The dynamic pricing game – where all is not 99c

Phil Libin the effervescent CEO at Evernote made headlines two days ago when he admitted that Evernote’s pricing strategy had been a bit arbitrary and a new pricing scheme for their premium offering would be launched come 2015. Although little was said about what the approach would be – I do hope it points to adopting a flexible pricing approach, and serve as a forerunner for pricing strategies to legions of firms down the road.

To put some context, many software providers (especially app companies) have adopted a one price fits all approach; i.e. if the price for the app is $5 per month in USA, the price is $5 per month in India. The argument has typically been one of these

1. Companies such as Apple do not practice price differentiation around the world, and yet they sell – so we should also be able to do the same
2. Adopting a one price fits all approach streamlines our go-to-markets and avoids gaming by users
3. It is unfair to users who would end up paying a premium for a product which can be sourced for a cheaper price elsewhere

From a first hand experience I believe that such attitudes have proven to be the one of the biggest stumbling blocks for firms to achieve global success. A good way to explain why is to pry apart these assertions.

• The Brand proposition argument – Although every firm would love (and some certainly do in a misguided manner) to believe that their firm has a premium niche such as Apple – harsh reality points in a different direction. There are only two brands who top $100 bn – and Apple is one of them; and no – unless you are Google, you are not the other! Even though your brand may be well known in your home of Silicon Valley, its awareness most likely diminishes with the same exponential loss as a mobile signal – its value in Moldova for example – may be close to zero. This simple truth is that there are only a handful of globally renowned brands (e.g. Apple, Samsung, BMW, Mercedes, Louis Vuitton etc) which can carry a large and constant premium around the world.
• The “avoid gaming” argument – this does have some merit, but needs to be considered in the grand scheme of things. Yes – this is indeed possible, but is typically limited to a small cross section of users who have foreign credit cards/ bank accounts etc. The vast majority are domestic users who are limited to their local accounts and app stores. The challenge here is to charge the same fee irrespective of the relative earning power in a country. While an Evernote could justify a $5 per month premium in USA (a place where the average mobile ARPU is close to $40), it is very hard to justify it in South East Asia (mobile ARPU close to $2) or even Eastern Europe (mobile ARPU close to $8). It then would simply limit the addressable market to a small fraction of its overall potential – and dangerously leave it open to other competitors to enter.

ARPU	$12.66	$2.46	$11.37	$9.20	$48.15	$23.88	$8.77
Region	MENA	APAC	Oceania	LatAm	USA	W.EU	E.EU

• The unfairness argument – also doesn’t hold true. The “Big Mac Index” stands testament to the fact that price discrimination is an important element of market positioning.

Even if you argue that you cannot buy a burger in one country to sell in another, the same holds for online software – take the example of Microsoft with its Office 365 software product, same product – different country – different price.

• That brings me back to the final point – $5 per month may sound like a good deal if you are a hard core user, but if you compare it with Microsoft Office 365 – which also retails at $5 per month, it is awfully hard to justify why one would pay the same for what is essentially a very good note taking tool.

Against this background, I do welcome the frank admission that this strategy is in need of an update, and also happy to hear that the premium path isn’t via silly advertisements. Phil brought up a good challenge with his 100 year start-up and delighted to know that he still is happy to pivot like one.  I do for sure hope that the other “one trick pony” start-ups learn from this and follow suit.

Why Germany Dominates the U.S. in Innovation …. or does it?

“Germany dominates the US in Innovation” blared the headline from the HBR blog posted by Dan Breznitz who put across several points to illustrate where and how Germany was better than the US in these respects. As a person who has lived and experienced both sides of the pond I beg to differ. The article does incorporate several facts such as the strong manufacturing base and a good work ethos but in mixing innovation with inequality and other issues I think the author has missed the point, and I would like to elaborate why.

