Xoom: Pricing is Wrong, Costing is Wrong or Playing for the Niche

Posted on by Rags Srinivasan

Update 7/7/2011: Motorola cuts Xoom prices by $100.

In my last article, Why there is no 16GB Xoom, I raised two possibilities

  1. It costs them $600 to make Xoom
  2. Their costing is wrong – they incorrectly allocated a share of their fixed costs to every Xoom there by getting an inflated cost number compared to true marginal cost

Yesterday, iFixit did a tear down analysis of Xoom and found that the marginal cost is not much different from that of 32 GB iPad 3G.

So why is Xoom priced higher even though it is a new entrant with no track-record (like iPod touch, iPhone)? In an investor conference, Motoral CEO Mr. Jha said,

“Xoom deserves its higher price tag because of its quality and the free upgrade to 4G”

No product deserves higher price tag just because of its quality or because the marketer believes so.  Customers decide whether or the higher price tag is worth it.

Even if Motorola believe there is higher value to the customer and customers agree with that value proposition,  the reference price set by Apple brings down the price they can charge.

It is highy likely they got costing wrong. They may not be just looking at the cost to make each unit, like iFixit did, but including a share of their R&D, Marketing, other company overheads like executive salaries and other investments to each Xoom.

The next step in this slippery slope is to tack on a percentage margin and set a price, regardless of what the customers value, because all their products must meet an artificial percentage margin target.

There is yet another possibility. They are yielding the mass market to Apple and want to target only those customers who desperately need a tablet that is not an iPad and hence are willing to pay higher price for a non-iPad. It is not a recommended move when the market is just getting defined. There is no reason to slice a small niche within a niche especially when tablets threaten the PC market.

Net-Net, not having value based pricing, not having versions or pursuing a niche strategy are all bad moves.

We should expect significant price drop real soon, like after tomorrow.