When is a $0 Price Valid?

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This is Tax season and I see ubiquitous Ads for free basic tax filing. All players from H&R Block, TaxAct to TurboTax offer free App for basic tax filing. Is that a good decision?

When is it good to give your product away for free?

If you believe any of the proponents of freemium, their generalization is, “if your marginal cost is zero, you should give it away”. If you were to look closer at this claim you will see why this fails miserably.

  1. Free is not free marketing because marketing is segmentation, targeting and positioning
  2. Cost has nothing to do with pricing
  3. Your marginal cost and $0 price does nothing to customer demand

It all boils done to pricing 101 – Pricing is share of value created not a markup over cost. And your share of value is affected by reference price in the minds of customers. If the reference price, that is that is the price they are used to paying for alternatives, is $0 then there is signifiant value compression that prevents you from charging for your product.

Returning to the Tax filing question, if we were to use just the marginal cost argument it would appear the answer is yes to offer them the standard tax filing as free. But by extension you could argue all advanced editions must be free as well because the marginal cost is still $0. You cannot have a breakdown in the chain of logic where it applied to basic version but not to advanced versions of your product.

A $0 price is recommended only if the following conditions are met

  1. The reference price is $0 and there is no way to move it –  filling out 1040EZ manually is the easiest thing even with paper and you have free  option from IRS.
  2. The $0 price does not diminish the value of your portfolio through adverse self selection – people who have more complex tax scenarios are not going to choose free version despite it being free.
  3. A business does not incur additional investment or marginal just to serve the free users –  the tax software is built for more complex scenarios and serving the simple filings does not incur incremental cost.
  4.  Free users serve as a pipeline for premium versions (through customer delight or stickiness)- as economic mobility happen, free tax software users will find the need to use paid versions for their new scenarios.
  5. There is no other opportunity cost of taking on free users.
  6. Your brand will suffer no erosion if the free option were to go away.

$0 price is not based on your cost. It is driven by customer reference price and the decision to whether or not offer it is based on your business dynamics.

 

 

When there is no value in beating customer expectation by a mile

The concept of “Good enough” draws mixed reactions from people. While some say  good enough isn’t good enough and we need to exceed customer expectations. Others argue for it more from the point of view of launching a good enough product on time vs. waiting for perfection. When it comes to product management and product design do we go with far superior features than what is available in the market or just checking the box will do? Does either one guarantee defending or expanding market share?

The simpler way to approach this conundrum is to understand the value step function. Value perceived by customers is not a linear function of product features. Value is a step function – an initial package of features causes a step increase in value perceived but  after that point it can level off for a very long time or until another shift occurs at which point it makes another step jump.

value-step-function

Take for instance the new Galaxy S7 that was launched in Mobile World Congress in Barcelona yesterday. Here is a reaction from the Journal on the device

We have seen the similar product strategy from Galaxy before. Improved camera, longer battery life, better screen etc. are all good, but do these matter on the plateau portion of the value step function? As customers see no incremental value in this part of value curve, none of these improvements will help with market share.

If a marketer want to gain share and drive adoption they need to focus on those value dimensions where the current products are stuck in the valley floor of the value step function. That is what happened when iPhone entered. The next innovation that will dominate the market comes only from focusing on new value dimensions.  In this part of value curve, good enough is good enough.

May I suggest innovating on a smart phone that is priced at $50? If the 7″ Amazon Kindle Fire can be priced at $49, a phone like that will most likely be a step function in gaining share.

When 50% of Your Customers Abandon Your Product

Customer churn is unavoidable. I have written before the futility of chasing 100% loyalty from customers.  Simple reason is – change.  Customers change, their needs change, norms change, technologies change, and competitors change. When such changes happen some fraction of customers stop buying all together, switch to competition or your product becomes irrelevant.  Every business needs to build in a certain level of churn in its future growth and plan to continue to grow installed base of customers despite losing some.

But what do you do when,

50% of your customers stop using your product, close to 30% in the first 3 months?

Your whole valuation is based on growth,  showing triple digit user and revenue growth year over year for next several years?

When you have really just one product?

That is the case for Fitbit. First it is a product that customers should want to buy and not a necessity. Second customers lose interest so quickly. Third even among  those who want to buy the band it is facing competition from low and high ends.

Just a few weeks ago Fitbit’s stock hit highs of $50, 250% over its IPO price, and now trading 30% below IPO. Today Fitbit will announce its fiscal Q4 2015 earnings. It may very well post its best quarter yet in terms of number of bands sold and revenue. Its stock will see movement in the near term to levels above its IPO price. But is there long term value in this? Take a look at this chart below on what it means to its growth when 50% of customers drop out

fitbit-growth

If it has to show even a modest 40% growth over next five years it has to get that all from acquiring new customers. Think of the effect of this on its marketing dollars.

How many more campaigns it needs to run?

How many new markets it needs to break into and the cost of market entry?

