Premium Pricing Just Doesn't Last

By Avi Deitcher

If there is one truism in the technology market, it is that premium pricing just doesn't last. If you are first to succeed in a new market - which is distinct from first to a market - then you often have a premium price product because you are the "first" and often the "best".

The problem is that it just doesn't last. No matter how good your IP (Intellectual Property, like patents, not Internet Protocol), eventually competitors catch up with "good enough" products for half your price or lower, and eat up your market.

I was reminded of this principle again this week from two different perspectives. I will leave smartphones out of it - the Xiaomi, OnePlus and Motorola stories are worthwhile in and of themselves - and focus on action cameras and cloud computing.

Action Cameras

The dominant action camera brand is GoPro. While I think it is a pretty good brand name, they haven't quite gotten it to be a ubiquitous none like Kleenex, or verb like "to Xerox the paper" (or at least it was in Xerox's heyday).

GoPro cameras are excellent, and the company has done a first-class job in marketing. But the price is still high, $300-$400 USD. At half to two-thirds the price of an iPhone, it is not even half as useful, unless your business involves action cameras. It is a worthwhile expense for hockey coaches or bald eagle researchers, but for the average person, it is a high-end gadget.

A number of teardown sites have taken apart GoPro cameras and determined component parts, but few provide actual costs. Fortunately, GoPro is a public company. They report its gross margins at 45%, although they include more than just components and shipping and warranty. It also includes various other costs that have been allocated, whose provenance is unknown. Either way, it is fair to assume that landed costs are below 50%.

Inevitably, a premium-priced product like GoPro will attract lower-cost competitors. Here are two:

  1. Xiaomi, the Chinese smartphone manufacturer, has announced their YiCamera for ~$63. That is one fifth the price of a GoPro. Sure, the specs are lower, but in the important areas - basic recording, waterproof, impact-resistant - it is good enough.
  2. SJCam released its SJ4000 action camera. The specs are very similar to Xiaomi's camera - I would not be surprised if they shared a plant - and the camera has a similar price. Unlike Xiaomi's, SJCam's is available on Amazon today.

While both cameras can "only" do 1080p resolution, or what we used to call "Full HD", and the GoPro goes all the way up to 4K, most TVs and computer monitors cannot even display 4K. If you are working for the NHL or MLB, or perhaps attaching it to falcon or lion on the hunt, you will buy a GoPro; for others, 1080p is more than good enough.

Will GoPro survive? Sure. It has cash in the bank ($320MM as of their last annual report), great products and a solid brand. Will it become a niche company, serving the high end? That depends on how "good enough" the competitors are. Getting consumers to pay double for a premium product they do not truly need is hard enough; getting them to pay 3-5x is near impossible.

Public Cloud

Amazon Web Services (AWS) qualify as the first serious public cloud provider, and remain the dominant one. There are two keys to their dominance:

  • Innovation: AWS keeps providing more and more services, and better ways to manage and integrate the existing ones. Many of the new services are simply new ways to use existing services and do not incur any charge. Amazon never rests on their laurels, and always looks for ways to offer more services.
  • Price Reductions: Every few months - and sometimes more often - AWS reduces its prices for new and existing customers. Your bill last month was $1,000, but this month, with no renegotiation, it is $900. Most businesses live by the rule that you must increase prices at least once a year. Part of this is built into Amazon's retail culture, but it definitely helps customers stay on board.

A few weeks ago, a friend of mine contacted me to review a significant price increase from one of their technology services providers. My criteria for review were simple:

  1. Is their new price still market-competitive?
  2. What would the switching costs be?

Nonetheless, the increase in price felt like a bait and switch. First we lure you with low prices, then we bump prices on you because it is too hard for you to switch.

Whether legitimate - costs go up, inflation is real - or just bait-and-switch, constant price increases are part and parcel of long-term relationships.

AWS turns this on its head. Who wants to switch off Amazon when their costs keep dropping? Even more, the lower prices often reflect higher services: larger storage, more powerful virtual servers.

I have seen many customers switch from, say, Rackspace Cloud, let alone the inferior providers such as IBM or HP, to AWS; I have seen far fewer switch  the other way. This isn't because the other offerings are not good or competitive (well, some are worth avoiding); it is because Amazon, to paraphrase Jobs, is constantly cannibalizing itself.

Summary

Your product and service inevitably will be undercut by cheaper competitors. There are only three possible solutions:

  1. Ignore it... and watch is you eventually disappear.
  2. Move upmarket... and watch as the low end eventually becomes better and you eventually disappear. This is a classic case of Christensen's theories at work.
  3. Be the one to undercut yourself.

It is hard to know where and how to cannibalize yourself, but it is extremely hard to get your culture and organization to accept, support and then embrace it enthusiastically.

Are you going to be your own next competitor? Or will someone do it for you? Is your team prepared for that earthquake? Ask us to get you there.