How the presence of lower priced version affects your profit?

Take a look at these pre-order numbers on Amiigo Fitness band. The product has not launched yet and is a project that is fully funded on Indiegogo.

Amiigo Versions

 

The black version, offered at $99, sold (claimed?) almost seven times as many as the color versions offered at $119.

Can we see this as an indication of the market demand for wearable fitness devices?

Can we conclude $99 is the sweet spot for pricing such devices?

The answers are no and no.

Two data points do not make a valid demand curve. And the fact that this product is now targeted at a very narrow segment that believes in funding such projects on KickStarter or Indiegogo we cannot say they uncovered the right price point.

What we can say however is the effect of lower priced version on the sale of higher priced versions.

Let us be assured that whatever justifications Amiigo folks may give us there is no cost difference in making black vs other colors. So the additional $20 they charge is pure profit. There is nothing wrong with that. I am all for profit maximization. If customers perceive higher value from a color other than black (or turned off  by black) then it is fair to capture a share of that value with higher prices.

What we see here is a possibility that for wearable fitness devices like Amiigo, customers do not see color as a value dimension that is worth paying more for. This is like the case of Strawberry and Raspberry yogurt pricing.

It is likely that the total demand would have been the same had they simply offered all colors at single price point of $119 (note that we don’t know if a higher price point is ruled out). But the presence of $99 black Amiigo made even those who would have gladly paid $119 for the device to choose it over the $119 version, resulting in lower overall profit for Amiigo.

That is the effect ill-conceived lower priced versions.

The bigger question remains – what is the right price point for such devices? Is it $99 or $119 or higher? We don’t know. It starts with customer segmentation and customer job to be done. Launching a product through any of the crowd-sourcing platforms does not allow you to find your customer segments or the jobs they are trying to get done.

 

Price Setters and Price Takers Revisited

Let us recap.

If you can set the price and defend it against competition you are a price setter. Premium price or bargain price does not matter. As long as you can defend it because of your product’s (perceived) differentiation (among your target segment) or because of your cost advantage you are a price setter.

If your pricing is a reaction to an existing competitor then you are a price taker.

In the tablet space, big or mini, Apple and Amazon are price setters but Google is a price taker.

In my September article in GigaOm I analyzed the profit implications of iPad mini for Apple. Making a case against $199 lower-end iPad mini I wrote this about price setting:

If Apple is the price setter in the premium tablet category, Amazon is the price setter in the low end. Entering this segment would mean becoming the price taker or making an effort to become a price setter with a different price point.

By design, Apple has never been a price taker. In any market, the price setter gets to control its  own profit while a price taker is at the mercy of market forces. Trying to become a price setter when there already is one requires Apple to either go low or just a bit higher. Either way, Amazon has set the price anchoring. The most likely scenario is a $299 price point for the iPad Mini.

The real pricing came in at $329. In other words Apple chose not to be player in the low end market because it realized Amazon as the unshakeable price setter in that category and chose a segment where it can be the price setter.

Price Setters will thrive and go on to create significant value over long term.

Price Takers will be relegated to the footnotes of history.

Why there are two 13-inch MacBook Pro Retina Display Price Points?

Pricing puzzle for you.

Apple introduced 13-inch MacBook Pro with Retina Display last week.  They introduced not just one but two at two different price points.

The only difference between the two editions (other than price of course) is the flash storage size, 128GB and 256GB. (On the related note see here for why your product versions should differ in price dimension.)

Did they really need the 256GB version at $1,999 price point? After all the 128GB version is configurable.  One can select 128GB version and configure it as 256GB for additional $300.

 

Questions (10 points each)

  1. Why is there a second SKU (version)? (Hint: See here)
  2. Why did they choose not to make this second SKU have different CPU? You can configure the 13-inch MacBook Pro with 2.9GHz CPU for additional $200. Why didn’t they make the CPU non-configurable and made the second SKU at $1,899 with 2.9GHz CPU? (Hint: See here)
  3. How can a feature (flash storage size) be such an effective  meter for value capture? (No hint here, ask me how I can help you find what your customers value and how you can capture your share of it.)

 

 

Just because there is a gap in product line

Recently I wrote an analysis on the implications of rumored  iPad mini on Apple’s profits. The best case scenario, one that will result in another billion profit, is the one where Apple successfully positions iPad mini as yet another device we need between iPhone and iPad. This may sound like a recent piece in The Onion,

Any other scenario is fraught with risk of cannibalization, not just to its iPad but to its iPhone and iPod Touch products as well.

Recently there was another article that looked at price points of iPod and iPhone product lines and made a prediction about iPad mini. The premise is based on Apple CEO’s comment about price umbrella,

“one thing we’ll make sure is that we don’t leave a price umbrella for people” in the tablet space.

The chart we see on the left is simply a representation of Apple’s current price points using bar-chart. From the iPhone and iPod examples it asks us to make a leap of faith about iPad.

Strategy is not about nicely completed artificial triangles. Absence of iPad in the lower price points does not point to a gap but Apple’s choice for profit share and not market share.

If filling the gaps in the price points is the driver then you we should have several sub $500 laptops and desktops from Apple. Just open the flyer from Fry’s and count the number of laptops available in the $400-$700 range and compare that to the price of MacBook and Macbook Pro laptops. Shouldn’t Apple be worried about yielding that market to others?

