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Price and Cost
03.17.11

 

So recently, there have been a number of product introductions designed to compete with some of Apple's products -- most notably the iPad and the MacBook. Here's the New York Times article on the iPad competitors [link] and a look at the new Samsung Series 9 laptop [link] which is quite good looking, I must say.
 
Here's the problem. The Samsung Series 9 is priced $50 more than the highest priced MacBook Air. The iPad competitors are offering, at best, similar features at the same or higher price points. This is for a variety of reasons but partially because Apple has so optimized their supply chain (and various relationships) that their competitors (if you can call them that) presumably can't compete on price without losing money.
 
So the question is why would I, as a consumer, pay the same amount (or more!) for an inferior product?
 
Let's call a spade a spade here. These products are fundamentally inferior in the minds of the consumer. There are no obvious differentiating features and they look like copycats of the Apple product. More importantly, they embody none of the psychic coolness factor one gets from buying a new Apple product. 
 
Let me throw out an example (from Dan Ariely). There have been studies done on consumers and fake goods. If a consumer buys a fake good (let's say a fake Gucci bag) -- the consumer derives less benefit / pleasure from owning the bag than a real one. Makes sense. After all, the quality of fakes is presumably lower than the quality of real products. However, in these studies, they would substitute real goods for the fake goods and then tell the customers that they were given fake goods. In that case, the consumer once again derives less benefit / pleasure because he/she is perceiving that they have a fake good. It actually had nothing to do with actual quality. So unless the quality of these new goods is so glaringly obviously better than the previous goods -- that fundamentally knocks them down a peg. I also think this is basically impossible because, in the example of the Samsung laptop -- it's running Windows! I think Windows is objectively significantly inferior compared to OS X -- maybe that's just one person's opinion, but I suspect most people would agree with me. At best, they find Windows acceptable.
 
So let me get back to my larger point about this post. I suspect here's the logic flow at these companies:
 
1. Apple has created these gigantic new markets / hugely profitable products. We must get in.
 
2. [after some research] We can create these products and probably copy them so they sort of appear to be similar BUT -- our cost structure is very high. This stuff is expensive!
 
3. We'll take our cost structure and mark it up ever so slightly so we don't lose money on a per item basis.
 
I think this is death.
 
Here's the problem with this thinking. Price is not determined by cost. PROFITABILITY is determined by cost, but not price. Price is determined by supply and demand. Once price is figured out by this intersection, you figure out what your cost is to see IF you can be profitable. If the answer is no -- then you basically don't enter the market / make a strategic decision to lose money on a per unit basis. What's happening is some variant of the logic, "We will make X. X costs us $. So we charge $+." But when $+ is more than the nearest competitor and there's no reason to go with your product rather than theirs -- will, I think that's the equivalent of lighting money on fire. 
 
I will throw one more thing out there. I don't think it's necessarily an unreasonable strategic decision to invest in this market. Let's say Samsung or someone else decided to lose several hundred dollars per unit to build up market share while they iterate on early versions of their product. It's incredibly painful but at least it makes logical sense. The consumer isn't buying the iPad and because of that, they receive a discount. That makes sense to me. What doesn't make sense to me is the current situation where companies try to charge consumers more for inferior products.

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