

Premium Pricing Just Doesn't Last - deitcher
http://blog.atomicinc.com/2015/03/02/premium-pricing-just-doesnt-last-2347/

======
krschultz
I believe engineers over-rate the cost/feature-consciousness of consumers and
under-rate brand consciousness.

People do want to shop on price, but they want a discount on the brand they
know. That's why they'll buy a laptop for $20 less on Amazon than at Best Buy,
but they probably won't buy a non-name brand laptop.

I don't even think his examples are compelling. There were action cameras
before GoPro, there are alternative cameras on the market now. Some have
different form factors, some are cheaper, some are better. At the end of the
day, GoPro is plastered all over every action sport competition and their
daily video email gets millions of views. That's harder to replace than the
actual tech - especially when the product itself needs to be redesigned every
18 months.

Also note that "come in under the incumbent's price" is a bad startup
strategy. The incumbent has economy of scale & bulk pricing advantages the
startup can't match. The only way to do it is to build a different product
that is so much cheaper to make that you can squeeze the same margins in a
lower price tier. If that's possible, then it means GoPro has shot over what
the market needs. In that particular case, I don't think it is true today. It
might be true someday.

In AWS's case, I actually think the competitive play is on the higher end.
Everyone is trying to undercut AWS's price (generally by giving it away for
free). I feel that the last 20 years has shown trying to get under Amazon or
Walmat's price is a bad strategy. How can anyone get under their price at
smaller scale without taking a "strategic" loss or having 0 margins? I'd
rather compete on the high side by offering better docs / UI & UX / support
and not be competing completely on the price of hardware.

~~~
jedrek
> I believe engineers over-rate the cost/feature-consciousness of consumers
> and under-rate brand consciousness.

I agree. They also tend to discount the value of an ecosystem around various
high profile electronics goods. Apple and gopro are both amazing examples of
that, there are hundreds of accessories for every iPhone and every gopro
camera. Then there's the value of a known workflow, of positive word of mouth
and, finally, a feeling of community. People would much rather ask a friend
who owns a product about some issue than hit the Internet to find a solution.

GoPro and Apple both also tend to bring killer features to market first. Be it
TouchID or 4K 30fps for $600.

~~~
deitcher
OK, but who pays for 4K 30fps at $600 other than pros?

~~~
exelius
People who read that it was awesome online. Or the same people who buy $4000
DSLRs when the $800 one has every feature they would ever use.

------
noelwelsh
Tech changes faster than almost any other industry, which is great for premium
brands like Apple as you can keep redefining the minimum baseline performance.

Remember computers in the hey-day of the PC? Every two years brought a huge
tangible improvement. Programs made for new computers just wouldn't run on old
PCs, or if they did would be unusably slow. That ended sometime around the
release of the Core 2, except for niche users (gamers, developers, etc.)

It's the same thing for phones right now. A phone that is more than a few
years old just feels like a piece of crap to use; it's slow, the screen is
poor, and it doesn't support new features. Good times for manufacturers!
(Though we are very rapidly getting to the end of this cycle, IMHO).

Same thing applies to AWS, brought up as an example in the post. The base
price is not really the issue -- AWS prices fall slower than Moore's law and
it is still more expensive that bare metal. It's the new toys you get every
year that make AWS attractive. AWS keeps providing more and more pieces of
your infrastructure at attractive price points with less admin overhead. At
some point they'll have reimplemented everything the modern company needs and
then they too will be subject to more serious competition.

~~~
deitcher
I never considered that point. Do AWS prices fall slower than Moore's law, and
do they fall slower than the prices of the underlying equipment?

I have managed a goodly number of AWS implementations and considerations
("should we do it or not?"). AWS was cheaper in most cases not because of bare
metal vs AWS, but because of the sheer efficiency of scale, and not having to
hire staff and expertise to manage all of the infrastructure.

Hmm... you just inspired a new post. Thanks, noelwelsh!

~~~
toomuchtodo
> AWS was cheaper in most cases not because of bare metal vs AWS, but because
> of the sheer efficiency of scale, and not having to hire staff and expertise
> to manage all of the infrastructure.

Once you get to a certain scale, you're hiring admins either way. The only
question is whether you're hiring AWS admins or you're hiring bare metal
sys|network|linux admins.

