Prepare for the Onslaught of Predictions

A stack of newspapers with headline "What's Next". Isolated on white.

This is that time of the year when we will see magazines, blogs, thought leaders and their ilk polish their crystal balls, look deep into it and make predictions. Predictions that range from big to extremely big, outrageous to ridiculous, all trying to outdo others in clairvoyance. The more ridiculous the prediction higher the number of page views, sharing and Retweets. And more such a prediction is shared the more believable it comes, even becoming a foregone conclusion.

Popularity and pervasiveness alone come to define the quality of predictions, with no one stopping to check the likelihood of the event or the reasoning of the guru making the prediction. Never mind none of the predictions made in the past year or the years before borne out to be true. There is is always weasel language to get out of it. Or who remembers, who checks or who cares?

superfThis year you may do well to simply ignore all such predictions. But I recommend a better options. Before you read any of the predictions read this recent book on science of prediction by  Berkeley and Wharton professors titled, Superforecasting. The concepts and methods explained in this excellent read are meant to help you make better predictions but they also help you evaluate predictions from others.

Armed with concepts like understanding of base rates, conditionals, likelihoods and outside-in process you can see how most predictions can be ignored regardless of pedigree of who made it, their popularity or even if one or two turn out to be true due to sheer luck.

Take for example the following prediction from Fortine magazine,

Apple Will Buy Tesla…

Apple has announced plans to build an electronic car, targeting 2019. Apple could dramatically accelerate this timetable by buying Tesla  TSLA . With over $200 billion cash on hand, the iPhone-maker has more-than ample resources to absorb the purchase, especially now that some of the bloom has come off Tesla’s once-rosy stock. In addition to its automobile know-how, Apple gets access to Tesla’s battery technology, which CEO Elon Musk claims can help change “the entire energy infrastructure of the world.” Of course, Apple would also get Musk—a worthy heir to Steve Jobs’ “think different” legacy and ideally suited to be Apple’s futurist, chief technologist and CEO-in-waiting.

You notice here there are no timelines so we have to assume this is meant for 2016. There is also no likelihood based metrics, only certainties – “Apple will acquire Tesla”. If Fortune magazine bothered to look at base rate for acquisitions by Apple in the past 5 years, there is none even close to the size of Tesla’s $30 market cap. Beats acquisition for $3 is one tenth of Tesla’s current market cap and it is not really about Apple’s launch of Apple music.

The biggest problem with this prediction is it is inside-out, it started with the idea and looked for specific aspects that will make the idea true without looking for what would make it false.  That is,

  • Apple wanted to enter electric car business (we know this only from rumors)
  • Apple has enough resources (base rate of M&A will show you really don’t need all the resources to make an acquisition)
  • Tesla stock is looking attractive (neglecting the fact that despite current valuation Tesla owners will demand hefty premium if at all they want to sell)
  • Apple gets access to Tesla’s battery tech (neglecting there are no other ways or options)
  • Capping it all, getting Elon Musk as CEO in waiting for Apple (you can see the flaws here)

However the prediction is outrageous, sounds plausible and seems like something pundits and avid fans want it to be true. So this will get traction. But that does not  make it a solid prediction.

If you give even a cursory review of all the 2016 predictions you will see how woefully unrefined they are.

4 SaaS Pricing Lessons

Take a look at the subscription pricing options from two leading national newspapers The Wall Street Journal and The New York Times.

times-wsj

Take a few minutes to look at the two approaches to bundling and subscription pricing. Which one is done better and stand to drive more profit? What do these tell us about your SaaS pricing?

