get rid of. Successful cherry-pickers leave an industry’s incumbents with the least profitable customers. They also push up the price to those consumers who are not attractive to them. In car insurance, for example, cherry-picking in the UK pushed up the price prohibitively for young male drivers, the highest-risk group.

A bunch of new airlines set about cherry-picking when deregulation of the skies in Europe and the United States allowed them into the market. Within limits, they were able to choose which routes to operate on. They were unencumbered with the obligations that the traditional national carriers had had to bear in the interests of government policies on transport and/or regional development.

In banking and insurance, cherry-picking newcomers were able to undermine the business of old-timers in just a few years at the end of the 20th century. Firms such as Direct Line, a British telesales insurance business, rapidly won market share by focusing on a narrow (profitable) segment of the market and avoiding costly traditional distribution channels.

The success of cherry-picking emphasises something known as the survivorship bias: the tendency of business analysts to judge the past by the record of relatively long-term survivors, ignoring those who drowned or came and went in the meantime.

Further reading
Goetzmann, W. and Jorian, P., “History as written by the winners”, Forbes, June 16th 1997

More management ideas
This article is adapted from “The Economist Guide to Management Ideas and Gurus”, by Tim Hindle (Profile Books; 322 pages; £20). The guide has the low-down on over 100 of the most influential business-management ideas and more than 50 of the world’s most influential management thinkers. To buy this book, please visit our online shop.