The iPad mini Price Premium

A common analytical method in pricing is Conjoint Analysis. While this has evolved into far more sophisticated methods, at its core Conjoint Analysis is about finding how much utility different customers assign to different “features/aspects” of a product. If you know the utilities you can find how to price different product versions.

Here is a quick tutorial if you want to know more.

In the case of tablets you can think of iPad and Fire to be a collection of  features (or benefits) that customers assign perceived utilities. So when you add up the utility assignment for each feature you get the total utility.

Total Utility from Tablet = Fudge Factor +
Price Point ($199, $329)+
Utility from physical features (screen, wifi, etc) +
Utility from Brand +
Utility from Ecosystem

A few days ago Amazon ran a message on its main page comparing Kindle Fire and iPad mini, feature by feature.

The message essentially says Kindle Fire at $199 price point offers better features (by extension better utility) than iPad mini at $329 price point.

Likely true. But the point to note is the utility value from features is neither absolute nor intrinsic. It is perceived utility and it differs from segment to segment. Furthermore there are the “Fudge Factor” – the unknowns, Brand premium and Ecosystem Premium.

Apple likely found a sizeable segment – different from Amazon’s target segment – that assigns lot more value to Apple’s Brand and Ecosystem than they do for Amazon’s Brand and Ecosystem and hence is willing to pay $130 more for iPad mini. (Technically it is $95 more if you consider Fire without “Special Offers” and add price of Fire charger).

Amazon’s comparison is valid. But if the customer segments and their value allocation is not the same, then it does not matter that Fire packs better features at lower price. That is likely why Amazon decided to pull the Ad?

 

There is something about Kindle and $150 Sunglasses – Results from Conjoint Analysis

Let me start by stating that my previous article about Kindle positioning is most likely wrong and Amazon product managers have definitely done their marketing research well.  There is something about the segment that prefers $150 sunglasses and Kindle.

I will discuss only part of the results from my recently conducted conjoint analysis. I will not be providing here the detailed results, differences across gender and other analysis.

When Amazon introduced Wifi version of their Kindle (priced at $139), Mr. Bezos said,

“At $139, if you’re going to read by the pool, some people might spend more than that on a swimsuit and sunglasses,”

Amazon also ran TV Ads that talked specifically about $139 Kindle being cheaper than Sunglasses.

I did not believe that was a valid positioning, I believed (and wrote),

What job will these segments hire the e-Reader for? The same job they hire their $150 sunglasses for – to make a statement about themselves. For that job, they might be more inclined to hire an iPad than a Kindle.

I recently conducted a conjoint analysis by surveying the Haas Berkeley, MBA class of 2011 (thanks to Hrishika, MBA 2011 for providing access). I did not get enough samples from my twitter followers so I ignored all those samples.

A key finding of the study is, those who preferred $150 sunglasses also preferred Kindle more than they preferred iPad, nook or a $99 Generic eBook reader.

Among those who preferred $30 sunglasses, Kindle had 26% market share – tied for second place with generic eBook reader.

Among those who preferred $150 sunglasses, Kindle had 37% market share – the highest with a RMS of 1.34.

Better yet, my past claim that those who buy $150 sunglasses will also buy iPad is wrong. iPad had the lowest market share of 17% for this segment.

Clearly Kindle has a better chance among this segment and Amazon’s marketing campaign is capitalizing on that. That said, the Kindle Ads take on iPad on readability. It is likely that nook is the bigger competitor to Kindle for this segment than iPad.

The two types of specialized single task devices

In the NYTimes article on Kindle, Mr. Russ Grandinetti, Amazon’s vice president for Kindle content make his case for Kindle thusly,

“If I’m going on a 10-mile run,” he says, “I want a really well-designed pair of running shoes instead of Converse high-tops.”

Another example is cameras.“As good as the technology in my phone camera is, when my son has his third birthday party, I’ll use my 35mm S.L.R.,”

Both are valid examples but do not apply to the case of Kindle. A specialized, really well designed pair of running shoes is a premium product, targeting a small segment and is offered at premium priced. Same goes for a premium SLR camera. The one thing that Kindle does really well is not marketed as a premium feature and is definitely not priced as such.  Kindle isn’t the only single task device either – it is competing in a crowded field of eBook readers all using the same technology (and even the same manufacturer).

