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iPod Theory and the Economics of Consumer Choice
From music players to cars, how price points and features make you spend more.
I won't get all technical with mumbo-jumbo stats and economics graphs. Lets look at this in gradual steps. If the smallest iPod can hold 2GB at $29.50/GB or 4GB at $19.75/GB, that's twice the storage for only 30% more. Lets take a look at the next level up that also includes a screen and video camera. You now step up to 8GB at $18.63/GB or 16GB at $11.19/GB on top of added features. The latter of the two being twice the capacity for only 20% more, or 8 times the capacity of the smallest at three times the price. Not convinced? Go a step further and you're staring at a staggeringly low $1.56/GB. That's roughly twenty times as much storage for each dollar as compared to the lowest version.
What do these ratios and percentages mean to an average buyer? Well they'll probably start at a lower model and after small incremental steps up walk out the door with a model with a capacity exponentially greater and a price not what originally drew them into the store in the first place with the excuse that it's a better buy dollar per dollar than the original.
What's that you say? I said this wasn't about mp3 players? You're absolutely right, it's about product pricing. Where perception of massively increased value with only slightly higher investment is seen there will be massive sales. I'm crazy right? Why wouldn't I want to buy a more "economical" model? Well the simple fact is, price points are not chosen at random, they're picked to make consumers buy up. Their listed prices are not reflective of their actual cost to manufacture. Case and point, again, iPods. A recent analysis of the latest iPod shuffle determines it's actual cost to manufacture including packaging is $21.77. Which is about 28% of the retail price. While the Nano is 40% and Touch 49%.
Thus we can clearly see lower models could be easily marketed for lower prices. Though as it stands you'd think they'd make more selling them and not want to push people up to their larger brethren. Not exactly, while their cost to manufacture is a higher percentage of sale price relative to the lower models, that small percentage of profit made from the highest capacity iPod Touch is more than three times the sale price of the smallest shuffle model. Thus to see the same profit from the sale of one high end model it would take roughly five sales of the lowest model. There you go, case closed.
Not everything is as cut and dry, gradually stepped as iPod pricing. Lets look at this backwards. How about cars? Many entry models start at around $20K, then fully optioned with leather, tech gizmos, big wheels and more powerful engine you're at over $40K. I can see parents using this reasoning to buy their teen a base model vs fully loaded. I mean, really, you can literally buy two base models for that price! Most mainstream cars hover around 50% net profit. This doesn't account for the billions it costs to develop them however. So manufacturers again want to maximize their profits.
As I realized this it made me look at the products I owned. While my car isn't brand new, it was at one time the top of the line. The same can be said for my iPod, Camera, Computer, Printer, well pretty much everything I own. I guess if I fell for it, and I know all about cost vs price, what chance does the average consumer have this Holiday shopping season? Hopefully by reading this you'll have the power of choice. I'm not saying to buy low or high, just buy what you need. If you only need a product to do a certain thing, don't buy a higher model that can do twice as much for only 10% more when you'll never do twice as much. It's just the principal of the thing, isn't it?