~~~
exelius
AWS admins are cheaper and you need fewer of them. With AWS, you don't have to
stand up and maintain an entire layer of infrastructure management tools; all
you really have is config management.

You definitely have to hire a lot less staff with AWS, ESPECIALLY when you're
in that "in-between" phase where you're starting to build out a tech ops
organization. You don't have those step functions where you have a huge need
for some vendor-specific technology knowledge, but not enough work to justify
a full time employee. AWS provides an abstraction layer that you need to have
anyway: the difference is that you don't have to _BUILD_ that layer, it was
there from day one.

~~~
toomuchtodo
> AWS admins are cheaper and you need fewer of them.

I have yet to find an AWS Infrastructure Admin job for under $120K/year (SF,
LA, CHI, Boston, NY were the locales I looked in). I _have_ seen quite a few
traditional sysadmin jobs under $100K/year.

> You definitely have to hire a lot less staff with AWS,

This has traditionally been true of Linux admins in general. I'm not seeing
that much of a difference in the marketplace between Linux admin and AWS admin
compensation packages at the moment, except AWS admin positions are usually
offered by startups and included equity you wouldn't get at a typical
enterprise position.

Disclaimer: I do DevOps/AWS/Infrastructure/Etc.

~~~
exelius
Yeah, I started out my career as a system admin and the AWS infrastructure
stuff always made me fear my job was going to disappear. In reality, it's just
made people aware that the skillset most system admins have were closer to
those of a software developer anyway. As everything moves to the DevOps model,
I find that under DevOps, "AWS Admin" as a job goes away, and your developers
all just know a lot about more about AWS since that's part of the underlying
stack.

AWS is a lot easier for developers to conceptualize as well - they're just
logical objects that can be created/destroyed like programmatic objects can.
Used to be that if you needed a new server, you'd have to talk to your
sysadmin and get a VM provisioned, keys issued, etc. but with AWS all you have
to do is issue a method to a class in your framework of choice (since AWS has
SDK libraries for most languages/frameworks), and the VM is created,
provisioned and integrated into your application like no work needed to
happen.

------
PaulHoule
There are some counterexamples.

Smart phones are still driven by bling and snobbery so if you have a $900
phone you get $900 of snob value, an $1800 phone gets $1800 of snob values,
etc. Same for "luxury" cars -- if you have a Cadillac it had better be your
second or third car because you'll still need a ricer to get to work for the
days your car is in the shop.

There is a vibrant market for cheap phones and a vibrant one for expensive
phones but nothing in between because the main value expensive phones has is
as a positional good.

Similarly, there is a lot of hating on tablets because tablets aren't
connected with the cell phone plan boondoggle economy, but rather they are
driven by economics and people just don't want to pay hundreds and hundreds of
dollars. It isn't such an exciting biz to be in precisely because it is
competitive.

------
GVIrish
Eh I think this analysis is pretty shallow and misses some key points.

A. Is the product/service something approximating a commodity?

If the answer is yes, then certainly premium pricing is not sustainable. In
the case of cloud services it's not quite a commodity, but ultimately if the
[cloud] service meets the customers technical and service/support requirements
the main differentiator is going to be price.

B. How high are the switching costs?

Once a customer has invested in a certain product or product ecosystem, how
expensive is it for them to switch? With Apple vs Android the costs are not
necessarily high, but it takes a decent amount of work to transfer media and
adjust to new ways of doing things. For some customers that may not be worth
it.

C. How big of a factor is branding?

See Apple, GoPro, Amazon, BMW, Mercedes, Coach, etc. With a physical product
the brand is often a such large component of the buyer's decision that even if
there is a cheaper similar product it[the cheaper item] doesn't even get
consideration. A Hyundai Genesis has many of the same luxury features as a BMW
5 series but is much cheaper. But, probably 90% of the time, the person
considering a 5 series is never going to even set foot in the Hyundai
dealership.