This is not to say there will not be a iPad Mini but pointing out that the case being made for iPad mini lacks any kind of rigor or evidence.

The gaps in the price points says nothing about the segmentation or the demand.  Nor does it say what happens to demand for current products when a newer cheaper one comes along.

If one is going to use charts to make a case for iPad mini, it will look something like this

This is the representation of the demand for iPad and iPad mini. We do not have data on how these demand curves look like. May be Apple has this information. What this chart tells us is the impact of the demand for $499  iPad when there is a $299 iPad mini. As long as the profit from iPad min sales exceeds the lost profit from cannibalization of other products, Apple will introduce iPad mini. Not because they do not like gaps in someone’s bar-chart.

 

 

Answer to Pricing Puzzle – Why do children’s museums charge lower price for children?

First note that the marginal cost for the museum to allow one more child (or a family) is $0. That is irrelevant to pricing regardless of what some guru says about future of pricing.

This is a case of metered price discrimination combined with partitioned pricing. Do not look at this as two separate price points for parent and children. This is just one total price. The museums want to charge a fixed price per family. If you assume a simple case of  one parent per child combination, the museums want them to pay one total price for their entry.

Some parents may find the total price too high and may not use the museum but others will.

Once they decided the total price for parent-child pair it becomes a question of how to partition it between parent and child.

  1. They could simply not partition, setting one price for the pair. That would result in the customer (the parent) assigning all the price to just one and see value mismatch. Research on combined vs. partitioned pricing suggest the single price will not be received well with the customers.
  2. Charge all the price to parent or child and call the other one as free. This has the same effect as previous case.
  3. They could share the total price evenly and set same price for both adult and child. But that goes against the reference price in the minds of the customers on priced they pay for children. Same reason they cannot assign higher share to the child.

Hence we have the case we see everywhere despite value delivered to the customer, parents tickets are priced higher than the that of children’s.

A case of partitioned pricing.

Pricing Strategy Vs. Pricing Parlor Tricks

A research paper published in Journal of Consumer Research, Jan 2012, found that how we present pricing affects perception

Presenting item quantity information before price (70 songs for $29) may  make the deal appear much more appealing than if the price were presented first ($29 for  70 songs).

There are many similar peer reviewed research reports that found behaviors like,

Customers are more likely to prefer prices ending with digit 9

Customers are immune to higher prices when you don’t show the $ sign

Customers pay higher prices when you write the price in words instead of numbers

Customers succumb to decoy pricing (present three options but one is asymmetrically dominated by other and hence a decoy)

Through books and TED talks these  academic reports seep into popular media and are presented as pricing lessons for businesses small and large, especially for startups. After all, these are peer reviewed research reports based on controlled experiments that found statistically significant difference, published in reputable journals and hence worthy of our trust?

May be these are true, but what do they tell us about the customers and their needs? What job is your customer hiring your product for when they pay this cleverly presented price?

The problem is these behavioral pricing tactics may just be statistical anomalies. Let me point you to a xkcd  comic that so nicely makes the point I am about to make . After what xkcd has to say, anything I say below is redundant.

Let us take the first research I quoted, “70 songs for $29 vs. $29 for 70 songs”. What could be wrong here?  Well, why specifically 70 and 29?  What other combinations did the researchers test and what are the outcomes? What about 60 for 25, 50 for 20 etc etc.

Is it possible that they had tested 20 different combinations and found that just this one produced statistically significant difference? (Like the green jelly beans in xkcd comic?). Did the researchers stash away all the experiments that produced no results and published  the one that produced this interesting result?

An opinion piece in Business Strategy Review, published by London School of Economics, pretty much says this is the case with most research we read.

The problem is that if you have collected a whole bunch of data and you don’t find anything or at least nothing really interesting and new, no journal is going to publish it.

Because journals will only publish novel, interesting findings – and therefore researchers only bother to write up seemingly intriguing counterintuitive findings – the chance that what they eventually are publishing is BS unwittingly is vast.

Pretty much we cannot trust any of the research we read.

What are likely statistical flukes get published as interesting findings on pricing and find their way into books, TED talks and blogs. The rest don’t even leave researcher’s desk. Let alone academic journal, try writing a blog post that reports, “found no statistically significant difference”. Who will read that?

What we are seeing is publication bias that is worse than any sampling bias or analysis bias and a prevalence of pricing parlor tricks presented as authoritative lessons in pricing for businesses.

When it comes to pricing your product, be it pricing cupcakes or a webapp, you would do well to look past these parlor tricks and start with the basics.

Pricing strategy starts with customer segments and their needs. You cannot serve all segments, you need to make choices. Choose the segments you can target and deliver them a product at a price they are willing to pay.

As boring and dull as it may sound, that is pricing strategy. Your business will do well to start with the most boring and dull than chasing the latest parlor trick based on selective reporting.

Everything else is distraction. May be these fine tunings have some effect but not before strategy. After you get your foundation right, then you can worry about what font to use in the sign board.

How do you set your pricing?

Other Readings:

  1. Segment-Version Fit
  2. Five Ways Startups Get Pricing Wrong
  3. Small Business Pricing
  4. Three Components of Effective Pricing
  5. Approximate Guide to Pricing Webapps  (buy access for 99 cents, pun intended )