Thursday, September 2, 2010

How to Price Consumer Electronics

How to Price Consumer Electronics
This is a compilation and expansion of several previous posts on pricing consumer electronics.
Because they are trained by you, consumers have preconceived notions about an appropriate price range for your products. People expect various categories of consumer electronics to fall within certain price ranges.
A 50-inch LCD HDTV shouldn’t cost $7,500. You can price it there, but you won’t sell many. You also won’t sell many if you price the same TV at $75, because people will wonder what kind of scam you’re running. Today, the sweet-spot for this television, depending on its features, ranges from $600 to $1,800. People expect a 50-inch LCD HDTV to fall within this range.
I call this sweet spot the Consumer Pricing Expectations Range, or CPER. Each product category has its own, unique range. Price your product within this range, and you eliminate an obstacle. Price it outside the CPER, and you voluntarily create a problem for yourself in an industry already littered with countless obstacles to success.
How do you know the CPER for your product? Three out of four products in your category fall into it.
If You Price Above the CPER: Most of these go without saying, but if you price your products above consumers’ expectations, these are issues you’ll be forced to deal with:
  • People have other, more affordable alternatives, and will buy those.
  • Your sales will lag.
  • You’ll have problems with retailers, who will wonder why your price is high.
  • You may be perceived as out-of-touch.
  • You’ll create a reputation of a company that charges too much. Think Sony.
If You Price Below the CPER:
  • People will assume your products have less value (features, functions, etc.) than other products priced within the CPER.
  • Retailers will wonder why your product costs are so low.
  • Ironically, you probably won’t sell as much as the higher-priced competing items.
Shifting the CPER:
It’s possible to shift the consumers’ expectations for pricing upwards, but to do so; you need to have excellent marketing and consumer evangelists. Most companies in consumer electronics have neither. Therefore, most companies are unsuccessful at shifting the CPER. One company has changed consumer perceptions on how much technology can cost and still sell successfully. 
Here is what it looks like:
Nokia smart phones are generally priced higher than competing models like the iPhone, various Blackberries and Android Phones. I know this is because they don’t have carrier partnerships for their smart phones like their competitors — they have been “out partnered” — but the why doesn’t matter. To consumers, an $800 Nokia smart phone is not even a consideration when an iPhone can be had for $200 and some Blackberries are free after rebate. Thus, Nokia’s U.S. sales have been suffering.
Sony attempted to adjust the CPER on many categories of consumer electronics, including the PlayStation 3. Sony has neither good marketing nor evangelists. When competing video game systems cost much less, Sony maintained its high price. People’s expectations were that consoles should cost less. They communicated this to Sony by not buying the PS3 until Sony recently lowered the price. Once pricing got within the expectations range, customers started buying again. Also recently, Sony failed adjusting the CPER upwards for its Bravia LCD televisions, which cost significantly more than nearly all other LCD TVs. People stayed away. When pricing came down into the CPER this holiday season (I saw refurbished 46-inch Bravias for $600!), Bravias started to sell again.
TiVo, which costs more than competing DVRs from cable companies, has not been able to adjust the CPER. TiVo once had evangelists, but it did not nurture them with excellent marketing. It’s not only easier to have a DVR from your cable provider, it’s cheaper. So, that’s where people go.
SanDisk put out an affordable MP3 player called the Sansa. It runs as low as $40. But it has yet to crack through to mainstream consumers, many of whom believe there is only one brand of digital music player. On the other hand, Pure Digital created the Flip digital camcorder, and priced it below $100. It was a huge success because the company had excellent marketing. Its consumer education, focused on simplicity, was extremely effective in communicating how the Flip will improve people’s lives.
One company in our industry has been successful at shifting the CPER. Here is what Apple’s CPER looks like:
 Note that there is no price that is Too High for Apple products. Apple has shifted consumers’ price range expectations upwards. Because Apple enjoys evangelist consumers and benefits from excellent marketing, they cannot price a product too high. Apple’s desktops, laptops and peripherals all generally cost more than the competition’s, and yet Apple remains one of the top manufacturers in the computing space. To Apple’s evangelists, the company is like a terrific author whose books you will buy simply because he wrote them.
So if you want to charge more than everybody else for your products, you better have evangelists and excellent marketing. Because the industry is littered with product failures from companies who tried but did not have both.
What Shifts The Consumer Pricing Expectations Range?
  • Time. As a product category matures and manufacturing is perfected, prices naturally come down.
  • Competition: New manufacturers within the same product category tend to drive down pricing and CPER.
New features generally do not drive pricing upwards. They are actually expected in new product iterations, which mean the same product with additional or expanded features usually costs less than the previous version. That’s what the CPER dictates.
Aim for the sweet-spot with your pricing. Aim for the CPER.

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