Think about this pricing puzzle for a moment.
Apple includes a standard, good-enough, headphones with all its iPods. Even the cheapest iPod shuffle, priced at $49, comes with one. But there is none included with iPad. Even the most expensive Wifi version, priced at $699 does not include headphones.
If you consider the marginal cost of iPad, it is safe to say it is less than 50% for 16GB iPad and even lower for 64GB iPad. If the cheapest iPod shuffle can include one, it is highly likely the headphone don’t add too much to marginal costs (may be a $1).
Then why there are none included with iPad?
If your answer included words like – consumer surplus, perfect product packaging, utility and willingness to pay – you can skip the rest of this article and go straight to the bonus puzzle at the end of the article.
While you think about this puzzle let us take a diversion to what has become the conventional wisdom in customer satisfaction. Number one advice from customer satisfaction/loyalty proponents is turn your customers into loyal and raving fans. And how would a business achieve that? By delighting them, by going the extra mile, by delivering remarkable customer service and not by nickel and diming for extras.
Conventional wisdom is neither conventional not wisdom. The basic economic theory about consumer surplus and pricing is you don’t leave too much consumer surplus – in other words you don’t give more than what is absolutely needed with the product at a given price point. From that perspective, Apple is offering the perfect Goldilocks package – include only the absolute minimum that is needed to sell the product.
Every additional item you include to the product package must deliver incremental value to customers that can be translated into incremental pricing for you. If either the customer does not see value or the value does not translate into higher willingness to pay, you should not be including it. (See also Value Step Function).
A moment’s reflection will convince you, an iPod shuffle is pretty much useless without the headphones. So the headphones are indispensable. For an iPad, headphones are purely incremental and no way reduces the value from the device. Customers are hiring the iPad for a different job. By better positioning the product for those jobs Apple is able to avoid including headphones and as a result make $60 million a year in pure profits ($1 per headphone and 60 million iPads sold)
May be you buy this economic argument from selling the product perspective. What about driving loyalty? Wouldn’t the customers be even more delighted if Apple were to throw-in headphones with iPads?
In a research I conducted two years ago, I showed that you do not have to beat customer expectations by a mile to gain loyalty. Beating it just enough will do. There is no statistically significant difference in customer’s propensity to recommend your product whether you just met their expectations or gave away the farm.
On a related note, Kindle Fire priced at $199 does not include headphones as well. That is likely driven by cost given Amazon’s approach to pricing.
How do you decide what to include in your product? What is your perfect packaging?
Why didn’t apple offer yet another iPad offering at higher price with premium headphones?
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