09 April 2013

Cost, pricing and perceived value

There’s a very simple pricing strategy I like. Wether you’re selling a physical product, a digital product or a service — it’s price is related to three different factors.

There’s the cost which basically is how much it’ll cost to produce or what your lowest hourly rate would be. If you price your product below the cost, you’re eventually run out of business (unless you have other super products to balance it up).

Then there’s the price which is how much the customer pays, sometimes referred to as the markup. Take the price and subtract the cost and you’ll end up with the profit.

Thirdly there’s the perceived value that the product has. If the cost is 50$, the price is 100$ but the customer’s perceived value is 150$ — everyone wins. The manufacturer will end up with a 100% profit and the customer will feel as if they’ve done a great deal — paying less than what they think the product is worth.

When the iPhone originally launched in 2007 and with the significant update in 2008 (iPhone 3G) — it was a huge success. iPhones were sold for 500-600$ depending on capacity and had a production cost in the areas of 200-250$ giving Apple a massive profit of somewhere in the amounts of 300$ per sold unit.

The perceived value of an iPhone was far higher than it’s price.

Now, the iPhone was not just a phone — or even a smartphone — it was a whole new category of products. Nothing like this had ever been introduced before. Expectations were high before it’s announcement and they were met — and exceeded. People were enthusiastic, they were thrilled. The perceived value of an iPhone was far higher than it’s price.

As we’re approaching a new product launch, it’ll be interesting to see what Apple have in store for us. The rumored, low-cost, iPhone 5c will likely be less of a profit product for Apple but instead bring users to it’s app-ecosystem. The perceived value of an iPhone 5c will surely be lower — as will it’s profits — but allow Apple to gain larger market share.

The world’s most sold phone is the Nokia 1100, having sold more than 250 million units. It doesn’t allow you to do anything besides call and text — but it’s value lies elsewhere, it has great battery life lasting for more than a week and is a low cost phone at a cost of 12-15$ (prices vary heavily).

What features could Apple introduce to the iPhone 5c that would allow for it to gain market share in regions such as India, Africa, China and Latin America?