Take a good look at this menu. Play close attention to the listed items and prices. This menu is from Picante in Berkeley, you should go if you have not been there yet.
Before we proceed, a word of caution. Please do no bother writing to the restaurant about your insight or write a blog postabout it. I speak from experience. Business owners are busy running their business, serving customers and making payroll. They don’t have time to listen to our free advice.This isn’t about them.
Now that you looked at this, what stands out? The first five are variations of the same basic model – chips. Six, if you include the half size option. There is one that stands out. The $1 base model. We are looking at this price list after the fact, we do not know the reasons it was introduced. Nor do we know if this came first, at the same time as other versions, or introduced after the premium market was saturated.
Is it there to capture those low value customers who are not willing to pay for premium features like salsa and guacamole? Or is it impacting revenues and profits by tempting those who would have otherwise picked the premium versions had the $1 chips not there?
For every unit of $1 chips they sell their average selling price (ASP) goes down. You do not need to know exact cost accounting to see their margins from premium versions are going to be lot more than the $1 version. Besides the $1 version may incur them unseen costs like those consuming lot more of their free condiment sauces (guilty).
Wouldn’t it be great if all of the low value customers who will never buy the premium versions are the only ones opting for the $1 version? This will help them grow their profit despite the drop in average selling price and makes a case for introducing the $1 version.
After all who but the most price conscious will pick the $1 version? And if they take away the unlimited free sauces they offer, some may even upgrade to premium versions.
The same logic is under works for the rumored Apple’s iPhone lite. We know here they only have the premium versions. But they kept their past premium models around and sold them at much lower price points. That indeed had an impact on its iPhone ASP and gross margin. The ASP and profits took a hit because these phones are too good that some who would have otherwise picked premium version find greater value in the older models and choose them instead.
Applying the conditions for introducing $1 chips above, Apple will introduce iPhone lite if
- Almost everyone who want the premium iPhone already have one
- These will continue to buy only the premium model and won’t be tempted by iPhone lite
- Even if they are tempted Apple is confident of its price fences – no Retina display, limited in wireless technology, flash capacity, data plans supported by wireless providers, etc.
- They see a risk of perennial profit erosion as some some of these high value customers switch – Apple may want to offer them a down market edition rather than lose them to competition
- Cost to produce and market these lite phones are much lower than keeping the older models around – not only these are most likely cheaper to make but will help Apple with better marketing story, it defangs competition’s criticism that these cheaper phones are ancient
That is simple incremental profit math.
Unless of course they found a way to convince us that we need both – one for each hand.