Here are a few things I would like to point out

  1. Branding – It is very important to brand your multiple versions. The WSJ branded the offerings and Times didn’t. Branding offerings is about telling customers how you think of them. It gives a much better way to position the offering than a utilitarian description. If you have three different versions take the time to brand them.
  2. Per Month vs. Per Week – Many SaaS product managers have asked me this question, “Should you list per month pricing or per year pricing”? Clearly the goal is have the customer stay longer but there is advantages to reducing the initial impact by anchoring on a lower price point. As a tactic it is preferable to show a price for the smallest period.
  3. Number of Versions –  WSJ has three versions but only two price points. Are four price points better than two? You remember my oft repeated statement, “If one price is good, two are better“.  So does this scale linearly? Can we say four prices are better than two prices? No. It depends on customer segments. As a rule of thumb 3 is an ideal number. A forced fourth version may pose more challenge to customers. The Times approach to restrict smartphone access does not make sense. In your SaaS pricing do not raise artificial fences.
  4. Entry level pricing – It is generally a good approach to have a lowest priced entry level version that allows customers to try your product. But if this is too good an option most will gravitate towards it. The Times approach priced it too good to pass, at $3.75 a week more will be willing to forgo the tablet access. Given we have significantly more smartphones than tablets (which is shrinking) this claim is validated in the data. Here WSJ approach is the preferred one.  As a scenario had the Times priced this at $5/week and not had the Tablet only option, they would bring in as much revenue (and profit) even if they see 25% volume drop.

How do you define your SaaS pricing?

iPad Sales are 100% Price Insensitive

I am doing an about turn on a statement I made 18 months ago on iPad price elasticity. Then I presented this graphic below and stated the existence of linear demand curve,

ipad_elasticity

Looking at the unit volumes and average selling price (ASP) over three most recent quarters it appeared iPad sales were price elastic. That is, volume changed  with price changes.

This time I expanded the time frame and included data from the first month iPad was launched to latest quarter. Over this nearly six year period here is how the chart for Units vs. ASP looks like,

ipad-elasticity

We can step back and squint all we want, this does not say much. So I ran linear regression analysis on this data, trying to test the hypothesis if changes in volume can be explained by changes in price.  It turns out there is absolutely no correlation between unit volume and price.

The linear model  Units =  Constant + Coefficient X Price,  has an R-square of 0.0017, that is absolutely no predictability. Changes in unit volume is independent of price.

Here is how the scatter plot looks like, almost horizontal curve with points scattered above and below the line.

predicted_asp

Which means demand for iPad is driven by completely different factors  – use cases, product fit, features, customer preferences  etc. So if Apple wants to spur value growth it has to pull different levers than price. That is why you are seeing newer product innovations like the iPad Pro.

On the other extreme of price spectrum is Amazon’s $50 Kindle tablet. If iPad is not price elastic can we say anything about volume for $50 Kindle. Unfortunately we cannot extend the model to a different product category at such a low price point. It is highly likely a price point like that can drive impulse purchases that can drive up volume significantly.

Finally on changing my stand on price elasticity of iPad,

When new data come in I change my mind. What do you do?

 

Does Intuition Fill Data Void?

intuition

In his final letter to Groupon employees ex-CEO  Andrew Mason wrote this as his biggest regret,

My biggest regrets are the moments that I let a lack of data override my intuition on what’s best for our customers.

Decisions need to be based on data. Right and relevant data. Decisions must change based on data, when new evidence is uncovered. Decisions with same supporting data must be reproducible and repeatable by anyone within and outside the organization.  This does not mean we are assured of the results. We never will be certain of results. The role of data/information is to reduce the uncertainty.

But how do we decide when there is lack of data? It is likely true not all that matters is measurable but do we give up on gathering data? Does lack of data mean we fall back intuition?

Decisions based on intuitions are not repeatable by you or by others with their own intuitions. It is like throwing darts blindfolded, you might hit the center but that does not mean your method is correct.

Lack of data does not mean we let intuitions drive but we experiment to seek data that will help improve our decisions.

Your regret should never be you did not override your intuition but you did not experiment enough.

Now a final word on Groupon whose stock is tearing around $2.30 from its IPO level of $20. The problem is who is group’s customer? The deal seeker who moves from deal to deal or the small business owners? You should read my book from four years ago to understand that.

 

Delighting Customers Just Right

What does delighting customers mean?  Stated differently,  what delights customers? Many have offered their own opinions and recommendations. Most fall in the general category of beating customer expectation by a mile.  Examples like throwing in something extra when they least expect, sending a thank you card to customer or flowers for life events are ubiquitous.

But let us drain the murky pond of opinions and get back to the basics. We have data that points to what delights customers – it is when they willingly pay a price for a version of product we offer and feel good about it. You build and offer the product at a price that delights them and at a cost that is profitable to you.