There are two types of specialized single task devices that appeal to different customer segments that are willing to trade-off price for benefits from these devices (you can find the segments and the trade-off function using Conjoint analysis):

  1. One that does the task extremely well and appeals only to a small segment that value the benefits more than they value the frills and hence are willing to pay a price premium for it. It stands relatively alone in its category and is not easily copyable. It adds little or no value to the rest of segments.
  2. One that does the task extremely well but nothing else  but is so inexpensive that customers do not mind buying them (like a mobile phone that can only make calls – not even SMS, alarms , camera etc) and do not mind losing them. These are like the dedicated sudoku gaming devices you pick up at Walgreens checkout counter while you are waiting to fill prescription.

Amazon’s CEO, Mr. Bezos stated that Kindle is a dedicated device for avid readers, 10% of the total market. But with the release of $139 Kindle their focus has shifted to making it a mass market device – to make people not think twice to buy Kindle and even make them buy one for each family member. That is not the sign of a premium device, the way it is priced now Kindle resembles the second category.

My hypothesis is, despite selling out Kindle at current prices, we have not seen the last of price cuts before the Holidays.

There is Nothing New in Marketing Except Catch Phrases

Marketing is about segmentation and targeting there is nothing more to it. Segmentation is recognizing that different people buy different products for different reasons and  finding those reasons, occasions, usage scenarios and hence what the customer is willing to pay for. Targeting is delivering versions that meets those reasons and customer’s willingness to pay. I started a new series of articles on what I called “Fidelity Trap“. As I said in the introductory post, this is  concept I based off of the concept of Fidelity, Convenience and trade-off  as used by author Kevin Maney in his book Trade-Off: Why Some Things Catch On, and Others Don’t and on the concept of congruence and traps used in a different context by  professor and author Henry Chesbrough (I did one course with him while at Haas School of Business).

If you take Maney’s book, the core of it is not new or groundbreaking – somethings catch on and others fail when the marketer fails to fully understand their segments and/or fail to target them with the right versions. By definition, products fail in the market place because of marketing failure. What Maney’s framework of  Fidelity and Convenience does is to  frame and group together different reasons, occasions and usage scenarios of the customers.

What about the Traps meme ? It is just another framework or my hope for getting a catchphrase. Traps result when a firm’s marketing strategy is inwardly focused, ignoring market evolution, or due to differences in customer’s stated preferences and behaviors.

In the Trade-off continuum, it is oversimplification to say Fidelity and Convenience are the only two factors involved in customer decision making. It should also be noted that customer utilities from these factors are functions of other variables independent variables. For the analytically inclined there are methods and tools like conjoint analysis that allow the marketer to find how much customers value the different features (be it a fidelity feature or a convenience feature), all other factors  and how to define versions and at what prices.

There is absolutely nothing new in marketing – only restatements, new mental shortcuts and of course catchphrases.

 

WSJ Charging For Mobile Version

If you are used to reading complete WSJ articles on your Blackberry of iPhone, the end is nigh. Starting third week of January they are going to charge for mobile access.

A mobile only subscription will cost $2 a week. For those with either a print or WSJ.com subscription, the cost will be $1 a week. People with both print and Web subscriptions will get full mobile access for free.

I think it is a great idea to charge separately for the mobile version. But the pricing is not perfect and needs adjustments to maximize profit. Let us analyze this deal and the prices of rest of their offerings (print, online only and the bundle) to see if there is room for increasing profits.

Print + Online Print Only Online Only Mobile Only
Weekly price $2.69 $2.29 $1.99 -
Weekly mobile price $0 $1 $1 $2
Total $2.69 $3.29 $2.99 $2

The first observation is for those who are considering Print Only or Online Only subscription and need Mobile version, the most cost effective version is the Print + Online version at $2.69 a week. This indicates pricing inefficiency in their current Print+Online bundle. This is something they should have fixed even before the  introduction of pricing for Mobile version.

Who are the Print Only subscribers? Businesses, libraries, and some individuals who still prefer whatever convenience the print version offers. These segments get little or no utility from Online version and are unlikely to switch to Online Only version because of the higher price of Print only version.  While the 40 cents incremental cost to add online access  makes sense, the base price of the Print Only version leaves more consumer surplus than necessary. The Print only version can be priced higher than its current levels.

