Why there is no 16GB Xoom?

Unlike Apple’s iPad which is available in 16GB, 32 GB and 64 GB versions the Xoom tablet from Motorola is available in only 32 GB version. The price of Xoom is $799 compared to Apple’s $729 (for 32 Gb 3G).

So why did Motorola decide not to have a 16GB version? If one price is good, two are better, no? A 16GB version at lower price would appeal to some customers turned off by 32GB version, wouldn’t it?

Their decision to not have a version based on disk size is likely due to following reasons.

The first rule of pricing (as old as Henry Ford), “Pricing always comes first. Find what price the customer is willing to pay and then see if you can produce it a cost that is profitable to you”.  Second, trade-off product features that are valued more by customers but costs you less to add.

The flip side of the second rule is, you cannot remove a feature if it does not save you much but without it the value realized by customers goes down significantly

iSuppli numbers for iPad shows, it costs $30 more for 32 Gb than 16GB.  So a 16GB Xoom cannot save any more than $30 for Motorola.

The reference price for low-end verison is stronger than that for higher priced version. The price customers are willing to pay for 16GB version is set by the iPad. May be there is some room for improvement because of added features like camera in Xoom. So the price is likely to be in the $629-$649 range for 16GB Xoom.

The fact that customer willingness to pay drops $170 while the cost drops by only $30 is a good enough reason to not have a 16GB version.

But if that price is still profitable(per unit), why not sell it? I am no iSuppli and I do not plan to buy a Xoom to do a tear down analysis, but it is likely that it costs Motorola close to $600 to make a Xoom.  In addition, seeing a lower priced version more customers may choose that instead of the $799 version. As a result the incremental profit by adding a 16GB version may not justify the production and marketing investments needed for it.

One cannot rule out the possibility that Motorola did costing wrong, and incorrectly amortized their fixed costs to each unit of Xoom and came up with a much higher cost number than true marginal cost. But I doubt it.

Another reason is, the Xoom sports a SD expansion slot that makes the disk space feature a moot point. This is also the reason why there is no 64GB version. iPad is deliberately designed to not have expansion slot and hence eliminate this arbitrage so Apple can use disk space as a value meter.

If one price is good, two are better. May be even this single price for Xoom is not so good?

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