The $10,000 Smartphone

Print version of Fortune poses the question to its readers,

Are you ready for $10,000 smartphone?

Then teases us with a promise to answer

Who buys these phones and why?

Un-Fortun(e)-ately it is asking the wrong question and fails to answer who and why in its article. The digital version does not commit these mistakes opting for a benign informational title.

Asking its readers whether they are ready for $10,000 smartphone is wrong because that’s not whom Vertu is targeting. Opinions of the columnist or the comments of their readers are irrelevant. You should consider the possibility Vertu understands

  1. Who their target customers are? (Hint: Not Fortune readers, likely Richistan )
  2. What job are they hiring the luxury phones for? (Hint: conspicuous consumption)
  3. What is their phone’s competition? (Hint: not $650 iPhone, likely other luxury products)
  4. What their willingness to pay and wherewithal to pay are? (Hint: No pricing pressure here)
  5. What budget will customers pay from? (Hint: not their smartphone budget)
  6. How to reach them? (Hint: Not through Fortune magazine)

Fortune quotes McKinsey study (don’t you love those sentences that start with, “McKinsey study states …”),

brand needs to continue building on its heritage — highlighting the skill of its craftsmen

And guess what? Each Vertu phone is assembled by a single craftsman and Vertu shows it off to its customers at its manufacturing site.

You don’t believe $10,000 price tab is due to the labor cost, do you? Or that the craftsmen are more precise and produce better quality smartphone than the automated machinery that can assemble parts with near perfect precision? In this case McKinsey finding is partly correct.

It is true Vertu wants to highlight the skill of craftsmen but not to the target segment buying the watch  but to us in the peanut gallery (and Fortune readers) how great the craftsmanship is so our admiration makes it worth it for those buying the $10,000 smartphone.

Finally an IDC analyst interviewed for the story states,

“even capturing 1% of the $295 billion global smartphone business would be an achievement for the firm”

If you followed the real target segment and understand the job they are hiring Vertu for you will see how irrelevant the size of smartphone market is or the share to capture. Vertu is not competing for the job of iPhone/Galaxy and customers are not paying for it from their budget for smartphone (as a utilitarian device).

The real market size should be based on luxury spend and the market share question is how much of that spend on Gucci handbags and Tiffany’s diamonds can Vertu capture.

The moral of the story is, your understanding of business opportunity, market size, market share, competition, pricing and likelihood of success will all be wrong if you do not start with customer segment and what they are trying to get done.

How do you size your business opportunity?



Pricing For Richistan

Richistan is the name of the book by The Wall Street Journal columnist Robert Frank. The book is about the lives of the wealthy and high propensity to consume. Frank says in that book,

Pricing for Richistan is like pushing an unlocked door – no pressure

Through @pricingclub I saw the USA Today news on $4000 sunglasses by Oakley.

“I could have seen something like this selling three years ago,” says John Horan, publisher of Sporting Goods Intelligence newsletter. “But conspicuous consumption is out.”

Conspicuous consumption is not all out. While marketers (like LVMH) targeted Richistan there were a few other segments which self selected themselves. They had high willingness to pay but not the wherewithal to pay.  Only these segments are now out. Since the economic downturn we do not know the population of Richistan. Their ranks may have shrunk but as it does I hypothesize that those who are left in it have increasingly low price sensitivity and are willing to splurge lot more than. So it makes sense to introduce super and ultra premium products like the $4000 sunglasses.

Oakley is producing just 200 pairs, thus making it exclusive and its stated target segment is “the guy who doesn’t blink at spending $300,000 on a car”. This is super narrow targeting, males of Richistan that can buy expensive cars without a thought. Compared to $300K price tag the $4K is going to look relatively small.

Another reason why this will help Oakley is the presence of $4K per pair sunglasses helps to improve customer reference price and make their $200-$500 prices look like a great deal.

Great marketing strategy. But, what is surprising to me from that story is not the price but the argument for the high price based on the cost.

About 80 layers of costly carbon fiber — a material more common to the aerospace and motor sports industries — are pressed into the frame. The ultracostly material and design make the frames more flexible and comfortable for athletes, says Neil Ferrier, Oakley’s advanced product development chief.

Another reason for the high price tag, Ferrier says, is the number of worker hours devoted to them. About 90 hours of machine time go into crafting each pair, he estimates.

Costs do not matter to customers and making a cost based justification makes sense only if a marketer expects push back.    So why bother even mentioning cost to produce?