More than the iOS is seeing flattening – MacBook Pricing

Last time I showed you the simplification of MaBook Air pricing. From an elaborate and complex model it was flatten to a simpler model that reduces cognitive cost to customer.

See  “Before flattening” pricing

See “After Flattening” pricing

That time I predicted a similar price simplification for MacBook Pro. Take a look at the “Before” pricing for MacBook Pro

Too many options, the non-retina version was still alive with HDD drives. Add to this 13″ models. So my prediction then was a simpler pricing model (below)

That is I predicted the end-of-life of non-retina and spinning hard drives. The reality is not that far off.  The non-retina HDD is no more an option for 15″ but lives on for some strange reason for 13″. The prices have gone down by $200 and there is a 128GB model for 13″.  Not as flat as I thought it would be but getting there.

What do you think?

The most beautiful price fence

Fence a3

Fences are never beautiful. May be the picket fences are. But when designed to keep two sides from moving easily from one side to the other they are not usually described as beautiful. Price fences are as bad as say a fence between two countries. But they do serve the same purpose – to keep the two sides apart. Here is how a research article from 2009 defines price fencing,

market segments should be kept separate to prevent demand spillover from high priced segments to low priced segments and the associated revenue loss. Tools to restrict customer migration across segments are referred to as ‘fences’

 Price fences are key components of segmentation and revenue management. They are designed such that those who can afford and willing to pay higher prices are not tempted by the lower priced versions.

Let us take an extreme example from the early days of railroad transportation. Railroads are a high fixed cost business and the marginal cost of adding one more passenger was practically zero. They could have set the ticket price really low to fill every seat but that would be not capturing value from those willing to pay higher prices.

So they offered classes of service – small number of super premium first class service, moderately priced second class service and really low priced third class service. To prevent those who can afford second class service from being tempted by the low price of the third class service railroad operators removed roofs from the third class cars.

That price fence was not beautiful.

But here is some really beautiful price fence – comes from your favorite brand that excels in product design, Apple.

mbp-price-fence-2

It is three different price points with right mix of features so carefully selected to let those who can and willing to pay higher prices from choosing the cheaper version. You may not see how impervious the fence is as you admire the beauty of the MacBook Pro. Let us dig deeper.

Between the $1,299 and $1,499 versions the differences are only in the RAM and flash capacity. Say you like the $1,299 version but just need more flash capacity. They are designed such that those with higher willingness to pay will choose the $1,499 version and pay the $200 extra.

You want the lowest priced version and try to customize your MBP with higher flash capacity. But guess what? There is no option available to increase just the flash capacity of your MBP. You can increase your RAM from 4GB to 8GB (the same level as the two versions on the right) for $100 more but cannot do that for flash  capacity. It is not hard for you to see that if RAM difference is priced at $100 the disk difference should also be priced and offered at $100.

Do not think this is a technical challenge. It is not, and it is offered as an option for another MacBook Pro – the non Retina version.

flash-upgradeThe MacBook Pro without Retina ships with hard-drive (the spinning platters kind) and if you want to customize it with SSD you would pay $200 more for 128GB and $400 more for $256GB. That is they want those customers to pay $200 for the same 128GB to 256GB upgrade.  So offering  just flash upgrade for Retina version  (for $100 as we saw above) would pose challenge to that $200 extra they charge for non-retina MacBook Pro version.

To state in simple terms, Apple’s price fences are not some isolated chain links but an integrated system of impenetrable walls that are passable only if you are willing to pay the same price where ever you decide to cross the fence.

They want $200 additional price  and they make sure they do it with price fences.

And go ahead and try to tell me that is not the most beautiful price fence you have seen.

 

Why you do not yet see a MacBook Air with Retina Display

There are enough tech blog posts on rumors about MacBook Air getting Retina update and on desires of many to get a MacBook Air with Retina display. The latest MacBook Air refresh from Apple did not include Retina display. Well the MacBook Pro 13″ version has it. The 15″ version has it. Why not the MacBook Air?  The right answer is customer value perception and Apple’s value capture.

A recent CNET article on  why MacBook Air still does not have Retina display makes its argument based on technical limitations and cost,

 because the technology is still being perfected it will take time to bring production costs down, she said. And that’s important for Apple, she said. Costs need to come down enough so Apple could use the display in a MacBook Air-class product without jacking up the price too much.

Technical issues are not limitations, if it is important Apple can workaround those limitations. And costs? Anyone can compute what the costs are (Henry Ford), but price always comes first. Since when did Apple  price its products based on the cost to make them?

As a marketer (or product manager or a startup founder) we should ask –

  1. What jobs does Apple want customers to hire MacBook Air for?
  2. What jobs does Apple want customers to hire MacBook Pro for? (could be same customers different jobs, different customers different jobs)
  3. How does Apple think those jobs fulfillments are improved by adding Retina display to the product? (what is the incremental value add to the two different customers?)
  4. Is Apple able to capture its fair share of the incremental value created in the form of price premium?

To answer (1) and (2), after misleading you to think that these are really two different segments and two different jobs I posit here that it is really the same segment and same job. Apple is simply offering two different candidates for the same job, making the customer choice be between its two products rather than between Apple’s and a competitor’s product.

Given this segment and job – Some prefer the lighter weight and  longer battery life and are willing to give up faster CPU, others prefer the CPU horsepower and are willing to compromise on weight and battery life.

Now to answer question (3)- Is there incremental value add from Retina screen?

Let us look for clues in how Apple is pricing MacBook Pro 13″ and 15″ versions for this. Because price is a function of value and looking at pricing we can approximate  customer value perception.

Here is the 13″ MacBook Pro version. I normalized with same 8GB RAM for comparison. The Retina version comes with 8GB RAM and only SSD disk. This indicates these customers see no incremental value from Retina.

MacBook Pro 13"

Here is the 15″ MacBook Pro version. Here the Retina costs $100 less indicating ever worse value perception by customers.

MacBook Pro 15"

Apple’s data must indicate customers hiring MacBook Pro 13″ version see little incremental value from added feature of Retina display and those hiring 15″ version see their total value decrease. Hence the prices.

So what does this say about incremental value from adding Retina to MacBook Air? Take a look at the comparison of 13″ MacBook Air and MacBook Pro

Comparison

Apple seems to be able to capture almost all value it can from MacBook Air with its current pricing and by positioning it as  better portable with longer battery life. There is not much value gap left between the two models that Retina display can fill

The price difference (hence minimum value difference) is $300. That can be explained by

  1. Gain a processor with almost double the speed (which does not translate to double the application performance). Apple offers CPU upgrade to 1.7GHz at additional cost of $150. There goes half the price differential for still lower CPU speed.
  2. Gain retina display – which we saw did not get any value in the 13″ and 15″ versions.

 

Which implies that if MacBook Air Retina is wedged between these two versions it stands to get no price premium or worse will erode current prices. Apple pretty much will have to offer  Retina only MacBook Air model, replacing current models, at the same prices as current models.

If there is even minimal marginal cost to delivering Retina display in MacBook Air but  if it adds no incremental value  to customers or offers no opportunity to capture that value as price premium, why bother delivering that extra value? (Like not adding earphones with iPad.)

If you do not see MacBook Air with Retina it is because of value and value capture reasons and not technology hurdles.