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Premium Pricing Just Doesn’t Last | Atomic Energy

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 productbecauseyou are the “first” and often the “best”.

The problem is thatit 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 ofthis principleagain this week fromtwo 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 isGoPro. 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.Athalf to two-thirdsthe price ofan iPhone, it isnot even half as useful, unless your business involves action cameras. It is a worthwhile expense for hockey coaches or bald eagleresearchers, but for theaverage 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.Theyreportits 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 aretwo:

  1. Xiaomi, the Chinese smartphone manufacturer, hasannouncedtheir YiCamera for ~$63.That is one fifth the price ofa GoPro.Sure, the specs are lower, but in the important areas – basic recording, waterproof, impact-resistant – itisgood enough.
  2. SJCamreleased its SJ4000action camera. The specs are very similar to Xiaomi’s camera – I would not be surprised if they shared a plant – and the camera hasa similar price. Unlike Xiaomi’s, SJCam’s is available onAmazon today.

While bothcameras 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 forthe 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 lastannual 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 topaydouble for a premium producttheydo nottrulyneed is hard enough; gettingthemto pay 3-5x isnear impossible.

Public Cloud

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

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 forreview 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 toswitch.

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 turnsthis on its head. Who wants to switch off Amazon when theircosts keep dropping? Even more, the lower prices often reflecthigherservices: 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 switchthe 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 onlythree 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 undercutyourself.

It is hard to know where and howto cannibalizeyourself, butit isextremely hardto 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 thatearthquake?Ask us to get you there.

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