Xoom: Pricing is Wrong, Costing is Wrong or Playing for the Niche

Update 7/7/2011: Motorola cuts Xoom prices by $100.

In my last article, Why there is no 16GB Xoom, I raised two possibilities

  1. It costs them $600 to make Xoom
  2. Their costing is wrong – they incorrectly allocated a share of their fixed costs to every Xoom there by getting an inflated cost number compared to true marginal cost

Yesterday, iFixit did a tear down analysis of Xoom and found that the marginal cost is not much different from that of 32 GB iPad 3G.

So why is Xoom priced higher even though it is a new entrant with no track-record (like iPod touch, iPhone)? In an investor conference, Motoral CEO Mr. Jha said,

“Xoom deserves its higher price tag because of its quality and the free upgrade to 4G”

No product deserves higher price tag just because of its quality or because the marketer believes so.  Customers decide whether or the higher price tag is worth it.

Even if Motorola believe there is higher value to the customer and customers agree with that value proposition,  the reference price set by Apple brings down the price they can charge.

It is highy likely they got costing wrong. They may not be just looking at the cost to make each unit, like iFixit did, but including a share of their R&D, Marketing, other company overheads like executive salaries and other investments to each Xoom.

The next step in this slippery slope is to tack on a percentage margin and set a price, regardless of what the customers value, because all their products must meet an artificial percentage margin target.

There is yet another possibility. They are yielding the mass market to Apple and want to target only those customers who desperately need a tablet that is not an iPad and hence are willing to pay higher price for a non-iPad. It is not a recommended move when the market is just getting defined. There is no reason to slice a small niche within a niche especially when tablets threaten the PC market.

Net-Net, not having value based pricing, not having versions or pursuing a niche strategy are all bad moves.

We should expect significant price drop real soon, like after tomorrow.

Why there is no 16GB Xoom?

Unlike Apple’s iPad which is available in 16GB, 32 GB and 64 GB versions the Xoom tablet from Motorola is available in only 32 GB version. The price of Xoom is $799 compared to Apple’s $729 (for 32 Gb 3G).

So why did Motorola decide not to have a 16GB version? If one price is good, two are better, no? A 16GB version at lower price would appeal to some customers turned off by 32GB version, wouldn’t it?

Their decision to not have a version based on disk size is likely due to following reasons.

The first rule of pricing (as old as Henry Ford), “Pricing always comes first. Find what price the customer is willing to pay and then see if you can produce it a cost that is profitable to you”.  Second, trade-off product features that are valued more by customers but costs you less to add.

The flip side of the second rule is, you cannot remove a feature if it does not save you much but without it the value realized by customers goes down significantly

iSuppli numbers for iPad shows, it costs $30 more for 32 Gb than 16GB.  So a 16GB Xoom cannot save any more than $30 for Motorola.

The reference price for low-end verison is stronger than that for higher priced version. The price customers are willing to pay for 16GB version is set by the iPad. May be there is some room for improvement because of added features like camera in Xoom. So the price is likely to be in the $629-$649 range for 16GB Xoom.

The fact that customer willingness to pay drops $170 while the cost drops by only $30 is a good enough reason to not have a 16GB version.

But if that price is still profitable(per unit), why not sell it? I am no iSuppli and I do not plan to buy a Xoom to do a tear down analysis, but it is likely that it costs Motorola close to $600 to make a Xoom.  In addition, seeing a lower priced version more customers may choose that instead of the $799 version. As a result the incremental profit by adding a 16GB version may not justify the production and marketing investments needed for it.

One cannot rule out the possibility that Motorola did costing wrong, and incorrectly amortized their fixed costs to each unit of Xoom and came up with a much higher cost number than true marginal cost. But I doubt it.

Another reason is, the Xoom sports a SD expansion slot that makes the disk space feature a moot point. This is also the reason why there is no 64GB version. iPad is deliberately designed to not have expansion slot and hence eliminate this arbitrage so Apple can use disk space as a value meter.

If one price is good, two are better. May be even this single price for Xoom is not so good?