It's inevitable

Prices of tech products always drop drastically

by David Morrill

Contra Costa Times (MCT)

19 September 2007


WALNUT CREEK, Calif. - If you haven’t learned how new technology is priced by now, the sudden cost cut by Apple of its iPhone earlier this month should have done the trick.

Those who walked away with the iPhone for $600 when it was first released fumed two months later when the prices dropped by $200.

“I gave mine back soon after I got it, but if I had kept it and the price went down like it did, I would have been royally (annoyed),” said Heather Lombardo, a resident of Danville, Calif.

While the short time span between the launch and price cut was unexpected, don’t expect consumer experts to shed tears for those who paid the higher price.

“The error that Apple made was that they didn’t anticipate a huge consumer backlash from the announcement, but the truth is it happens all the time,” said Rafi Mohammed, pricing expert and author of “The Art of Pricing.” “The flat screen television you buy today, will be 20 percent lower by Christmas.”

You can almost bank on the fact that any time a new technology product is released, it’s a near certainty it will go down in price drastically.

And whether it’s computers, cell phones, DVD players, or GPS systems, patience is the best tip when trying to get something you want at a cheap price.

When Motorola first released the Razr, known for how thin the phone is, it came out at about $500. Today, it can be found for anywhere from $50 to $100.

Unlike a loaf of bread at a grocery store that has nominal price fluctuations, it’s more extreme with technology. A big reason is that consumer electronics have built in a “learning curve” that translates into cost cuts.

“With a cup of coffee, it is pretty much always made the same way, so you don’t get those kind of cost improvements,” said Gloria Barczak, professor of Marketing at Northeastern University in Boston. “With consumer electronics, as you produce more and more of a product, you get better at it, so it becomes much easier to bring the high costs of more volume down.”

For example, one of the high definition disc formats, Blu-ray, utilizes new equipment and technology to run the specially released content for its players. When it first came out late last year, the standalone players hovered around $1,000. Now they can be found for half the price, largely because of a more streamlined manufacturing process.

Similarly, both Sony and Microsoft have knocked $100 off their next generation game consoles, PlayStation 3 and Xbox 360.

Nintendo’s entry, Wii, still hasn’t lowered their costs, but that’s because they tried to enter the market using a drastic cost cut right out of the chute.

“The classic strategy is for new products to start off high and go down over time,” Mohammed said. “So the question for consumers becomes, `How much do you value the new product when it first comes out versus waiting for six months when the prices will be drastically reduced?’”

For the manufacturers of the products themselves, they try and tap into both.

“If you look at the common patterns, a technology will come in at a higher price because they know that there always are the early adopters who need to have the product before anyone else,” said Chuck White, senior vice president of market information company Telecoms TMS. “Even if Apple had said at day one the price would drop $200 in three months, there would still be people lining up to buy it at the $600 level.”

After the fanatic market has been worn thin, then the goal becomes to pull in the interest of those who base their purchases on bang for the buck.

“When (Apple CEO) Steve Jobs said the company hoped to sell 10 million iPhones worldwide by the end of 2008, there was no way he could do that at $599 each,” Mohammed said.

One analyst, Gene Munster of Piper Jaffray, reported that sales have tripled, from 9,000 per day to about 27,000 a day, since the $200 was taken off.

For some people, the reason they hold off buying the first generation release of a new consumer electronic device is not just for price reasons, but for quality as well.

Oftentimes, some of the “bugs” that slipped in the first round are taken out in later rounds.

Also, a company like Apple has been known to lower the costs of its products, only to fill the higher range with better versions later. It’s about setting the stage to give the customers the option of “good, better, and best,” Mohammed said.

Topics: apple | iphone
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