How to fix your wrong 1.0 pricing?

fitbit-flexfitbit-forceFitbit, the San Francisco based maker of wearable fitness devices, recently announced a new device Fitbit Force. This new product launch comes less than six months since the release of their last device, Fitbit Flex. When you look at the two devices side by side they do look almost identical  with some feature additions.

The Force, as you can see, adds a display that gives more descriptive metrics than just four LEDs progress bar in Flex. Internally it also adds features like stairs counting.  It is still a product evolution. Yet, instead of choosing to call their new version as Flex 2.0 they chose to introduce a new brand, Force.   To give an analogy it is like Apple deciding to call iPhone 5s as  iPhone Force or some such name.

The answer to why they chose to introduce a new brand for a product evolution lies in how they chose to price Force. Fitbit Flex, when launched in May, was priced at $100. Force is priced at $130, a price realization of additional $30.  Surely you do not believe their marginal cost to add the tiny display or the altimeter is  $30 do you?

After  Fitbit launched Flex at $99, it is highly likely they realized that  a device someone sports on their wrist is lot more about image than about pure fitness. That is, in a basket of reasons why customers buy a product the hedonistic reasons outnumber and outweigh the utilitarian reasons. And hedonistic reasons carry higher willingness to pay over utilitarian ones (just look at the luxury market).

Another aspect is the profile of customer segment. Those who buy a fitness band to proudly display on their wrist are less cost conscious, have higher willingess to pay and have higher disposable income (wherewithal to pay).  So with $100 pricing, Fitbit was leaving too much money on the table by not capturing more consumer surplus.

They needed to fix this initial pricing mistake. And introducing 2.0 version was not going to do it because of previous reference price and its inability to properly serve the hedonistic aspect. Besides they would have to drop the price of Flex below $100 or discontinue it.

So they took a trusted play out of the pricing playbook – Shift the product category, which you can do by deliberate product positioning or by branding. With new brand, Force, they are telling their customers that this is a new category. More importantly their customers just want a reason to give more of their consumer surplus and this new brand gives them that reason.

Previously I wrote about this category shift in moving from free to fee. The same rules apply in fixing your past low price  mistake and getting price realization. It is a new device. It is a new brand. It is a new category. It breaks the comparison and helps them set a new higher price. It gives their customer a reason they are looking for to pay the new price.

Fitbit Force also took another additional step that results in better price realization. Flex ships with two bands for different wrist sizes. That was additional marginal cost with no profit driver. Force switched to one model one size, saving cost of extra band.  Don’t add a cost  component that does not serve a value driver.

Overall good moves by Fitbit. Not great, as I still believe there is more to be gained with even better price realization because wearable fitness devices are extreme form of hedonistic consumptions, they are conspicuous consumptions.

Can you think of another marketer who recently fixed their pricing using branding and category shift?  Amazon’s KIndle Fire HDX. Think about why they branded the new HDX thusly and its $229 price tag.

How do you fix your past pricing sins?

How the presence of lower priced version affects your profit?

Take a look at these pre-order numbers on Amiigo Fitness band. The product has not launched yet and is a project that is fully funded on Indiegogo.

Amiigo Versions

 

The black version, offered at $99, sold (claimed?) almost seven times as many as the color versions offered at $119.

Can we see this as an indication of the market demand for wearable fitness devices?

Can we conclude $99 is the sweet spot for pricing such devices?

The answers are no and no.

Two data points do not make a valid demand curve. And the fact that this product is now targeted at a very narrow segment that believes in funding such projects on KickStarter or Indiegogo we cannot say they uncovered the right price point.

What we can say however is the effect of lower priced version on the sale of higher priced versions.

Let us be assured that whatever justifications Amiigo folks may give us there is no cost difference in making black vs other colors. So the additional $20 they charge is pure profit. There is nothing wrong with that. I am all for profit maximization. If customers perceive higher value from a color other than black (or turned off  by black) then it is fair to capture a share of that value with higher prices.

What we see here is a possibility that for wearable fitness devices like Amiigo, customers do not see color as a value dimension that is worth paying more for. This is like the case of Strawberry and Raspberry yogurt pricing.

It is likely that the total demand would have been the same had they simply offered all colors at single price point of $119 (note that we don’t know if a higher price point is ruled out). But the presence of $99 black Amiigo made even those who would have gladly paid $119 for the device to choose it over the $119 version, resulting in lower overall profit for Amiigo.

That is the effect ill-conceived lower priced versions.

The bigger question remains – what is the right price point for such devices? Is it $99 or $119 or higher? We don’t know. It starts with customer segmentation and customer job to be done. Launching a product through any of the crowd-sourcing platforms does not allow you to find your customer segments or the jobs they are trying to get done.