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.

 

To Unbundle or Offer Multiple Bundles?

If you are looking at pricing your new cloud based service, there are two Airline pricing stories in recent news that I want to call your attention to. These are relevant to X-as-a-service businesses that struggle with value maximization. The two stories are similar in their goals of maximizing their value capture while not taking away customer choices. But they go about that in two different ways.

FlySafair ExtrasFully Unbundled Pricing – South African airlines FlySafair completely unbundled its ticket. The base price you pay for the ticket gets you just that – a seat with assured safe travel. Everything else is extra – inducing selecting your seat or getting TXT alerts on status. Their business policy is recognizing there are many different customer types that value different features differently. But a vast majority they want to serve select based on base price. Instead of bundling features and set a higher base price they practice fully unbundled pricing.

investor-day-2014-32-638Option of Multiple Bundles – Delta Airlines reported its latest quarterly numbers and in that stated it made $75 million in profits from its “Branded Fare Initiative”.  Branded Fare offers customers five different versions at different price points and features mix and letting customers self-select. Each version is a bundle of features and targeted at specific segment. For instance,  the lowest priced version does not include the option of seat selection while it includes Wifi.

Delta calls this strategy as better customer segmentation. That is correct and likely they did extensive marketing research to find what is relevant to which segment and define the right number of versions. You can see a similar segmentation research on the airline preference I did a few years ago. FlySafair is practicing segmentation too – it allows for many different segments, not just five we see with Delta.

I have written at depth about Unbundling as pricing strategy and about price bundling based on customer segmentation. Which approach is better for your cloud service?

Should you take FlySafair approach of offering a base product at lowest possible price and make everything else extra? For example a APM SaaS may offer simple data collection at base price and offer advanced analytics, monitoring, alerts,  replay etc as extras. Or should it offer 3 to 5 versions?

I recommend Unbundling as experimental approach rather than a long term pricing strategy for your MVP.  A big advantage of complete unbundling is it drains the water in the pond and exposes all rocks and deep ends. When you are starting with a X-as-a-Service it makes sense to start with fully unbundled pricing. This is your marketing research unlike established businesses.

However it does have the ill-effect of being seen as nickel and diming. Even if that is not the case every time customer has to make a buy or no buy decision on an extra they incur significant cognitive cost. Paying for multiple extras causes more pain than paying once for a prepackaged bundle (Prospect theory).

Use unbundling to find the value distribution among customer segments. Then use the customer preference data to define specific and limited product versions like Delta did. That offers better customer experience and value maximization.

Snail Slime Facial Gender Based Price Discrimination

Let us recap the news item. A spa in Japan offers Live Snail Facials – For $350 you can have five snails slink all across your face. It is a painful process even though it lasts only five minutes.

Who is the customer? Almost all women. Here is what the spa says about catering to men,

The service attracts a mostly female clientele in their 30s to 50s, and although men can also opt for the live snail treatment, none have done so yet. “I’ve observed that women will endure more pain and fright than men, if it’s for beauty,”

Let us set aside the fact that this non-scalable , one customer per day, service is not really the product. Let us ask, if this were a real product, if the spa would like to expand its market to men, what should it do?

Say men have less tolerance for pain when it comes to beauty. Could the spa offer lower price to men to help slime grease the wheels? That is overt and egregious price discrimination. A no no!

While price discrimination is good, gender based price discrimination is NOT. So how can it put to practice an effective and fair price discrimination?

Two options – none of these need any gimmicks – both are tried and tested and rooted in economic principles

  1. Bundling – Offer couples package
    Remember bundled pricing works when customer preferences are negatively correlated. Set a price that represents the sum of the higher and lower value perceptions of women and men. Say a $550 couples package could work. The man would think his cost is $200 while the woman would think her cost came down from $350 to $275.
    Besides the couples package will help drive more customers as women bring their partners, like this Candy store CEO says.
    Sure you give some consumer surplus in cases where both people value it at full price. As long as that lost revenue is smaller than what is gained from serving more customers with the bundle you should do it.
    For complete fairness, you should offer the couples package to any couple.
  2. More Product Versions
    Create an express version – 2 minutes for $200. That helps assuage men’s concern for pain and fright. And the lower price is attractive too. Brand it to signal something other than the best so women are less likely to choose it.
    As long as you are creating versions, create another premium version, there exist customer segments willing to pay more and you should capture that.

Both these options implemented together would work as well.

There you have it – Live Snail Price Discrimination done fair and square.

Perfect Packaging and Pricing – Delighting customers doesn’t mean over-delivering

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?

Bonus puzzle:

Why didn’t apple offer yet another iPad offering at higher price with premium headphones?

Deliberate Pricing or Math Ignorance?

What do you think? Is this a case of

  1. Asymmetrically Dominated  Option (Decoy pricing) to make it attractive to buy the middle option?
  2. Effective non-linear pricing to capture more value from those who want 3 baskets (like what we saw with hair-braiding case here)
  3. Deliberate mis-pricing to capitalize on those customers not so good at math?
  4. Deliberate pricing (with the separation of price postings) to capture consumer surplus?
  5. Math error by vendors compounded by customers’ reluctance to do the math?

 

Pricing the Weekend Edition

The Sunday edition of the print version of The Times is priced $6,  3 times the price of daily edition. But the Sunday edition comes packed with many extras. According to Ad it would take someone the whole day to finish it. The Sunday edition is actually a type of bundling that combined many different specialized offerings that are valued differently by different segments. Note that even weekday edition of newspaper pricing follows bundled pricing model (See for more on bundling).

But I saw a different case of weekend edition pricing for business newspapers in India (The Economic Times, Business Standard, The Financial Express).  The weekend editions are actually much thinner and sparser than the weekday editions and priced almost twice the weekday editions. The regular newsstand that I bought the weekday edition did not even carry them. The news vendor said there aren’t many buyers for the weekend edition because it was priced  so high. The vendor at the other newsstand I walked to said he carries fewer copies than the weekday edition.

So why is the weekend edition that carries fewer stories (and fewer Ads) priced higher and sold fewer copies? This is just another case of effective pricing.

Fewer people bought the weekend edition than the weekday edition. Due to fewer readers the advertisers weren’t willing to buy Ads for on the weekend edition and hence the newspapers are also losing Ad revenue. But those who bought the weekend edition valued the paper more and hence were willing to pay more. The price is simply set to sell just to these high value customers and maximize profit.

If we were to dig deeper the Ad prices would also be higher for the weekend edition, despite fewer copies sold because of the targeted reach.

That’s effective pricing.