In the IT context, the choice might be between a well-known software vendor
and a much-cheaper alternative. But enterprise customers typically are going
to go with the name-brand option, even if they don't need all the bells and
whistles it provides. Many shops don't need something like Salesforce but they
pay the premium just the same.

D. How price sensitive is the target customer?

Depending on the customer and the market, sometimes the customer doesn't
really care if there is a cheaper alternative. They're happy with what they're
doing and the price difference might be a rounding error to them so they just
stick with what they've always been doing.

So yes, premium pricing can't last for some scenarios but that's hardly a
rule.

------
bitslayer
But where does Apple figure into that argument? I would say that their premium
pricing was and still is worth the difference.

~~~
IgorPartola
Arguably Apple is still only serving the high end of the market. They are in a
unique position where the consumer does not do the math on the true cost of
the iPhone. I also don't see a whole lot of college kids with rMBP's. Besides,
who is to say that they are not going to run out of their premium price
runway?

~~~
coob
Probably depends which college you go to, but Macs are pretty popular on a lot
of campuses: [http://askmeboy.com/wp-content/uploads/2014/08/college-
class...](http://askmeboy.com/wp-content/uploads/2014/08/college-classroom-
laptops1.jpg)

~~~
jfoutz
As far as the U.S. goes, around 1/3 don't go to college, and 1/3 go to
community college. I doubt many of those kids are going for the MBP. I can't
tell if you're using this as evidence for or against apple being a premium
brand.

------
patwolf
I would say the argument doesn't have anything to do with premium pricing and
everything to do with lock-in.

In the case of AWS, prices are cheap. But once you've built your software to
use all of the proprietary AWS services, it's not economically feasible to
switch to another cloud provider. You're locked in.

This works similarly for Apple. You do pay more for the product, but it's not
trivial to switch to a cheaper Android device after plugging into the Apple
ecosystem.

GoPro clearly can't continue to win technologically (what comes after 4k?),
and they don't have an ecosystem to lock you in.

~~~
exelius
> In the case of AWS, prices are cheap. But once you've built your software to
> use all of the proprietary AWS services, it's not economically feasible to
> switch to another cloud provider. You're locked in.

I would actually say that this is not a huge issue with AWS. Amazon tends to
either use open protocols, or the industry adopts Amazon's open protocols (see
S3). It's also their philosophy as a company that they want to win by helping
their customers win. The folks at Amazon drink the kool-aid: from the top
down, they legitimately believe that this attitude is their core competitive
advantage. Bezos has been known to fire people for making moves that were
profitable, but customer-hostile. He sees it as undermining the long-term
brand value of Amazon in the pursuit of short-term profit.

Amazon's whole strategy here is really interesting: in markets where they can
achieve economies of scale, they are totally willing to help lower their
competitors' cost bases. That's because their competitors are now contributing
to the scale that allows Amazon to succeed, and also helping Amazon to lower
their own cost base. The ultimate idea is that if you always give the customer
what they want -- even if that means helping your competitors -- you will be
at the forefront of any industry you want.

~~~
jimmrf
Great points, but I would (and have - news.ycombinator.com/item?id=911252)
argue that prices are not cheap, at least relative to costs. They are spending
to develop some great services over top, but the perception that they are
charging anywhere close to their marginal costs is purely successful PR.

Also, subtle point but I would add that any firing would be for moves
_perceived as_ customer-hostile. Just looking into the EC2 Reserved Instances
and the supposed secondary marketplace I see some less-than-consumer-friendly
practices that seem to be just fine so long as nobody takes note.

~~~
exelius
Like you, I doubt that they are charging anywhere close to marginal costs
because that's simply not how you run a successful business ( _especially_ a
capital investment business like AWS). Price is determined by the market, and
Amazon charges a price they think the market will support - no more, no less.
If you think you can put a product out there at a lower price than Amazon,
you're always free to try. It was a genius customer retention strategy to
continuously drop prices without customers even having to ask - it's basically
the opposite of what telecom companies do and it makes Amazon's customers love
them.

