The iPad Average Selling Price Erosion

I have written at length about value waterfall and price waterfall. Value waterfall is a model to understand what prevents you from getting your fair share of the value your product creates for the customer. It is marketer’s failure to understand customer choices, buying experience, sales process and mostly a messaging failure. Price waterfall occurs in most cases because of the markup mindset which leads to discount after discount to a low pocket price or average selling price. Price waterfall leads to low average selling price (ASP) and hence lost profits.

You would not think of Apple committing either of these mistakes. There is no question about Apple’s monomaniacal focus on value messaging and setting prices to capture its share. Apple does have to give better pricing to channel so its ASP is not same as MSRP but we hardly ever see any discount on Apple’s products. Apple does join Black Friday for minimal discount but nothing you would call as significant price leak.

But take a look at this chart of ASP of iPad till date since its introduction in 2010. This is the blended ASP, that is across the mix of all iPad models computed from Apple’s earnings reports.

What we see is the ASP erosion from its high of $662 to $433.There are two reasons for this erosion

1. Every time Apple introduces new iPad models it drops the price on previous gen models by $100.
2. Apple introduced iPad Mini whose MSRP is $100 lower than iPad Air.

The previous gen models are still value rich and compelling. iPad mini was attractive to a large segment that prefers the compactness of the device. Together these two changes nudged customers to pick models that are lower priced, resulting in lower ASP. This ASP erosion is brought about by product mix not discounts.

ASP drop is not all bad if that makes up in volume. Unfortunately you can see in the chart how far the volume has fallen.  Apple tried to help fix the ASP with another product mix change when it introduced 16GB, 64GB and 128GB getting rid of 32GB models. But that change did little to ASP as you see the near flat ASP curve in the last 5 quarters. Counterfactually we could say the change helped step further erosion.

Let us break the ASP down further and compute ASP for iPad and ASP for iPad mini. For this we need percentage of each.in the sales mix which Apple does not report. Using the devices share mix reported by Localytics  I computed the sales mix to,

iPad 57%  (current and previous gen models)

iPad mini 43%  (current and previous ten models)

Looking at iPad ASP in quarter prior to introduction of iPad mini in November 2012, we see $467. Using this with the sales mix and $433 blended ASP we get iPad mini ASP o $380.

What is left for Apple to do? It tried the 32GB level but didn’t move the needle. The two ASPs are not going to move much. So it did the only option available, introduce another product at much higher price point, the iPat Pro that starts at $799. In addition it introduced iPencil and Keyboard which can be attached to sale of $99 and $169 respectively.  Together it hopes to get iPad Pro ASP as much as $800 (after channel pricing etc).

In last article I made a prediction of number if iPad Pro models Apple will sell this quarter. With individual ASP numbers and the volume predictions the blended ASP of three models come to $471. A 10% increase, not bad but not enough.

$800 ASP for iPad Pro is far better that $467 for iPad Air. And Apple will try hard to split the market between Pro and Mini by not introducing any more innovations to Air.

Price Unbundling Vs. Product Unbundling

We are all too familiar with price unbundling. Remember the first time Airlines charged for checkin bags? Or a restaurant charged for salad dressing?  The simple recipe for price unbundling is to separate out benefits that used to be part of the offering and charge for it.

In general price unbundling has its roots in business limitations rather than customer imperatives.

1. Businesses see increasing cost to serve customers with no ability to increase prices
2. Their base product is undifferentiated and competes only on price
3. The extras were added to the product when times were good – when they had pricing power – but things changed
4. Cost of providing the extras keep increasing
5. It is never about serving more customers and growth. It is always about getting more out of customers you already have.
6. Price unbundling is driven by accountants.

It is all about the business. Customers and their preferences are missing in this defensive move. Pricing here is about extracting value from customers versus getting them to willingly pay for value they get. In the end this results in even more cost cutting and reduced quality of offering.

Product Unbundling is the exact opposite.

1. You are not driven by cost economics – it is not about punishing customers, reducing or managing cost to serve customers.
2. You are driven by growth economics – your current product has great product-market fit for certain segment but you are looking to reach adjacencies.
3. You start with customers – understanding the current segment and its needs, understanding the adjacencies and what is needed to serve them.
4. If you are not actively seeking to unbundle the product, your competitors will – that is how disruption happens. Disruptors are not better innovators than you are but just better at customer segmentation.
5. Product unbundling is driven by product managers with focus on customer preferences and armed with data and analytics.

Are you prepared to unbundle your product?

 

That is Not Our Competition

Most of us running a business, building a product or starting a venture think we get to choose who our competition is and exclude those who are not. It is commonplace to see the refrains,

“Their product is completely different from what we are building”

“Spunk is just a log analysis tool, we are about application analytics”

Well here is a sobering thought,

“We do not get to decide. Customers get to decide that.”

Here is a simple rule, for enterprise customers or consumers, whether you sell enterprise software or cycling class. Ask what budget is customer going to pay for your product? Everyone who gets paid from that budget is your competition, whether you like it or not. They need not be in the same industry classification, category, or provide same utilitarian purpose.