Who are the online only subscribers? Mostly individuals, the wired segment. For most of the sub-segments in this category, there is little or no utility by adding Print version. For some, this may even be negative utility. However for those who want the print version added to their online version, the utility they get from it is high. Hence the incremental price to upgrade to the bundle can be more than 70 cents they are charged today.

Who are the Mobile only subscribers? For people on the go with smart phones there is considerable value from the mobile version, more than the current $2 price,  but WSJ is prevented from capturing all the value because of the reference price set by their Online only version. Even though it is cumbersome, people can simply read the journal using the browser on their mobile phone, using their online subscription. So the $2 price for Mobile only version makes sense.

What about the price for adding Mobile version to Print only and Online only subscribers? For Online Only subscribers, the $1 is most likely the right price. I bet WSJ’s customer data showed that most of their Online Only subscribers will simply use the mobile browser instead of paying separately. In other words a very steep demand curve, with demand falling sharply after any price more than $0.  So the high $1 price for adding mobile version delivers more profit for WSJ than a lower price.

But for the Print only subscribers, those who did not even prefer reading the online version the incremental utility from mobile version is low. I believe $1 price for these subscribers is not the profit maximizing price. The price lies somewhere between  a few cents and  40 cents (the incremental price for adding Online version to Print Only subscription).

Why not give away mobile access for free to the Print Only  subscribers? Because this would make the print only subscribers who will never prefer adding mobile version think that they are paying for something they do not use. So the incremental price for adding Mobile version to Print Only subscription has to be more than $0.

The net of this is, it is a great idea to charge for mobile version. But the prices need adjustments to maximize profit. While they are at it they should also fix the pricing for the print only subscription.

Segmentation and Targeting – YMCA Pricing

I recently received YMCA publication that talks about all programs and membership benefits. The single version, single price ($47 a month) full-service membership  with loads of benefits looks very good on the surface but definitely could use improvement. I am referring to improvement necessary for profit maximization – even though YMCA is a non-profit. Because pricing right is not just about profit maximization but fairness – charging customers only for the services they value and use.

For $47 a month the full-service program offers

  1. Complete use of fitness centers, lap pools
  2. Free access to  fitness classes
  3. Free access to facilities for children under 13 with couple membership
  4. Free open gym time in Kindergym
  5. Free Childwatch (babysitting) services for children (ages 8 weeks to 7 years)
  6. Free Fit Kids program for children (ages 6-13)
  7. Free family circuit classes
  8. Free Babygym
  9. Free family swim
  10. Free towel service
  11. Free validated parking

A moment’s consideration will convince you that

  1. There just are many free offerings
  2. Almost all of them are targeted at families, especially those with children

The questions YMCA needs to ask are

  1. Is $47/month the right price – are they leaving money on the table by giving away too many things for free or are they pricing out other people who do not require all these freebies and would become members at a lower price?
  2. Are there opportunities for further segmentation within the family segment? Is there a value differential across families with no children, 1 child, multiple children, very young children, etc?
  3. Is it primarily serving the family with children segment or wants to reach others as well?
  4. Should they be offering multiple versions with different feature set and at different price points  so the customers would self select themselves to the right version?
  5. Should they offer unbundled pricing for certain features?

I believe the answer to all these questions is yes. But before making any changes they need to start with te enormous data they have on facilities usage and member profiles.

For example, find how many customers use each of these freebies, how many use all 10,  9 out of 10, etc. Those that get used the least are ideal candidates for either elimination which would result in cost savings or separating them from the full membership and  offering  at an additional charge.

In addition they should also find out the relative utilities of these freebies to its customer base, in other words how the different sub-segments value the individual features. Once they find the sub-segments and the utilities of individual features for these segments they can find customer willingness to pay for each and then design multiple versions at different price points.

For example, how parents with one three month old child value  Kids Fit program is is going to be different from those parents with two children in the 6-13 age group. The latter group obviously values Kids Fit more than the former group and hence must be charged for it. The segmentation can go even further including usage of pools vs. exercise equipment, but you get the picture.

This is not just about charging customers for the value they get, this is also about fairness – those who do not use certain services should be given a version that does not charge for the features they do not use.

The net is, whether the business is for-profit or non-profit  there is room for improvement and profit maximization based on segmentation and targeting.  If one price is good, two prices are better.