As far as customer-hostility goes, you're right, there are some customer-
hostile practices that happen just due to the nature of some of these B2B
markets. But they're largely restricted to "expert" markets where you're
expected to know a little bit more and prevent yourself from getting ripped
off. There is an element of subtlety to this, but the idea is that you
shouldn't be trying to leverage your customers' ignorance in exchange for a
big pay day. I'm sure there are small instances of individual marketing
managers getting away with things that are against the "Amazon code", but by
and large those practices stop as soon as the product is big enough to make it
on executives' radar.

~~~
jimmrf
Agreed and especially like your points around expert markets about the
executives' radar.

Just a to build a bit on the pricing point: Outside of perfect competition,
price is not determined by the market. It is determined by executive or
committee or some agent of a company subject to the market, specifically 1)
observed and expected competitors' prices and 2) the company's estimate of the
demand curve composed of all possible customers & workloads.

~~~
exelius
Right; I meant only that cost has no bearing on the price set by the company.
The two things you mentioned (competitive landscape and demand forecasts) are
both ways of measuring the market.

Marginal cost only plays into the equation when the marginal cost of the
product is higher than the maximum price/pricing structure the market is
willing to bear over the time horizon you're considering. Amazon just has a
longer time horizon than most companies.

------
Htsthbjig
I disagree. GoPro is not Premium. For me GoPro is cheap for what it does.

I had bought Sony and Canon DSLR in the past. THIS IS PREMIUM. Several
thousand dollars each.

My Gopro does things NO OTHER CAMERA in the thousands category could do. In
fact , the people at Canon, Nikon, and Sony disable features on the hundred
dollar category so it does not compete with the thousands.

E.g You want instantaneous electric controlled shutter on your NEX X Sony
camera? Sorry, you need to pay thousands of dollars. You want uncompressed
HDMI video output? Same answer. They have an HDMI port!!, they simply disable
it!! They provide you with crappy analog output.

With my GoPro, I can do it all way cheaper, smaller, lighter, great video, and
rock solid. Connecting it to a HDMI grabber provides amazing quality. You
could stabilize it with cheap motors as it is so lightweight. Control via the
Web?,mobile phone?with my own apps? no problem with the GoPro.

I love this camera so much, and hate the others. If Gopro decided to make a
DLSR, I would buy it. The other companies could burn in Hell, they had abused
so much.

~~~
saiya-jin
good for you to be such a fan, for one I am not, although owning their
devices.

Overpriced products, some botched updates (yes, most companies screw up more
than once, but that's not an excuse), not really caring that much for
customers (cases oficially usable under water were only included in Hero 3,
which is roughly +-5th generation, till then they were just waterproof &
completely out of focus).

Image quality is a joke compared to recent cell phones. Price wise their top
model is ridiculously expensive, without delivering anything special (ie
better picture quality).

Battery life is bad, and no sign of improvement (apart from PR talk every
single release). THis is exactly the type of device needing long battery life,
since it's often in environments where switching battery is impossible/very
hard, and often being exposed to cold.

They are chasing 4K video and ridiculous frame rates, but picture quality was
never paramount (problem is, competition is worse). This is niche interest,
most people don't need nor want 1080p / 120 fps. For nice slow-mo movies, you
need anyway much higher framerate (at least 240 fps).

They have good marketing, no doubts. As for products, not so much. I
repeatedly end up with sundown images/videos being one ugly orange-
oversaturated mess, that cannot be fully corrected in post processing (and why
the hell should I? Even my 4 year old phone can cope with it automatically).

I was recently considering whether to go for top of the line GoPro or buy
small but good camera. Usages - underwater, climbing & mountaineering side
camera. GoPro lost on all but small form factor, and I bought Canon S110 with
underwater housing. It costed me same, picture quality is completely differetn
level, and form factor is sometimes actually better with Canon.

If you look around, there is quite a lot of people disappointed in them. But
as I said, they have good marketing.

~~~
Htsthbjig
I am quite emotional because the people at canon and Sony had f*cked me so
many times in the past.

The Gopro has solved most of my problems. I am a geek and use my cameras for
crazy things like 3d recognition of spaces, with my drones, robotics.

The GoPro is the camera that gets in my way the least of all the cameras I had
tested.

Image quality for me is quite good. But nothing replaces basic knowledge of
video making that probably would solve most of your issues.

