(Disclosure: Testmasters, a Princeton Review competitor, is a client of mine.)
When it comes to entrepreneurs, management experts, professional communicators and other careerist business junkies, the dream of becoming a top brand in the marketplace is near the top of the list.
The point of business is to make money, so topping almost all competitors in an industry is a sign of high performance.
But it’s not easy to get to the top.
In fact, it’s easier to stay on top than it is to get there in the first place. Once you are in the top two in a category, the competition has to work hard just to keep up, much less catch and surpass you.
And not every major brand sticks around forever.
Studebaker was once the number one luxury car. Now, it’s out of business.
Yahoo! was the number one search engine. It’s still number one… in Japan.
As for social networks, you might have heard of a site called MySpace. Needless to say, it’s no longer number one.
The most recent industry to see the fall of a leader, though, is perhaps less exciting than luxury cars, social networks and Internet search. At the same time, it’s an industry that most adult Americans have heard of:
The test prep industry is worth $4.5 billion, a small sum compared to that of most major tech sectors but still more money than most people (and some countries) will ever see in their bank accounts.
Test prep services have succeeded largely because of the essential nature of standardized tests in the college admissions process. Two thirds of Americans go to college, and most colleges require you to take at least some kind of standardized test (maybe even multiple tests) just to get in.
And Princeton Review has capitalized on that trend.
The first test prep company to teach students how to beat standardized tests was Kaplan Inc. Princeton Review was started in 1981 and rose to dominance in the industry within a matter of roughly ten years.
The company was able to create a strong brand in the test prep industry, eventually growing in popularity and rivaling Kaplan Inc., the market leader, for dominance in the industry. Given that Kaplan is the original player in the industry and was a general force to be reckoned with for a long period of time, Princeton Review’s performance was mighty impressive.
Excellent marketing and intense research and development helped them build their brand up over time and put them on an impressive test prep pedestal.
Over the last few years, Princeton Review has been hemorrhaging cash, losing dollars with every twist and turn. Since late 2007, its stock has dropped from a bit under $9 to – gulp – ten cents! In 2010, it lost $50.4 million.
Just last month, Princeton Review finally hung up its test prep hat forever, selling its test prep unit to a private equity firm.
So what was the #2 pencil that finally broke the camel’s back?
Princeton Review figured that it could do anything related to education: admissions, scholarship hunting, general college assessment, and online education (something it now plans to focus on). Rather than sharpen and maintain its advantage in its main category, it extended its reach to related categories.
The problem with that is that, as you might know from word association, it doesn’t take long to enter categories you know nothing about.
Ben and Jerry’s is great when it comes to ice cream, but it might not fare so well if it decided to start selling spoons, bowls, sugar and napkins.
There’s a relationship between the products, but it isn’t strong enough to start entering industries with abandon.
And with each new industry a company enters, its focus becomes thinner, losing more and more of its understanding and dominance of its central category. In test prep, that means cheaper courses that are less effective and get less word of mouth buzz.
Contrast this entire idea with, say, that of Testmasters, which focuses only on standardized tests. The company can maintain its guarantees, achieve strong word of mouth, and continue to own test prep, just like it was meant to.
All of a sudden, POOF! Goodbye market advantage, hello losses for Princeton Review.
So what can you do if your company is in Princeton Review’s position?
Nothing. At some point, it becomes impossible to go back to your strengths.
But if you work in a hamburger shop and your boss starts mulling over whether or not you should enter the condiments business, advise against it.