Posted by JP Gownder on April 26, 2010
Product strategists struggle with the issue of value all the time: What constitutes a revenue-maximizing price for my product, given the audience I’m targeting, the competition I’m trying to beat, the channel for purchase, and the product’s overall value proposition?
There are tools like conjoint analysis that can help product strategists test price directly via consumer research. However, there’s a bigger strategic question in the background: How can companies create and sustain consistently higher prices than their key competitors over the long term?
The Mac represents a good case study for this business problem. Macs have long earned a premium over comparable Windows PCs. Though prices for Macs have come down over time, they remain relatively more expensive, on average, than Windows-based PCs. In fact, they’ve successfully cornered the market on higher-end PCs: According to companies that track the supply side, perhaps 90% of PCs that sold for over $1,000 in Q4, 2009 were Macs.
Macs share common characteristics with Windows PCs on the hardware front – ever since Apple switched to Intel processors about four years ago, they’ve had comparable physical elements. But the relative pricing for Macs has remained advantageous to Apple. At the same time, the Mac has gained market share and is bringing new consumers into the Mac family – for example, about half of consumers who bought their Mac in an Apple Store in Q1, 2010 were new to the Mac platform. So Apple is doing something right here – providing value to consumers to make them willing to pay more.
While there will be numerous hypotheses here, I think product strategists should take into account three major categories of analysis as they think about establishing a pricing strategy. Apple has successfully perpetuated the price gap because of:
Self-selection means that consumers identify with a product and then “self-sort” into continued affinity. Part of this effect derives from brand loyalty (repeat customers) and another part comes from brand aspiration (consumers who have long aspired to be associated with the brand and its products).
Apple has a very long history of maintaining customer loyalty; robust user groups like Washington Apple Pi – founded in 1978 – attest to the fierce loyalty of core Apple buyers. Apple has also cultivated high brand aspiration via gateway products like the iPod (high penetration), through halo products like the iPhone and iPad (high innovation), through the direct sales efforts of its appealing Apple Stores (high visibility), and through other methods (providing high levels of product satisfaction; strong branding and advertising). Successful self-selection promotion leads to positive feedback loops. Mac users tend to be educated and affluent, aside from student users; in turn, other educated and affluent consumers, or other students, will also tend toward the Mac’s proposition, influenced by their friends and by brand images.
What It Means: Product strategists can use both long- and short-term techniques to promote self-selection among target consumers. Self-selected fans of a product will tend to pay more.
Imperfect substitution means that my products are not cut-and-paste duplicates that can be used in lieu of my competitors’ products. Consumers who want ice cream but can only find a bakery selling pie engage in imperfect substitution – they are consuming dessert, but not the one they wanted. Carmakers have a long history of cultivating uniqueness in their lines – while all cars get you to your destination, a Porsche (for example) will take you there in style. That style merits a premium. As a result, imperfect substitutability is a desirable component of product strategy.
Naturally, OS X makes the Mac stand out compared with Windows-based competitors. Software packages and experience – related to OS – bolster this sense of difference. And something about the style and visual design of Macs continues to stand out from Windows machines. The list can grow longer, but there are many ways in which Macs stand out as different – and in ways that target consumers seem to value.
What It Means: Product strategists must cultivate differentiation – truly valuable differentiation – to bolster their price claims.
The final arrow in a product strategist’s quiver is the product definition itself. Bundling (a monitor with a PC, free VOIP service with a broadband Internet connection, a three-pack of Windex cleaner) is a tried-and-true strategy. Even more radically, though, product strategists can incorporate training and support into the implicit product proposition.
Consumers aren’t just buying a personal computer when they buy a Mac: There’s something categorically different about the definition of “the product” itself with Macs (see Figure 1). According to Forrester’s Consumer Technographics, two-thirds of US consumers care about manufacturer tech support, placing it among the top 10 criteria people employ when buying a PC. The Apple Store offers free (and paid) classes called Workshops to help consumers master the Mac. When things go wrong, the Genius Bar supports consumers with free and paid services. The bottom line? If my Mac isn’t working, I know precisely where to go and who’s responsible. By contrast, a Windows PC buyer might need to call Best Buy, HP, and Microsoft to solve problems. Consumers might know where to go – or they might not. Apple offers the clearest built-in support ecosystem in the physical world: Just walk into an Apple Store.
What It Means: Services, support, training, and live customer service can bolster pricing in an age when consumers can be easily frustrated by customer service – so long as these value-adds are perceived to be part of the product itself by consumers.
Analysts on my team are helping product strategists solve these problems every day. Sarah Rotman Epps helped product strategists rethink their pricing propositions for eBook readers in her old coverage space (now a topic covered by James McQuivey). She’ll continue helping product strategists develop winning pricing approaches in her new coverage area, product strategy for PCs and software. Doug Williams has helped product strategists understand conjoint analysis and has begun helping them employ product co-creation with consumers. Contact me for more information!
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