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iPod v. Walkman
Winning Price to Quality Competition Using Customer Perceptions and Market Segmentation

November 2006 Pricing

The old adage of “you get what you pay for” has long driven both customer behavior and pricing strategy. Some people are willing to pay higher prices for higher quality items, while others seek lower prices and for them, lower quality items will suffice. Furthermore, given two items of equal price but varying quality, rational consumers will consistently select the higher quality item.

Price v. Quality Map and Line of Equivalence

The simple insight that willingness to pay is proportional to quality has led many strategists to plot their pricing practices on a Price v. Quality map. Within the Price v. Quality map, the adage of “you get what you pay for” has been translated into the analytically named Price to Quality Equivalence Line. The Price to Quality Equivalence Line provides strategists with a visual representation of the relative strength of offers, and thereby the likely market outcome from making such an offer.

  • For products on the Price to Quality Equivalence Line, price provides a meaningful signal of quality. Any marginal increment in price is accompanied by a marginal increment in quality.
  • Products to the right of the Price to Quality Equivalence Line offer greater quality than is demanded by price, and thus should attract market share as consumers select the better offer.
  • Products to the left of the Price to Quality Equivalence Line offer lower quality for a given price, thus consumers should select a competing offer and the product should loose market share.

Price v. Quality maps and the Price to Quality Equivalence Line can be easily demonstrated with Apple’s iPod line of digital music players as shown in Figure 1. The iPod Shuffle offers the fewest features and is priced the lowest. The iPod with video offers the most features and is thus priced the highest. In the middle in terms of both features and price is the iPod Nano. Combined they define the Price to Quality Equivalence Line.

Walkman Intrudes on the Cozy iPod Worldview

Recently, Sony released a new lineup of Walkman digital music players. The one priced near the level of an iPod Nano is said to have superior sound quality, the ability to upload music directly from CD players, and half the storage capacity.

How well Sony does in the digital music market compared to Apple is largely dependent upon their relative position in the Price v Quality map. Yet, this is precisely the challenge. Placing this new Sony Walkman on the Price v. Quality map in comparison to iPod cannot be done in the abstract. It must be done with deeper understanding of the alignment between product and market needs.

Is it Overpriced?

If consumers consider storage capacity to be the main measure of quality after the basic functional issues are satisfied, then Sony’s new product is overpriced and, as such, it will fail to capture market share and profits.

The case of being overpriced is demonstrated below in Figure 2. Here, we have indicated that the Sony product has a lower quality than the Apple product of the same price. Presumably, rational consumers will not purchase a lower quality product that costs the same amount as the higher quality product. As such, the Sony Walkman should not be expected to capture the market.

Or Underpriced?

On the other hand, if consumers consider sound quality to be the main measure of quality after the basic functional issues are satisfied, then Sony’s new product is underpriced and, as such, it will succeed in capturing both market and profits.

The case of being underpriced is demonstrated below in Figure 3. Here, we have indicated that they Sony product is positioned as having a higher quality than Apple’s product of the same price. Presumably, rational consumers will purchase the higher quality product when price is equalized. As such, the Sony Walkman should be expected to capture these consumers.

Interesting, but Insufficient to Answer.

While these pictures are pleasant, they leave some critical issues unresolved. Such as where is Sony relative to Apple with the new product release? And, is it definitive?

Where is Sony?

The relative position of Sony vs. Apple cannot be answered today based upon product features and benefits. To know today if Sony is overpriced or underpriced, we must know what customers value in a digital music player. That requires market research. Over time, the market will demonstrate which metric of quality it accepts by simply buying the preferred product. Today this information can only be gathered by either anticipating or measuring customers’ perceptions of the meaning of quality.

The prior paragraph reveals one bit of insight for a pricing strategist: Before a product is released, a sound pricing strategy requires an understanding of what customers value in order know how a product stands in relation to the competition on the Price v Quality map. Mere familiarity with product features and benefits is insufficient. A pricing strategist must also know what customers value.

Is it Definitive?

Any piece of market research will reveal that there are dispersions about the norm. In other words, no two people will have the exact same perceptions of quality and, at times, a single person will redefine their definition of quality at different times. This leads to the value of market segmentation.

If one portion of the market defines “quality” as sound quality while another defines it as storage capacity, then different segments of the market will consume both products simultaneously. Each market segment will select the product that provides them with the greatest quality for a given price.

When market segmentation becomes an issue, predicting which product will do better in the market requires an understanding of the relative size of the different market segments. All else equal, the product that provides the higher quality as measured by the key area of interest of the larger segment will end up with a larger market share.

To put this in the context of the Sony vs. Apple competition, some consumers will perceive Sony’s offering as overpriced, others as underpriced. The real issue is which segment of consumers is larger? Based on past market results of customers choosing between sound quality and storage capacity, we suspect Sony will gain the praise of the smaller segment for now.

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References

  • Michael Marn, Eric Roegner, and Craig Zawada, 2004. The Price Advantage., Hoboken NJ.: John Wiley & Sons, Inc.
  • These authors use the term Benefits rather than Quality and speak of the Value Equivalence Line rather than Price to Quality Equivalence Line. I have chosen the term Quality for this article in order to highlight the issue that Benefits and Value are dependent upon customer perceptions and to speak to a broader audience. Largely, we are appealing to the same concept but with different words.
  • iPod product features and pricing Retrieved Oct 24, 2006 from Apple website at http://www.apple.com/itunes/
  • Yukari Iwatani Kane, Sony Struts Out New Walkmans to Take on iPod, The Wall Street Journal, Oct 13, 2006, p. B2.


About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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