Category: Editorial

The market for smartphones has one of the most fascinating examples of creative pricing today. When a consumer walks into a Rogers store, they expect to be able to purchase a high-end smartphone for less than $200, or a simple feature phone for nearly free. What many fail to realize, however, is that the true cost of their $199 iPhone is nearly $700 when purchased off contract. This artificially creates a very low barrier to entry for consumers, and masks the true cost of ownership which comes in the form of monthly billing.

Cell carriers are willing to essentially give away devices, because the true cost of ownership for a high-end smartphone can exceed $3,000 in the first two years of the contract alone (in the United States contracts are typically two years, and in Canada they are generally three). By signing the two to three year agreement, consumers are essentially accepting overpriced data costs in exchange for a cheap phone.

This model, however, has also introduced an undesirable side effect for phone manufacturers: the devaluation of phone hardware in the eyes of consumers. In addition, it has created an extremely crowded, and competitive landscape, with severely limited pricing options. With the introduction of the $99 iPhone 3G (and the subsequent $99 iPhone 3Gs after the release of the iPhone 4) phone prices have gotten to the point that very little price differentiation is available. Even though the 3Gs is only one year old, it has set a very high benchmark for low to midrange phones to compete with, and provides very little room for cheaper phones to compete in. Furthermore, it makes it difficult for anything but the highest-end smartphones to be priced above $99 on contract.

In addition, consumers have developed a psychological price ceiling of $199 for almost any smartphone on the market, so there is also very little room above $99. The real problem then, is that there is no longer any way to effectively price smartphones, especially when all of the real money is being made on monthly plans.

In an Engadget editorial earlier in the year, Chris Ziegler gave his solution to the problem. European carriers have actually already solved it in a unique way, by offering any phone for as low as free, depending on the length of the term that you sign up for. Therefore, a cheap phone will not require as long of a contract, whereas an iPhone or Blackberry will require up to 24 months. This removes the issue of limited pricing options, and allows carriers to differentiate their mobile offerings more effectively based on the true cost of owning a smartphone — the plan. Therefore, Chris recommends that North American carriers follow the example set by their European counterparts, and I would completely agree with his assessment.

For more of Chris’s work you can follow him on Twitter @Zpower (and I have included a feed of his most recent tweets below).

I recently read an interesting editorial on Engadget that discussed the pricing strategies currently employed by mobile phone manufacturers for software updates. In the article, Chris Ziegler discusses the issues associated with providing updates for free, and the potential consumer benefits that could be attained by switching to a paid model.

Smartphones are, essentially, just computers themselves, but Ziegler makes the point that while paying to upgrade from Windows Vista to Windows 7 makes sense to consumers, new versions of smartphone operating systems are generally expected to be free. The primary issue with this “free upgrades” model is that consumers fail to realize that only the monetary portion of the price is going away: not the price itself. Without a monetary price attached, companies do not feel as obligated to support older products for as long, and consumers end up paying with their time (companies do not need to update older phones as quickly) and the overall utility of their phones (companies may drop support of older devices sooner). This issue has become particularly prevalent for Google’s Android smartphones, in which older models commonly have to wait months after release to get updated, if they get the updates at all.

Ziegler suggests that companies begin charging for new updates, in order to create an additional incentive (aside from boosting customer loyalty) to support their products over the long term. It has gotten to the point where many companies only support phones that are still on sale, and even those who do support discontinued models do so on a delayed timeframe in order to achieve maximum “market impact” rather than serving their customers to the best of their ability.

I highly recommend reading the whole article, as it is extremely well written and poignant for mobile phone enthusiasts.

Apple has historically kept a relatively small assortment of products, but over the last ten years it has slowly expanded its reach into new product categories.

From its inception in 1976 all the way up until the turn of the century, Apple was a personal computer company exclusively. It not only limited its product assortment in breadth, but also depth. For many years, the Lisa, and then the Macintosh were essentially the only tangible products they sold: all-in-one personal computer solutions with the computer built into the monitor.

In 2001, Apple made the first major change to its product mix by introducing the iPod. By extending its brand to the portable music player category, Apple was taking a huge risk, but the new category would allow Apple to reach a completely segment of consumers. Furthermore, Apple recognized the opportunity to transform these new customers into Mac customers by roping them into the iTunes ecosystem. iPod users would need music on their devices, and they would need a computer with which to purchase that music, so iTunes and iMacs were perfect support products.

As most people are well aware, the iPod eventually went on to be a huge hit for Apple (although the introductory stage was notably rocky). Furthermore, in the same year, Apple had opened its first Apple Retail Store with the aims of improving its distribution strategy. As the company grew off of a string of huge successes both with new iPods and re-designed Macbooks and iMacs, its product lines began to expand. The iPod Mini was introduced alongside the classic iPod, followed by the iPod Nano and Shuffle. In addition, the brand was extended even further with products such as the Apple TV, or more recently, the iPad.

However, even as Apple has expanded its product assortment over the years, it has proven the merits of a closely integrated product mix, with a specific focus and a limited scope. For the second largest company in the United States its product mix and product lines are still astonishingly small, which proves that diversification isn’t always necessary for success.

Most recently, Apple has added newly redesigned Macbook Airs to its notebook product line. These small and light laptops attempt to compete with with Windows based notebooks, offering superior quality and performance. The prices have even become more competitive at $999, however, they are still priced far above Windows-based alternatives that can be purchased for under $400. You can read more about the new Macbook Air on Chang Jie Hu’s marketing blog here.