How many promotions it needs to run? (Costco is running a promotion on bundle and today BestBuy is running a $30 off promotion)

What is the ROI on all these marketing dollars when only 50% return and spend less and less over lifetime.

This is not to repeat the fact the product itself does nothing really to fitness despite the name.  It will be interesting to see heart rate data of its shareholders over the next few months.

Why Wearable Fitness May Be Bad For You

BN-MR546_Wearab_G_2016021910593910 Reasons why wearing one of those fitness bands that count steps may be bad for you.

  1. They make you believe walking 10,000 steps is an effective activity and make you forgo or skip regular exercise that elevate your heart rate.
  2. It takes time to obsessively track the number of steps you take making you miss the day to day moments or simply enjoying the walk.
  3. They mislead you in calories burned and make you eat more than you would have otherwise – well I walked 15,000 steps today, I earned this cupcake (which happens to take 42 minutes of intense cycling to burn off)
  4. They make you believe you are making progress on your health and fitness goals while there is no improvement in either.
  5. They measure the wrong thing – not all 10,000 steps are the same.
  6. They do not take into account the fact that the effect of your activities are cumulative and instead treat every day as a new start.
  7. They make you do wasted effort just so you can hit the mystical 10,000 step goal.
  8. They make you do wasted effort just so you can hit the mystical 10,000 step goal.
  9. They make you do wasted effort just so you can hit the mystical 10,000 step goal.
  10. They make you do wasted effort just so you can hit the mystical 10,000 step goal.

3 Things to Watch for in Fitbit Q4 Earnings Release

simple.b-cssdisabled-png.h4212c4916dfd03e82a8f54e8eebd5b3c.packFitbit will report its December 2015 quarter earnings coming Monday. It has almost become the “Kleenex” of wearable fitness market but we need to ask if all the hype is worth the very high multiple we pay for the stock. I discussed previously about its weak product strategy,  signs of that weakness will come clearer on its earnings report. What to watch for in the earnings report?

  1. Number of units sold is a big indication of its continued growth. In the previous quarter Fitbit sold 4.08 million units. Given the holiday quarter will engender additional sales from people driven by fitness goals and gifting, we should expect a big bump. Compared to same quarter last year when they sold 5.3 million units,  we should expect 6.9 million units for a YoY growth of 83%. If it is any lower it indicates the accelerated plateauing growth curve.
  2. Average Selling Price – This is simply calculated as reported revenue divided by number of units. Their ASP has been languishing below $90. Their hope is to sell more of their $250 device to bring up the ASP.  Unfortunately that device falls short of customer expectations for a smart watch and product reviews recommend customers are better off sticking with its $149 device.
  3. Gross Margin – With increased volume and with the core technology remaining essentially same we should expect gross margins grow 200 to 300 basis points to get back over 50% watermark.

One thing that will be absolutely critical for investment decision is device abandonment rate – what percentage of customers abandon devices after each milestone? This is more important for the next quarter as the New Year resolutions fall by the wayside and people who get Fitbit as gifts feel less attached to it than those who buy for themselves. Unfortunately we will not see that number even though Fitbit has complete visibility into it.

 

Perils of Defining Market Share

It is comforting to define what we can see as current spend the market, identify who the competitors are and take solace in the fact that we have a high share of the market. There are two ways we size markets,

  1. We rely on analysts who survey players like us in the market, add up our forecasts and define what the market size should be.
  2. We add up customer spend on the specific product category and model a growth in spend and number of customers.

As long as we maintain share or show growth we are winning. Or so we want to believe. What we miss here is the clear understanding of customer job to be done growth matrix. With these approaches we do not fully understand why customers buy and what will make them buy. In other words, what would the market size be if we add up what all the customers are willing to spend for the job to be done.

This is why disruption happens when a new player from a completely different domain enter the field to compete for the same customers. Successful new players come from customer job to be done perspective with a product that is far better than current players and can bring in new customers who stood on the sidelines because none of current candidates were worth hiring for their job to be done.

Swiss watch makers were happy to define their market as number of luxury watches sold and measured their share of those units. This worked well until smart watches came along. Take a look at this chart of what happened to the market from Q4 of 2014 to Q4 of 2015 (data comes to us from Strategy Analytics).

watch-market

Before 2014 Smart Watches seemed just a fad but by the end of 2014 they were selling 1.8 million units in 3 months. The 18% share grab alone should have been a concern to Swiss watchmakers. But what happened next is even bigger. The new entrants enabled the unit volume to double and grabbed all of the new sales. As you notice carefully, not only did the Swiss watchmakers did not gain share in new customers but also lost share as their unit sales declined from 8.3 million units in Q4-2014 to 7.9 million units in Q4-2015.

If you are not growing you are dying. This is not failure of product strategy. This is the failure to understand how growth happens. The traditional way of looking at growth has been to sell more of the same, sell to more customers or sell new things (Ansoff growth). The right approach to growth is not making it product centric but defining customer job to be done, the new growth matrix,

Customer Jobs To Be Done Growth Matrix

How do you define market and growth?