You need to focus on what job is the customer hiring the products for. Every product competing for that job to be done is paid for from the same budget and hence are alternatives.

Let me make this concrete with an analysis I recently did on Cycling classes. SoulCycle offers cycling classes at the cost of $35 per class. They position themselves as more than an exercise class at local gym,

“SoulCycle isn’t in the business of changing bodies. It’s in the business of changing lives.”

A quick analysis of twitter bios of fans of SoulCycle point out  this about customer job to be done-

They love life, they are into fashion, they are enthusiastic about life, they love music and food.

That means they are not hiring SoulCycle for just fitness but seeing it as part of their lifestyle choice. They pay for it from the same budget they would for fashion, pop culture or trying out gourmet food.

From the broader pattern from analyzing 44000 twitter followers let us see a specific  anecdote of one such customer,

“It’s definitely a bigger investment,” says Ms. Dougherty, who has curbed shopping trips and brought her lunch to work to afford her boxing-boutique investment.

So competition for SoulCycle is not just other cycling classes, Peloton that sells ride at home cycles, or other gyms. It is everything that is positioned as , “changing lives”. These customers pay for SoulCycle from the budget for “changing lives”.  Fashion, food, music, etc. all compete for the same customer spend.

If you do not define your competition this way and ignore a large swath of products positioned for the same customer job to be done you likely will not have a viable business for much longer.

10 Pricing Takeaways From SurveyGizmo Philosophy

Note: My 1000th article.

Three years ago I wrote a detailed piece on the end of freemium. In that obituary I called out these key things

1. It is not a substitute for customer segmentation.
2. Simplest way to monetize remains charging for value delivered.
3. Examples used to support freemium are just examples, not proof. Those freemium companies are fading like Evernote or winning because they adopted strategic marketing like Dropbox.
4. The Hershey’s experiment many use to support freemium is flawed.

In that article I shared some perspectives of Christian Vanek, CEO of SurveyGizmo, who then had gotten rid of freemium and strongly believed in charging for value.

That was then. This is now.  Last week SurveyGizmo made news headlines by announcing a free version that offers unlimited survey question and responses. What does this mean to freemium? Are we seeing its resurgence among startups that are looking at all options to drive growth? Did my case fall apart because of SurveyGizmo’s decision reversal?

I recently shared my outsider view of why SurveyGizmo went back on its stated position and introduced free version alongside paid versions. To get a better perspective and understanding I virtually sat down with Vanek to quiz him on this change and his overall pricing philosophy.

At the outset nothing materially changed on his views of freemium nor is he giving up customer segmentation. What he shared with me, showed his vision, his approach to pricing and how transparent he is in teaching others his methods. You can see from Vanek’s explanation below, this is not freemium as it is customarily defined. It is a free version for a segment that will never pay for a survey tool.

What are the takeaways from SurveyGizmo pricing and its adoption of free?

1. Pricing starts with customers – It is never about you or the competition. You start with what customers seek to do, what their options are, how do they buy and what is their budget. All these factors vary across different customers. In SurveyGizmo case some are just looking for a simple response collecting tool, while those with research tasks are looking for a sophisticated survey tool. Failure to understand this difference will result in disappointment for all.
2. Those who seek free has many options – When you chase those users who prefer free you risk being compared against all those options and lose the opportunity to show differentiated value to your customers.
3. Customers do not know the right price – This may sound as contradiction to the first point but it is the other side of the same coin. While pricing starts with customers they do not know what is the right price to pay for a product. They look for value clues and specifics like services offered with a product. They are influenced by nudges like High-Low pricing that shows a high price with strikethrough and a discounted lower price.
4. Free is not secret to growth – SurveyGizmo recognizes growth is oxygen for a startup but free is not the path to it. They model almost zero lifetime value for those who choose free. “Very few if any of these users will upgrade”, says Vanek. If you understand the free users will not upgrade, there is no opportunity cost of lost revenue or reference price when it is time to upgrade.
5. Understand all the costs of free– When they had free version SurveyGizmo found it cost them significant amount to support those users even though the marginal cost in software is zero. That meant degraded experience for paying customers or adding more costs with no return. A service model innovation, leveraging communities, took away all these costs to support free users. So they decided to reintroduce free.
6. Use Free only to be part of conversation – The reintroduction of free was carefully decided not as growth source but to enable SurveyGizmo be part of the conversation. When people Google for “Online Survey tools” Survey gizmo is in the top 3 results. Offering the free version enabled them to be in the consideration set of those searching and increase awareness among others.
7. Practice the right type of free – SurveyGizmo understands most who use a free survey tool use it in its simplest form. They want to ask 2-5 questions and get just about 100 responses. So they opened up both those dimensions and made no limits on number of questions or responses. The professional survey writers value advanced features like question logic and response error checking. These features are not offered in the free version so those who are willing to pay for the product are not tempted.
8. Offer optimal versions – SurveyGizmo had just one version at a fixed price of $50. That was attractive to its existing customers but turned away new customers who were willing to pay but not the high fixed price. So they replaced that with a $22 and $85 versions.
9. Always be experimenting – Vanek understands pricing is never done and it is not something we will all understand completely. The right approach is to be willing to change and always be experimenting to find the right price that delights customers and supports your business.
10. Do not jail in customers – Pricing and licensing should never be about making life difficult for customers. If customers try to downgrade to free version from paid version, allow it. Make it easy for them to do business with you and do not use guards to fence them in.

