Waging the right price war – The $65,000 Mistake

I believe “price war” may be a misnomer if both sides do not live to fight many rounds. We only see price battles or skirmishes that go for 1-2 rounds before one side throws in the towel or runs out of cash. There are two kinds of companies when it comes to price wars.

Category 1: There are just handful of companies that can wage incessant price war  by consistently keeping their prices low

Category 2: Even fewer that can withstand such low price attacks by their competitors.

Amazon.com and Walmart fall into the first category. Apple is in the second category.

In fact if the two players know that the other has the will, reserve and wherewithal to keep up the fight without ever letting up they most likely will choose not to enter price war in the first place. This is very much like nuclear deterrent  — mutually assured destruction.

BestBuy does not fall in either of the categories but was tempted to take on Wal-Mart with its iPhone 5 pricing. The result? BestBuy lost $65,000 in a single day.

Let alone the price war dynamics this is simply the wrong fight to pick. A tactical blunder.

First the product is not yours and the customer has many alternatives. Most are willing to pay full price at Apple stores. Customers do not think where they buy is important when it comes to iPhone (a qualifier is some insist they buy only after standing in line in front of Apple stores).

Second Walmart did not cut the price uniformly across all stores and did not make available unlimited quantities. Agreeing to match the price on such promotional tactic is simply wrong. It appears smart deal-seekers, instead of running from one Walmart store to another, simply walked into to neighborhood BestBuy and asked for the low price match. How convenient.

Finally, the low price was not attached to any other product sales and not designed as a loss leader that would help maximize customer margin.

And the result? Deal-seekers walked in, probably for the first time in many months, bought the $127 iPhone 5 and walked out without buying anything else. That is the $65,000 loss in a day.

Other readings:

See here for Waging Effective Price Wars.

See here for Effective Pricing

 

 

What is phone doing in smartphone

What job do we hire a phone for?

If it is talking and if we are using a smartphone for less and less of talking, should these even be labeled as phones?

If you take out the ‘phone’ part from the name, does it smash down the rules and expectations on the form-factor for a phone?

If it is a “revolutionary internet device” for consuming content and occupying time, why settle for smaller screen? As Kevin Tofel writes,

Why watch the content on a small, low-resolution screen when you can watch it on a high-definition screen that’s still easily portable?

Simply put, we can’t think about today’s constraint of needing to put a mobile device in a pocket. We only put phones in our pockets when we’re not using them. Guess what? We’re using them more and more, which means they’re in our pockets less and less.

That is right, we put phones in our pocket. What if it is not called a phone and there are no more phones?

Another factor that could hasten the transition is the service providers’ reliance on voice revenue. While it is great pricing scheme by service providers, some customers may start giving up their phone altogether for tablets or adopt a tablet plus dumb-phone for occasional phone function.

Add to that Apple’s rumored iPad mini. A mini tablet from Apple will likely hasten the move away from phone. Is the possible demise of iPhone (as we know it) the reason why Apple may introduce iPad mini?

Disclaimer: Any prediction about the future that is about specific solution is bound to be wrong. So this prediction is likely going to be wrong as well.

Just because there is a gap in product line

Recently I wrote an analysis on the implications of rumored  iPad mini on Apple’s profits. The best case scenario, one that will result in another billion profit, is the one where Apple successfully positions iPad mini as yet another device we need between iPhone and iPad. This may sound like a recent piece in The Onion,

Any other scenario is fraught with risk of cannibalization, not just to its iPad but to its iPhone and iPod Touch products as well.

Recently there was another article that looked at price points of iPod and iPhone product lines and made a prediction about iPad mini. The premise is based on Apple CEO’s comment about price umbrella,

“one thing we’ll make sure is that we don’t leave a price umbrella for people” in the tablet space.

The chart we see on the left is simply a representation of Apple’s current price points using bar-chart. From the iPhone and iPod examples it asks us to make a leap of faith about iPad.

Strategy is not about nicely completed artificial triangles. Absence of iPad in the lower price points does not point to a gap but Apple’s choice for profit share and not market share.