Customers buy products in order to gain benefits.

This isn’t a very new concept, but I think it is something that marketers miss a lot of the time when they are deciding how to promote their new products. We are now in the value-based era of marketing, and what better way is there to communicate your product’s value than actually demonstrating it?

Many technology companies use marketing that is highly conceptual, and try to associate their products with feelings or popular culture, but sometimes this isn’t the most effective way to drive initial sales and buzz. This is not to say that this method doesn’t work — quite the contrary. Attitudes are an important focus of marketing. However, for technology products such as smartphones, sometimes the best way to promote your product is to show it doing what it does best! If viewers are able to see all of the amazing things it does, and how those features can create additional value in their lives, they might be more likely to want to try it out, and consider purchasing it.

Microsoft didn’t understand this, and paid Jerry Seinfeld $10 million to appear in this largely unsuccessful ad. The ad is amusing, but it never gives the viewer any idea of why Windows is a good product (aside from that maybe they should associate it with cheap shoes), and actually never even lets the viwer know that they are watching an ad for Windows until the logo flashes briefly at the end:

Unlike many other markets, such as those for foods and clothing, the vast majority of consumers might not immediately understand the benefits of certain technologies. They know they need to eat, and they know they need clothing, but they might not know why they need to spend $200 on a new iPhone 4 when their old phone can already make calls perfectly well. Therefore, the best way to get customers interested is to just show them what they can do with it, and how it could add value in their everyday lives.

Once the customer is hooked, and becomes open to the idea of making a purchase, this is when the company can begin to build affection, and Apple does an excellent job of this in its ads:

Consumers might not know that the new high resolution screen provides 326 pixels per inch (high enough that individual pixels cannot be seen by a human eye) or that the miniaturization of the processor and logic board allowed Apple to fit a 20% larger battery into an even slimmer device, but after watching these ads they know that the phone looks amazing, and allows them to share amazingly detailed pictures of their loved ones. In each commercial, Apple picks a few key features that can create the most value for their customers, and then they just show how intuitively and easily they work. In a field of complicated and (potentially) confusing products, this is instantly appealing, and is an excellent example of how to market smartphones to the masses.

Today is Blog Action Day 2010, and the focus this year is on Water. Water is something that touches virtually every aspect of our lives; it takes up 70% (approximately) of our bodies, and yet, for those of us who live in North America, it would be lucky to take up a fraction of our day-to-day thoughts.

Marketing to a Generation of Connected Consumers

According to Blog Action Day, “Unsafe water and lack of basic sanitation cause 80% of diseases and kill more people every year than all forms of violence, including war,” and yet many of us barely think twice when we take a sip of water. So how do we raise awareness and make sure that clean water doesn’t become a scarce resource? Virtual Water has attempted to target tech-savy generation Y’s with its new iPhone app that breaks down how much water goes into making the products we use every day. It is available for $0.99 on Apple’s App Store, and is a highly polished, visual way of measuring one’s footprint on the world’s clean water supply. It would be nice if the app could be available for free (whether through sponsorship or some other means), as it would reach a larger audience, but at $0.99 it is still very affordable for such a high quality app.

Since the completion of the Seymour-Capilano Filtration Plant, we now have some of the best drinking water in the entire world. However, many consumers still buy bottled water due to the ingrained perception that bottled water is “good” and tap water is “bad.” Not only is this water no better than tap water, but its production requires 17 million barrels of oil per year. Furthermore, 86% of the plastic bottles that hold it are still not recycled (you can read more at Change.org).

The Seymour-Capilano Filtration Plant “uses the world’s largest ultraviolet disinfection facility” and has put sustainability at the forefront of its construction. Since its opening in May 2010, Vancouverites have one more reason to say no to bottled water, and do their part in protecting the world’s shrinking supply of clean water.

I was reading a blog post regarding the Apple App Store pricing model and how it affected the pricing strategy for Hemisphere Games’s iPhone/iPad title Osmos, and felt compelled to reply to the company.

The App Store is experiencing a very unique combination of competitor-based pricing and value-based pricing, which has put tremendous pricing pressure on developers. Since the barrier to entry in the App Store is very low (only $99.00 per year to release an unlimited number of apps on the store) and the developer tools to create apps are free, the store has seen a tremendous volume of apps since it opened in 2008. As a result, the competition for visibility on the store is intense, and prices have been forced downwards to the point that many believe pricing an app at anything above $0.99 is suicide. This has caused the perceived value of apps by consumers to drop considerably, regardless of the fact that many apps require large teams and upwards of 6 months in development time. The top selling $0.99 apps on the App Store have seen sales of up to 20 million copies, and as a result the pricing structure of the market has been sustainable. However, this structure is dependent on volume, and companies without a top 100 app are starting to find it difficult to recoup costs and turn a profit with such low prices.

To complicate matters further, Apple released the iPad this year with an App Store that is only partially separated from the iPhone/iPod Touch store. Developers now need to decide whether they release a “universal” app that is purchased once and works on the iPhone, iPod, and iPad, or release separate versions for each platform.

On their blog, Hemisphere Games addressed this issue very well, and although I agree fully with their reasoning, I had some additional ideas for a strategy that they could pursue.

I could probably write an entire essay on this topic, but for the time being I have kept it brief and to the point. Here is their blog post, and here are my comments on their strategy.