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Prices and Product Lifecycle – Must All Prices Fall?
An examination of Amazon Kindle, Sony Reader, Barnes & Noble Nook, and Apple iPad

July 2010 Pricing

The classic product lifecycle theory predicts that prices fall as competitors enter.  Well, do all prices fall?  Similarly, many pundits like to talk about first-mover advantage.  Well, does it really exist?

An examination of e-reader market demonstrates some serious flaws in a cursory acceptance of these premises.  In this article, we look at the price and product evolution of the Amazon Kindle, Sony Reader, Barnes & Noble Nook, and Apple iPad to demonstrate some finer nuances of the product lifecycle.

First, Second, or N Mover Advantage?

While the e-reader market didn’t take off until the Amazon launched the Kindle in 2007, Amazon wasn’t the first to market an e-reader.  Sony was back in 2006.  By 2010 however, even Amazon is being given a run for its money with the Apple iPad.

Which device will win the market over the coming years?  This is dependent upon a number of uncertain factors and I lack the data to predict.  But clearly, first mover advantage has proven illusionary and second mover advantage has been called into question.

Rather than taking broad business theories and applying them to a business challenge like a sledge hammer, the e-reader market demonstrates the need to think through the issues and prepare contingency plans as the market takes some serious diversions.  Competitor actions are hard to predict, especially actions from competitors that executives didn’t predict would exist.

Prices Fall As Products Are Adopted, Or Do They?

A quick look at the history of e-readers and prices shows that, while some prices on entry level e-readers have progressed through a traditional downward trajectory, many models sport prices significantly higher than early models.  See the e-Reader Price Evolution infographic.

The Sony Reader was initially launched in November 2006 at a price of $349.  Within the year, Sony had knocked the price down to $299.  By November of 2007, Amazon entered the e-reader market with the Kindle priced at $399, slightly higher than the original price of the Sony Reader.

Already, within the first years of the e-reader market, we see that not all prices have to fall.  Moreover, if we were to look at the market share of Sony vs. Amazon in the 2007-2009 time frame, we would find that the cheapest product wasn’t the product that captured the dominant market share.  It was the more expensive Amazon Kindle that caught everyone’s imagination in the States.

Being cheap isn’t the route to winning market share.  Being a superior value offering is.

Between 2007 and 2009, prices held steady as Amazon and Sony competed over functionality and market share.  While both Amazon and Sony relied upon E Ink Corp. technology, the Amazon Kindle sported 3G downloads of books, while the Sony Reader required readers to download books through their PC.  With the launch of the Kindle DX, Amazon took their e-reader global and further increased storage capacity

It wasn’t until 2010 that competition began heat up.  First, Barnes & Noble entered with the Nook.  By June, Apple put some serious heat into this market with the launch of their highly successful iPad franchise.

And where did prices go?  Barnes & Noble Nook took the conventional route of selling the entry level Nook at the low price of $149, most likely the hopes of making money off the selling of titles.  Meanwhile, Apple took the alternative route in selling the iPad at prices ranging from $499 to $829, seriously higher than all the competing prices, and with a much broader set of features and benefits than its competitors.

Hence, we are left with a much needed clarification on the evolution of prices with the product lifecycle:

While prices on entry-level products tend to fall as product categories evolve, new entrants do not have to compete at the entry-level.  Rather, new entrants can be highly successful by adding features and benefits, as well as higher price points.

The Devil’s in the Details

The product lifecycle is a very useful concept, and first movers into a market can find an advantage, but simply citing to these concepts with the expectation of having a winning market strategy is foolhardy.  Executives who avoid the error of myopic concentration on product volumes and prices can avoid the traps that lead to market irrelevancy. These are the executive who instead concentrate on the needs of customers, both their existing customer base and the customers who haven’t yet adopted the product category.

I wonder with the Dell Tablet Reader will offer?

eReaders



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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