Second Degree Price Discrimination Infographic

Could not resist the title.

Take a closer look at the two images. These show the prices and main features of the tablets at the two extremes. In fact there are only extremes in the tablet market. There is no middle yet.

What do these images say about price discrimination? Write your answers on the back of iPad3 and send it to me.

The first image lists prices of Wifi only and 3G versions of tablets.

Why the price difference is not the same?

The second image shows the price difference of the tablets based on their storage.

Why the price difference?

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.

What if Customers don’t Want to Hire Your Products at Any Price?

Lot will be said and written about the nook and Kindle price war. Success of iPad will be quoted as the reason for the price cuts. Comparisons will be made to razor and blades and why the reader should be free. Will the price cut increase footprint and convince customers who would have bought iPad to buy nook or Kindle instead?

Let us ask the key question on product positioning for nook and Kindle:

What job will the customer hire the product for?

Kindle is applying for the job of, “Easy to read, even in sunlight.  Carry all your books with you.”.   nook is applying for the same job as well. In other words nook and Kindle are paper book replacements. Yes there are social features, and free books in stores (nook) but these are add-ons.

To some segments this is the job they are hiring for. As Mr.Bezos said, this is for serious readers to read without distractions. He also said that less than 10% of reading population are serious readers. For this segment that has decided on the job, they will choose on cost to hire for that job. So the price cut by nook threatened to take away customers who would have bought Kindle hence Amazon had to respond with its own price cut.

Will the price cut make the product attractive to segments that are not looking to hire for the job of easy reading? The answer is mostly likely no.

What job is your customer hiring your product for?

Follow up on number of nooks sold

Last November I made a claim on how many nooks Barnes and Noble might have sold before they ran out of them. The claim was based on an analysis of accruals in their quarterly balance sheet. My numbers were 200 to 400 thousand nooks sold. B&N announced earnings today but as expected they decided not to disclose number of nooks sold.  Here is another attempt to validate my previous claim and project the number of nooks sold.

  1. B&N did not have nooks in stores until recently and since most of the sales happened during holidays, let us assume all nook sales happened over their BarnesAndNoble.com website.
  2. Their online sales growth from Nov-Quarter to Jan-Quarter for FY10 has nook and non-nook components. Let us assume the non-nook revenue growth rate is same for this year as previous year  Q2 to Q3.

Here are the BN.com (online channel) revenue numbers (their FY09 dates were different for Jan quarter), all numbers sourced from their press releases.

Nov-Quarter Jan-Quarter
FY09 $109 MM $157 MM
FY10 $120 MM $210 MM (with nook)

If we assumed that the 44% growth we saw in FY09 repeated in FY10, that comes to $172 MM leaving $37.2 MM from nook.
At $259 a nook, that comes to 143,000 nooks sold – much lower than my previous claim of 200K-400K numbers for just the November month.

The revised estimate is between 60,000 nooks that Techcrunch said based on its sources in Taiwan and 200,000 units (accounting for store sales and using the lower bound of my previous prediction).

Shining New Light On nook Investment and nooks Sold

Barnes & Noble announced its Q2-FY10 earnings last week. Their balance sheet shines some new light on their cost of nook product development and marketing and the number of nooks they might have produced. nook was so successful that Barnes & Noble cannot anymore deliver one before Christmas nor can it sell through its stores. How many nooks were sold? B&N is silent about the number of nooks they sold, but from their latest balance sheet I estimate they sold about 200K-400K nooks, read on.

12/26/09 Update: Techcrunch says, based on its sources, 60,000 nooks sold but I stand by my 200K-300K estimate unless I get data on cost per unit that is different from the assumptions I made.