These are great business lessons for any startup.

Pay What You Want Is Not Pricing Strategy

I have long advocated against Pay What You Want (or Pay What You Can) pricing. The lure of this however does not seem to go away. Recently it is back in vogue with Instpaper fame Marco Arment adopting this for his podcast app.  Predictably you see the social media latching on to this as a great approach. Had it not been for someone with the brand recognition of Marco, would anybody have noticed it?

Marco writes,

This year, with 2.0, I decided, for various reasons, to replace the “free with paid unlock” model with an “everything’s free, pay what you want” model.

His reasoning includes,

I’m trying not to repeat my mistakes, and one of the biggest mistakes I made was putting short-term gain from paid-app sales above long-term growth. I watched my biggest competitor clone all of my features, raise VC money, and hire a staff. I knew he’d go completely free months before he did. He wasn’t doing anything I couldn’t do, but I wasn’t doing it. I knew I was vastly outgunned, but I just sat back and let it happen.

I see Marco has clear understanding of alternatives available to customers, his competitor’s approach and that there is really no clear and defensible differentiation among the products in the minds of customers. So instead of competing on price he had adopted Pay-What-You-Want as is pricing.

One hand you might see this as perfect way to price – not leaving any customers. But the assumptions this is based on are just wrong because

1. We the customers do not know value of a products like these let alone the price to pay
2. Even if we did, the price we want to pay is influenced severely by the reference price (the price we pay for other alternatives)
3. We are easily influenced by nudges like Goldilocks pricing and signaling like high-low pricing

When we leave pricing to customers to decide we are telling them we do not understand their needs (the customer job to be done), value created by our product and why our product is the right candidate to do the job.

Some define Pay-What-You-Want as a great experiment. If it is an experiment, what is the hypothesis are you testing? These experiments have been done before. You should not repeat experiments expecting different results just because, “this time it is different”.

Some say Pay-What-You-Want is the only way they would have made any revenue. Once again that points to lack of understanding of customers and what job we want customers to hire our product for.

Segmentation, Targeting and Positioning are the Diet, Exercise and Sleep of staying healthy and fit. But like our predilection to opt for dietary supplements and quick fixes we gravitate towards methods like freemium and Pay-What-You-Want. I will leave you with the wise words of Berkeley and Google Chief Economist Hal Varian said,

Success in selling digital goods does not require a whole new way of thinking about business. Rather, it requires the same kind of smart managing and smart marketing that have always set apart the best companies. The real power of versioning is that it enables you to apply tried-and-true product-management techniques-segmentation, differentiation, positioning-in a way that takes into account both the unusual economics of information production and the endless malleability of digital data.

Playboy Product Positioning Pivot

The WSJ reports today that Playboy magazine will move away from what started it and what it is known for to become articles only publication. It turns out its print strategy trails its online digital strategy. Playboy had already made its website Safe For Work with no pictures that will get you in trouble at work. That change to playboy.com led to its web traffic skyrocket from 4 million to 16 million visitors a month.

So why the change? Let us use the customer job to be done growth matrix I have shared with you.

They were, for a long time, stayed in the top left quadrant – serving specific jobs of a chosen customer segment.  What job did customers hire Playboy for? They hired it as hedonistic consumption and needed utilitarian justification. Playboy provided the former with pictures and latter with articles. And it was never meant to be conspicuous consumption.

“I only read it for the articles”

This was not a good place to stay put because of two reasons

1. Customer mix changed –  people grew out of it or didn’t grow into it
2. Alternatives proliferated – other numerous cheaper alternatives became available. And these did the customer job better than Playboy could – in cost, content, accessibility, discreteness etc.
3. Customer preference changes – you can see the many possibilities here
4. Contention for customer spend increased – There were more than one candidates competing for the same budget.

So after seeing declining sales, dropping web traffic and site revenue they are doing a pivot. They chose not to play in top left quadrant – that is they did not want to evolve the product to be the better candidate to fill the hedonistic job-to-be-done than alternatives. Instead they are moving to top right quadrant – Existing customers, new jobs – with option to include New customers, new jobs.

Hence the focus on articles and a complete product revamp. As you see in my matrix that is a product pivot and product positioning change. The new positioning is, “Utilitarian consumption with hope as Conspicuous consumption”. That is the articles will be so well researched and erudite that you will proudly display it like you do for The Economist to The Journal.

That is a product pivot and positioning to tell customers what new jobs Playboy wants customers to hire it for. And it opens up new customers beyond its dwindling install base.

Final note, product pivot does not mean they are the right fit. Now they need to contend with other options available to customers for the same job to be done and the cycle starts over.