The iPad mini Price Premium

A common analytical method in pricing is Conjoint Analysis. While this has evolved into far more sophisticated methods, at its core Conjoint Analysis is about finding how much utility different customers assign to different “features/aspects” of a product. If you know the utilities you can find how to price different product versions.

Here is a quick tutorial if you want to know more.

In the case of tablets you can think of iPad and Fire to be a collection of  features (or benefits) that customers assign perceived utilities. So when you add up the utility assignment for each feature you get the total utility.

Total Utility from Tablet = Fudge Factor +
Price Point ($199, $329)+
Utility from physical features (screen, wifi, etc) +
Utility from Brand +
Utility from Ecosystem

A few days ago Amazon ran a message on its main page comparing Kindle Fire and iPad mini, feature by feature.

The message essentially says Kindle Fire at $199 price point offers better features (by extension better utility) than iPad mini at $329 price point.

Likely true. But the point to note is the utility value from features is neither absolute nor intrinsic. It is perceived utility and it differs from segment to segment. Furthermore there are the “Fudge Factor” – the unknowns, Brand premium and Ecosystem Premium.

Apple likely found a sizeable segment – different from Amazon’s target segment – that assigns lot more value to Apple’s Brand and Ecosystem than they do for Amazon’s Brand and Ecosystem and hence is willing to pay $130 more for iPad mini. (Technically it is $95 more if you consider Fire without “Special Offers” and add price of Fire charger).

Amazon’s comparison is valid. But if the customer segments and their value allocation is not the same, then it does not matter that Fire packs better features at lower price. That is likely why Amazon decided to pull the Ad?


WSJ Charging For Mobile Version

If you are used to reading complete WSJ articles on your Blackberry of iPhone, the end is nigh. Starting third week of January they are going to charge for mobile access.

A mobile only subscription will cost $2 a week. For those with either a print or subscription, the cost will be $1 a week. People with both print and Web subscriptions will get full mobile access for free.

I think it is a great idea to charge separately for the mobile version. But the pricing is not perfect and needs adjustments to maximize profit. Let us analyze this deal and the prices of rest of their offerings (print, online only and the bundle) to see if there is room for increasing profits.

Print + Online Print Only Online Only Mobile Only
Weekly price $2.69 $2.29 $1.99
Weekly mobile price $0 $1 $1 $2
Total $2.69 $3.29 $2.99 $2

The first observation is for those who are considering Print Only or Online Only subscription and need Mobile version, the most cost effective version is the Print + Online version at $2.69 a week. This indicates pricing inefficiency in their current Print+Online bundle. This is something they should have fixed even before the  introduction of pricing for Mobile version.

Who are the Print Only subscribers? Businesses, libraries, and some individuals who still prefer whatever convenience the print version offers. These segments get little or no utility from Online version and are unlikely to switch to Online Only version because of the higher price of Print only version.  While the 40 cents incremental cost to add online access  makes sense, the base price of the Print Only version leaves more consumer surplus than necessary. The Print only version can be priced higher than its current levels.

Who are the online only subscribers? Mostly individuals, the wired segment. For most of the sub-segments in this category, there is little or no utility by adding Print version. For some, this may even be negative utility. However for those who want the print version added to their online version, the utility they get from it is high. Hence the incremental price to upgrade to the bundle can be more than 70 cents they are charged today.

Who are the Mobile only subscribers? For people on the go with smart phones there is considerable value from the mobile version, more than the current $2 price,  but WSJ is prevented from capturing all the value because of the reference price set by their Online only version. Even though it is cumbersome, people can simply read the journal using the browser on their mobile phone, using their online subscription. So the $2 price for Mobile only version makes sense.

What about the price for adding Mobile version to Print only and Online only subscribers? For Online Only subscribers, the $1 is most likely the right price. I bet WSJ’s customer data showed that most of their Online Only subscribers will simply use the mobile browser instead of paying separately. In other words a very steep demand curve, with demand falling sharply after any price more than $0.  So the high $1 price for adding mobile version delivers more profit for WSJ than a lower price.

But for the Print only subscribers, those who did not even prefer reading the online version the incremental utility from mobile version is low. I believe $1 price for these subscribers is not the profit maximizing price. The price lies somewhere between  a few cents and  40 cents (the incremental price for adding Online version to Print Only subscription).

Why not give away mobile access for free to the Print Only  subscribers? Because this would make the print only subscribers who will never prefer adding mobile version think that they are paying for something they do not use. So the incremental price for adding Mobile version to Print Only subscription has to be more than $0.

The net of this is, it is a great idea to charge for mobile version. But the prices need adjustments to maximize profit. While they are at it they should also fix the pricing for the print only subscription.

Presence of Vice Products Increases Utility from Virtue Products

On a sunny afternoon you just finished your run and is hungry for a snack. Now consider these two scenarios

  1. You walk by a fruit stall that sells only fruits and you buy an apple
  2. You walk by a fruit stall that sells Snicker and other chocolate bars as well and you still buy an apple

In both these scenarios, which one of the two will you feel more virtuous? According to Dhar and Wertenbroch, you will feel  more virtuous in the second situation.

Selecting an unappealing virtue from a choice set that also includes tempting vices provides a positive self-signal (highlighting one’s ability to resist temptation) that enhances the utility of consuming the virtue

Utility from consuming the virtue when a choice is available is more than that when virtue was the only option available. Since consumer’s utility translates to their willingness to pay, can a marketer apply the findings of Wertenbroch and Dhar to increase perceived value of their virtue products and hence be able to charge higher price premium? Yes,  here are a few applications for this finding:

  1. For the said two stores, the one selling both candy bar and apples can price the apples more than the other stores and the customers would gladly pay for it.
  2. For a restaurant selling fresh green salads, offering a really greasy and fatty appetizer or entree  in the menu will enable it to price the salad at a higher price than it would have been possible with all healthy options. This is one reason why McDonalds is able to charge  premium prices for its salad options.
  3. A broader example is green products, these qualify as virtue compared to regular products. Are customers willing to pay a higher price for green products? In a study done by Yale forestry department it was stated that half the people surveyed they were willing to pay a 15% price premium for green products. A marketer cannot take these results to imply that customers will choose green products at the point of purchase. But we infer from Wertenbroch and Dhar’s study that a marketer is better off, in terms of profit maximization, offering regular products alongside green products instead of just green products.

Take the most recent story from NYTimes on how chickens are killed before they are processed.

Two premium chicken producers, Bell & Evans in Pennsylvania and Mary’s Chickens in California, are preparing to switch to a system of killing their birds that they consider more humane.

When customers see these benignly killed chicken next to regularly killed chicken, their willingness to pay for the former is likely to be higher than that for the latter.