chrome-pixelWhen Google unveiled its new touchscreen laptop, Chrome Pixel, Chrome executive Mr. Pichai said

the high price tag was justified and argued that the Pixel stands up very well against a MacBook Air

It is usually a bad sign when a brand uses words like, “the pricing is justified”, let alone  comparing against market leader with established track record in the category. Last time we heard the price tag justification it was from then Motorola executive on Xoom pricing. We know how it ended (agreed, one data point does make evidence).

If you are going to justify your price tag the best path is to use cost arguments, signaling to customers that you were doing it only because of your hardship and appealing to their “good will”. Classic example is Starbucks. While you set the prices based on customer value (and definitely not on costs) you do not communicate so explicitly to your customers.

This is how head to head comparison of MacBook Air and Chrome look like (after upgrading MacBook Air to 8GB RAM).

Macbook Air - Chrome Pixel Comparison

Let us assume, for now, that indeed Chrome Pixel is packed with features, compares favorably against MacBook Air. But does that mean Google can set the price point to match value delivered (or perceived)? No. The reason is the Value Waterfall.

Value Waterfall

Several factors are at work here that cause value leaks, bringing down the price customers are willing to pay. In case of Chrome Pixel, the value leaks are

Credibility Discount: It is from a brand that isn’t known for making premium hardware. Nor is the Chrome operating system as mature, full-featured or have supporting App ecosystem as Apple’s OS X.

Selection Cost: Customers are told the additional value comes from touch screen feature (which may not be relevant to them) and from the extra 1 TB of Google Drive storage for 3 years. This isn’t as obvious to customers who have to do the math to see value of 1TB of Google Drive.

Cost of Doing Business: Operating System, Apps, buying experience, support, user experience – everything comes into play here knocking down value delivered.

Risk Aversion Discount: This isn’t the first attempt by Google in making hardware but there isn’t much track record for customers to see. For all practical purposes this is version 1.0 from an upstart laptop maker who does not have integrated hardware-software design.

Reference Price Difference: While Google wants the reference price to be that of MacBook Air, customers will most likely use previous Google Chrome models sold at $299 and tablets with same storage ($499 for Nexus 10).  Despite the additional features and the value Google would want customers to focus on, customers will see the price jump from $299 Chrome to $1,299 Chrome Pixel an unpalatable (and even unjustified) price increase.

So it is not a surprise we see several media reports knocking down Google’s pricing. In his review of Chrome Pixel, Om Malik wrote,

Pichai and I argued a bit about the pricing strategy: my belief is that they need to sell a lot more devices so the price has to be much much lower. Pichai argues that one needs to be able to open our mind to the possibilities of a cloud-based machine. He said that one shouldn’t look at the 32 GB of storage, but instead focus on the terabyte of storage space that comes as part of Google Drive.

Google is not only trying to justify its pricing but also its measly 32GB storage by signaling value from its 1TB cloud storage. But the Google Drive cloud storage comes for only three years and costs $50 a month. On the surface it would appear the 1TB space is good value – if you were to get it separately it costs you would pay $50 a month and hence a value of $1,800.

But that depends on a customer segment that values cloud storage over additional flash storage on their laptop. Besides after that three years it is going to cost customers $50 a month because with all their data on Google Drive there will be significant switching costs. This goes back to the value leaks I discussed above.

Finally, is it possible that they uncovered a segment that values this product at the current price point and we are not the target segment? Mr. Pichai replied to Om,

“The device is for a segment committed to living to the cloud, and who really want a good, high-end laptop, and we believe we have built the best laptop for that experience,”

If true then they should have controlled the messaging channel and the messaging to communicate the pricing and value proposition to just that segment with proper product positioning.

They are not clear in their product positioning to that segment – they are positioning Chrome Pixel against MacBook Air, asking customers to hire Pixel for the same job customers hire MacBook Air for and for the same price. That contradicts their segment definition of “committed to living in the cloud”, because that segment may be hiring different cheaper alternatives and not $1,299 MacBook Air.

Furthermore even if such a segment exists, their willingness to pay will probably go down when they see the media reports on Google getting its pricing wrong.

At this point it is safe to drop likelihoods and probabilities and go on record to say, “Google got its segmentation, targeting, positioning, product and pricing wrong”, with its Chrome Pixel.