  1. Increase in Intangible Assets: Their Intangible assets jumped from $82 million in Q1 to $587 million.  This is surprising for a bookseller. Part of it should have gone towards acquiring rights to digital content and part  to product R&D. The latter cannot be capitalization of their product development costs (3 months is short time),  so I think they bought the design and other patents form outside.
  2. Long-term Debt: There is now long-term debt, to the order of $325 million, showing up in their books. There was no debt in the previous quarter. The long term debt definitely went into their nook product line – for manufacturing and marketing.   B&N does not own the factories, it rents capacity from Prime View International of Taiwan, who also owns the rights to e-Ink technology and makes those displays for all Kindle and Sony as well (source: GigaOm). To guarantee capacity B&N may have had to invest or at least cover part of the assembly line. But I think most of it went into design acquisition (described above).
  3. Increase in Other Long-term Liabilities: Another increase is their “Other long-term liabilities”, by about $240 million. There are no footnotes explaining this. For the purpose of this discussion I would allocate a good part of it towards its increase in Intangible asset (design acquisition).
  4. Cost of R&D: So the total cost to design and manufacture nook is about $500 million – that is going big for a bookseller!
  5. Accounts Payable: Their accounts payable increased by $500 million. It is expected that this would go up as stores build inventories for the Holiday season, but in the previous year it increased by only $200 million from Q1-2008 to Q2-2008. I do not think the other $300 went for stocking more books and merchandise, it must have gone to content suppliers, nook suppliers and for marketing campaigns.  Accounting for the rest, $100- $2o0 million (guesstimate) went to Prime View for making the nook.
  6. COGS for nook: The $100-$2o0 million is possibly allocated for the right to acquire capacity, labor and parts. If we assume half of that $100-$200 million went for parts and if we assume the cost per unit is $250, they made about 200,000 to 400,000 units. Which is what I said they should have manufactured based on the projected market.

If they indeed manufactured 400,000 nooks, given that they are sold out, they must have sold 200,000 to 400,000 nooks in just one month.  That is extremely impressive! B&N has indeed gone really big on nook but still missed the opportunity to price it right!

Footnotes:

The final number is based on the assumptions I made on allocating the step increase accounts payable, the total material costs and cost per unit. Any or all of which can be wrong but at least we have a small range of numbers to work with.

Should Barnes & Noble have Gone Big with nook?

Barnes & Noble received so many pre-orders on its ebook reader nook that it cannot anymore deliver nook for Christmas. With more than a month to go before Christmas, B&N says it can only deliver after January 4th.  It makes me think if they could have done things differently for the launch:

  1. Market size: Forrester says 900,000 eBook readers will be sold just during the holidays. Amazon is the market leader with 65% and Sony the rest. nook is the new entrant, and Barnes & Noble is not saying how many units they sold.  Introduction of this new and better looking and functional device definitely would have grown the market, bringing in new customers who did not want to go with Kindle. B&N should have planned on selling 400K to 500 units during Holidays.
  2. Did they plan on under supply to create buzz? I doubt it, even though brands have previously been accused of doing it to create buzz, Barnes & Noble already had enough buzz going for it with the device and the marketing campaign.  Since they priced it as penetration pricing, shouldn’t they line up the supply chain to meet the volume?
  3. So why did they not plan on selling 400K-500K units? If we assume their margin is so low that nook cost $250 to make, for 500K units the total cost is $125 million. They have no long-term debt in their books (amazing) and could have financed this investment with debt – besides they need not take long-term debt if they could strong-arm their suppliers to delay their account payable until after B&N gets paid. (Update: B&N did take debt but did not have the power to strong arm its supplier because there is only one)
  4. The device looks definitely better than Kindle and they positioned it as such – so why follow Kindle’s price leadership? If they had priced it higher could they have not only handled the lower demand but also delivered more profit?  For instance if they had priced it at $279 with a profit per nook (i am not including book sales) of $29, even if they managed to sell only a third of current sales (which is an unlikely drop) they would make more profit than current price.
  5. Customer Margin: nook profit is about total customer lifetime value, from all those ebooks customers buy, accessories and the 2-3 year refresh cycles. So footprint helps and they do not have to make up all the profit just from the device. But it appears they did not calculate what the demand is going to be and followed Kindle’s lead (which could easily be wrong as well).

Now I waited too long to order a nook and I am not going to gift one for the Holidays.

Update: Here is an estimate of number nook readers Barnes & Noble sold in the early days.