If filling the gaps in the price points is the driver then you we should have several sub $500 laptops and desktops from Apple. Just open the flyer from Fry’s and count the number of laptops available in the $400-$700 range and compare that to the price of MacBook and Macbook Pro laptops. Shouldn’t Apple be worried about yielding that market to others?

This is not to say there will not be a iPad Mini but pointing out that the case being made for iPad mini lacks any kind of rigor or evidence.

The gaps in the price points says nothing about the segmentation or the demand.  Nor does it say what happens to demand for current products when a newer cheaper one comes along.

If one is going to use charts to make a case for iPad mini, it will look something like this

This is the representation of the demand for iPad and iPad mini. We do not have data on how these demand curves look like. May be Apple has this information. What this chart tells us is the impact of the demand for $499  iPad when there is a $299 iPad mini. As long as the profit from iPad min sales exceeds the lost profit from cannibalization of other products, Apple will introduce iPad mini. Not because they do not like gaps in someone’s bar-chart.

 

 

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The Smart Phone is on its way out

Take this 4 question survey before you read on: Survey Link. This will help me test the hypothesis  I am offering here.

This week we commemorated the fifth anniversary of iPhone. It has come a long way since then and so have we and our use of iPhone. Let us go a little further back in time to the day Steve Jobs made the iPhone announcement. Mr. Jobs made a dramatic announcement about three new devices they were introducing that day,

A revolutionary mobile phone

Widescreen iPod

Break Internet communications device

He kept repeating these three until he got the expected reaction from the audience. Surprise! All three devices were in one neat device called iPhone. Those were the days when smart phone meant getting email and combining music player with phone was positioned as convenience.

Those were also the days when

A phone’s mandatory purpose was talking,

Visual voice mail was a killer app,

Music meant listening to ripped songs,

Entertainment meant reading news and other sites and

Staying connected meant email.

Today all these mean completely different things –

Talking is Skype,

Music has many options,

Entertainment is 500K apps and

Staying connected is Social.

If the phone has become an App platform, does it make sense to have it in the phone form factor and keep paying $100 a month to mobile subscribers to support their phone driven business model?

With changes afoot at Verizon an ATT, the total cost of smart phone for two years is  $199 + $2400. As customers use the phone less and less for talk and text there are far fewer takers for the lucrative all you can Talk+TXT plans. So the mobile subscribers did the one think they know, get rid of cheaper alternatives in the name of simplicity, making $100 all you can  Talk+TXT with 2GB data as the only choice.

Customers see plans designed to prop up outdated business models rather than those designed to fit their changing needs?

If the iPhone was three “revolutionary” devices rolled into one, is it time to unroll it into two different devices?

The same Apps run on Tablets that offer better form factor to consume Apps and content, and cost far less than  device price and service charges for smart phones. For instance, one could get 3G data for their $199 tablets for $30 a month and get prepaid Talk+TXT only phone for less than $30 a month. Net savings for carrying a phone and tablet separately?  $960 over two years.

Do we see a future where the smart phones as we know it ceases to exist and is replaced by a dumb phone for exigencies and a tablet?

Can you afford to set your pricing wrong?

“My only regret was how we introduced pricing in the beginning, because how did we introduce pricing? Thirty dollars and you get all you can eat,”

This is what ATT wireless CEO Mr. Randall Stephenson said about their iPhone history.

It is likely that the price and the unlimited data plan made sense in 2007 when 95% of the people consumed far less mobile content. ATT was fighting for subscribers in a market that was close to saturation. Only way to show growth was by causing churn away from competitors. They chose a price such that it brought in large number of customers with only a small percentage of them being outliers in consumption.

All you can eat was not all bad when there was not much to eat, everyone eats differently, and the amount one can eat had an upper-bound. But all that changed when the very device (iPhone) they were after resulted in explosion of content to consume and rate of consumption.

ATT was forced to rethink pricing to better align price with value delivered. But the initial low price and offering set a strong reference price that was hard to overcome.

Hats off to Mr. Stephenson for seeing their initial folly and admitting it. He sees the importance of getting initial pricing right.

What about your free webapp? How difficult is it going to be to move from free to fee?
ATT has the resources to recover from its pricing mistakes. Can you afford to make mistakes?