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.

Price Takers – Case of $199 Tablets

 Food Truck Race is a reality TV series on Food Network where contestants compete by selling food from their food trucks. Compared to other cooking contests, this series has very objective metrics- final sales dollars they are left with that decide who gets eliminated each week.

Contestants get seed money to buy first batch of raw materials but have to use part of revenue to buy more for producing more. You can see why just maximizing revenue is not the winning strategy but maximizing profit is. So they choose different products and pricing to maximize profits, mostly choosing premium products at premium prices.

While the contestants generally have freedom in designing their menus and setting prices, in one of the episodes they were told they had to price everything below a dollar. That is someone else just set the price for them.

The contestants became price takers whose only path to success consists of

  1. Sell lots of products to lots of customers to maximize revenue
  2. Cut costs – be it cutting a grilled cheese sandwich into four squares or using cheaper ingredients – to minimize costs
  3. Practice unbundled pricing by charging for every extra

That is it. No branding, no positioning or no product versioning. In summary these became the price takers to an external entity.

There are two kinds of businesses – those who take active control of their pricing and get to set their own prices and those who react to price set by others, be it an Food Network TV show host or another player in the market.

Food Trucks competing with price limit may sound unrealistic but that is exactly what is happening in the low end tablet space. There is one price setter, Amazon with its Kindle Fire that set the $199 price point. As Henry Ford wrote in his autobiography, Amazon chose the price first and did everything to deliver a product at that price. While Ford added the importance of making a profit on the sale Amazon is focused on other ways to drive profit like making incremental sales through the device.

But the fact remains, Amazon is the price setter in this space. Anyone else entering the mini tablet market are forced to take the price set by Amazon, like the Food Truck Race contestants did. Even the mighty Google that practices perfect pricing with its AdWords network saw itself in the role of price taker. The fact that it is a superior product to Kindle Fire did not matter in setting its price.

Again looking at Food Truck episode,

Lime Truck, now in dire straits since they’ve spent all of their seed money on premium ingredients they were going to sell for $11 dishes, has to rethink the strategy. Quinn is later seen at the supermarket crumpling in the aisle bemoaning that they have “lost all of (their) integrity.”

That is correct, with Amazon as price setter, Google was reduced to the role of price taker, forced to rethink their strategy and in that process abandoning any plan they might have had for different pricing. In the TV show it was impossible to go against the set price and in real life it is almost impossible unless one can change the target segment, reference and product positioning. By targeting the same segment with same value proposition and positioning Nexus 7 in the same way Amazon positions Kindle Fire, Google is forced to take Amazon’s price.

Life is not fun being a price taker!

Finally, what about Apple and its much rumored iPad mini designed to compete in the 7″ tablet space created by Amazon and now expanded by Google?

Here is what I wrote in my GigaOm piece,

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.

For a business that actively takes control of its pricing it is highly unlikely they would give up that control for a new device. Revisit the three steps I listed for price takers. Apple already sells millions of premium price iPad at low enough cost and unbundles almost everything. How much more volume should they get and how much more costs can they cut to make profit from iPad mini?

If Apple indeed introduce iPad mini, expect them to position it much different from how Fire and Nexus 7 are positioned and hence become price setter for this category.