When you say they have good marketing... well their videos are made by
professionals. Any pro with any camera could do marvels, but with some cameras
takes more effort than with others.

------
slgeorge
As it says, "If there is one truism in the technology market, it is that
premium pricing just doesn’t last."

It definitely has one aspect of a Truism [1] - no-one really looks at the
underlying assumptions. The biggest assumption in much of the tech industry is
that you're aiming for mass market - the consumer tech brands like Facebook
particularly have that assumption - other people follow sometimes without
understanding the implications.

If that's your focus, and you have limited differentiation your pricing has to
reflect that over time replacements will come in and undercut you. That's the
GoPro example he's using, where the parameters of his comparison are the
"components of the hardware camera".

What he's missed is that Apple and plenty of others (think every car brand)
have shown that brand and real differentiation can prevent new entrants from
being able to provide an equivalent that is good enough. The point is that the
customer has to believe that product A and product B are comparable - and that
the parameters may not just be the bits or atoms.

For example GoPro's brand speaks to "action sports" and being active, they
have software and communities that people want to be in. It's perceived as
something that 'active people' use and has brand cachet. So the 'replacement'
has to capture all that value, not just the hardware costs. Frankly, they've
absolutely eaten the lunch of much bigger hardware companies who have far more
economies of scale.

The AWS example is even less clear cut. Since Amazon is a retailer we can
assume their strategy is mass take-up, and we know that their general pricing
strategy is for people to "believe" they are cheapest. But, we also know that
Amazon practises differentiation, we've seen that with Kindle and Amazon
Prime. If you look at the AWS services you can see they are aiming to provide
a highly differentiated service aside from "simple" IaaS. We also know that as
a retailer Amazon uses extremely sophisticated pricing strategies. At this
point I would think that Amazon is continuing to drive down the cost of basic
IaaS due to economies of scale which makes it very difficult for competitors
to get started, while keeping the cost up of 'value-added' services which
provide differentiated service and make the whole service a lot more sticky.
They will probably do Amazon Prime like things with their whole portfolio over
time.

There are plenty of businesses where the strategy of being cheapest is right,
but it's not the only approach.

[1] [http://en.wikipedia.org/wiki/Truism](http://en.wikipedia.org/wiki/Truism)

------
sly010
Upvoted, not because I agree, but because I would like to see discussion on
this. I just bought 2 Mobius Action cams for $70 each and they are awesome. On
the other hand someone doing any sports worth recording probably won't even
think about buying anything else but the best accessories.

------
SmallBets
You can add Beats to the list - a low barrier industry ripe to undercut a
premium priced brand, but it has not done so.

There is an emotional factor, where customers associate their own identity and
how they see themselves with the brands. That is what allows premium pricing
to last.

------
vwelling
As long as it's just a better product, there will always be those willing to
pay a little more. Even if the product is part for part the same as a
competitor's, better customer service might still warrant a premium price. Not
having to go through the hassle of dealing with a horrible RMA process for
example, is worth the extra money to me.

The nice thing about customer service, is that its monetary value is very hard
to quantify, making objective comparison difficult. So there's always room to
charge extra.

------
amelius
The same holds for many things. For instance, software licenses. If your
license is restrictive, then no matter how good your product, eventually your
competitors will catch up with a "good enough" product that has a less
restrictive license.

Therefore, open source licenses will eventually converge to permissive, like
MIT or BSD style licenses.

~~~
deitcher
@amelius, I haven't though of software from that perspective. App servers, Web
servers, databases and a lot of middleware have gone down that path.

Have you written it up? I would like to see a write-up on that.

~~~
amelius
No I haven't, but feel free to do so :)

~~~
deitcher
I wrote one. [http://blog.atomicinc.com/2015/03/11/licenses-as-premium-
pri...](http://blog.atomicinc.com/2015/03/11/licenses-as-premium-
pricing-2387/)

Feel free to post to HN if you like (or if you dislike and then comment :-) )

------
bluedino
Many premium brands have been around for years. Rolex, Coach, etc. Sure,
trends change but there are always going to be people willing to pay extra for
the status of having a premium brand.