The product packs the right set of values that are most relevant to them for the price point. They are more delighted to swap their cash for the product. Stated in economic terms, they get positive consumer surplus and you as marketer get better profit than otherwise. Perfect synchrony.

Nothing more. Nothing less. No need for gimmicks, to throw in an extra or send handwritten thank you note. If the customer sees positive consumer surplus at the offered price point you are done.

See this on display with Apple. Take the case of ear phones they pack with different iPods, iPhone and iPad.

  1. With the $49 iPod shuffle Apple ships the older style ear phones
    specs_headphones_mediumRemember Apple’s messaging when they introduced the newer EarPods that fit the natural shape of the ears? Wouldn’t customers be delighted to get that over the older models?
  2. With $199 iPod Touch Apple ships the EarPods but without the Mic and remote volume control.
    earpods_medium
    Wouldn’t customers be delighted to get the same one they get with iPhone? Wouldn’t the Mic be useful when you make Skype or FaceTime calls on iPod Touch? If customers want to add that convenience they can buy for the model that retails for $29.
  3. With iPhones Apple ships the EarPods that has Mic and remote control.
    earpods_mic_smallThis makes sense after all it is a phone.
  4. With its most expensive iPad model, iPad Pro that costs $1079 apple ships nothing. That is right, not even the cheapest earphone that ships with $49 shuffle is included with $1079 iPad.

This is not just one example making the case but an example illustrating the principle of pricing, value allocation and consumer surplus. Yes we all will feel happier when we get the EarBuds with Mic thrown in with iPod Touch or iPad. But the point is we are already delighted to get the product as is at its price point. Once we stand up and reveal our preference there is no need to do anything more, even if it is to add EarBuds that likely cost less than a dollar for Apple.

When it comes to customer delight ignore the platitudes and focus on the simple principle that customers express their delight when they swap their cash for your product. If your product does not offer value that leaves positive consumer surplus they are not going to buy your product. Therefore not delighted.

Do you understand customer delight?

Why isn’t there a iPad Pro Bundle?

ipad-pro-primary-100627050-largeAre you tired yet of reading the many reviews on iPad Pro? May be it is time for you stop and take a closer look at its pricing and its two key accessories.

Apple’s iPad Pro goes on sale today for a list price of $799. But wait there is more. You can spend $169 more for a keyboard that turns it into a laptop. And you can spend another $99 to get its Pencil.  These are optional add-ons. There is no Apple bundle that offers iPad plus keyboard or all three at a lower price than the sum of individual products. What if Apple offered one or both these bundles?

  • Bundle 1: iPad, Keyboard and Pencil for $999 (a $69 discount )
  • Bundle 2: iPad with Keyboard for $919 (a $49 discount)

It doesn’t and it won’t. Why is that?

Before we go into this I want to remind you why a product manager should consider product bundling. I wrote this while back on bundling,

pricing a bundle is not a straightforward answer. A marketer needs to know the demand schedule, customer preferences, customer segments, and value add from bundling. The correct price is the one that maximizes profit

Regarding two possible bundles, let us knock out one right away. It is the iPad plus Keyboard bundle. This simply could have been achieved by pricing the keyboard at $129 vs. $169. The keyboard has no standalone purpose and works only with iPad Pro. So a bundle at lower price is exactly same as a lower priced keyboard.

There is no reason for Apple to bundle or drop price because it understands well the customer segment that prefers the keyboard, why they choose the keyboard and what the customers are willing to pay.  Dropping the price may increase volume but at the expense of profit. If we assume 50% gross margin on the keyboard (highly likely number given Apple’s track record),  Apple will have to sell twice as many keyboards $129 to make same profit as $169 keyboards.  That does not fit its pricing philosophy or strategy.

If you see the logic of this simple bundle it is not difficult to see why a full bundle of all keyboard and Pencil doesn’t make sense either. Additionally the segment that prefers Pencil does so for very specific use case and that does not apply to most who prefer a keyboard. So a bundle price will need to so low to appeal to both segments to generate any incremental volume, meaning even lower total profit than selling them unbundled.

In simple terms, no customer demand or economic preconditions exist to create iPad Pro bundles. Apple’s product management team took the simpler and favorable approach of selling the add-ons to maximize profit.