On government sponsored research – the author does extol the large benefits of government based applied research at institutes such as Fraunhofer. True, they are indeed great and have provided many an invention – perhaps the most widely known is the MP3 license. However, there are multiple efforts by the US government in the same direction; key difference being that they prefer to fund private firms to carry out the research on their behalf. Let us take the example of the Small Business Innovation Research and compare (all figures taken from their respective websites)

• Number of institutes/ firms funded
  • Fraunhofer: 66 institutes and research facilities around Germany
  • SBIR grants: Supporting 15000 small firms all around USA
• Number of people (engineers/ scientists) employed
  • Fraunhofer: 22,000 staff
  • SBIR grants: 400,000 scientists and researchers
• Funding
  • Fraunhofer: annual budget around 1.9 Billion Euro
  • SBIR: annual $2.5 Billion

As can be seen, one major program in the US is able to employ 20 times more people and support a whole lot more of private enterprise than focusing on a few big institutes. It is this private capital driven mentality that allowed NASA to downsize and opened the doors to many upstarts who are developing new technologies at a fraction of the cost of what it cost the government under NASA (see SpaceX). From my own experience, small and agile firms are able to innovate at an astonishing rate. Although government funded research is nice, they are typically trapped by layers of bureaucracy and inefficiency which limits their productivity.

The second argument around German leadership in manufacturing; if the American’s learnt one thing early was to franchise, scale and mass produce – all at the lowest cost. This was the key determining factor which led to a flight of capital to developing markets such as China and India which became the manufacturing hubs. In recent times as technology innovations such as automation and 3D printing are becoming more wide spread – we can see manufacturing come back (again to provide a cost advantage). What Germany is definitely good at is in manufacturing, but if you talk to the vaunted mittelstands’ there is a distinct fear that as China and India catch up, this technology edge is fast evaporating as the technology is copied (or sadly robbed due to poor control), localized and enhanced to suit the local market. The US took the other route to economic prosperity – focusing on services rather than manufacturing – which has directly led to the huge explosion in this industry, and the innovation around it (I am considering IT more as a service rather than a traditional manufacturing industry).

Yes – this does bring about inequality, because you end up with a high tier service class (who make the cool software etc), and a lower tier class who “serves” (the fast food server etc) and the absence of a strong “manufacturing” middle class as in Germany. But this is not tied to who is the better innovator, but the impact of the choice to focus on a particular aspect of the food chain i.e. services rather than manufacturing. Putting both in the same pot simply befuddles the discussion.

It is also true that Audi, BMW etc do sell well – but within high-tech you can also see that their connected car platforms are in partnership with the likes of Google and Apple (all US companies).  And if you want to talk about cars – the US is one of the few places where you can see the emergence of players such as Tesla to challenge the erstwhile giants.

What Germany trumps the US in is in its social benefits – working hard to ensure higher and more egalitarian employment and a fairer distribution of wealth.  This is part of a cultural ethos and mindset rather than an outcome of innovation – and definitely a model to be copied. However, pairing this as an outcome of innovation is far fetched.

In the end, I believe both countries have their own strengths and weaknesses and could do well to learn from each other; In innovation – if anything, Germany could take a piece out of the US system.

iPhone 5C – from pull to push

A couple of weeks ago, I spent the weekend ambling around San Francisco, a place I call home when I am not traveling. What was interesting were the number of advertisements promoting the iPhone 5C (and not the more expensive 5S variant). This got me thinking; was this an attempt from Apple to try and attempt to use its marketing muscle to push this device in the market? A different tactic from previous generations of iPhone where the almost unheard of hype led to Apple having to literally ration the device.

The million dollar question to be pondered on – did Apple blunder in the release of the the iPhone 5C, so much so that it has to coax customers to buy this device? Note the following press releases

• Both Best Buy and Walmart began discounting the devices within 2 – 3 weeks after release
• Apple was forced to slash production orders of the device

This is a very different experience compared to what Apple has gone through in the past. Before, it had to figure out how to increase production to meet demand, now the tables seem to have been turned. Oddly enough, ask the common man on the street and the choice between the devices was nearly unanimous. If you had the money, you wanted the 5S; the 5C wasn’t cheap enough in comparison to appeal to a different segment – these folk couldn’t afford it in the first place! I would have assumed that a firm like Apple would have gone through a similar internal exercise, hence cannot figure out what may have caused such a pricing goof-up in the first place!

Apple executives till date haven’t stepped up to admit this wasn’t what they expected, referring to complicated supply chain issues with regards to production orders etc. However, the advertisements everywhere seemed to reflect just this – Apple has now to try to convince people to buy the device. Was this a calculated move, or was this hubris – we may never know. For Apple’s sake – I do hope not the latter. The memories of a Blackberry haven’t quite faded away, where executives thought that they could do no wrong – look where they are now.

All I can suggest is in the future, Apple should do a bit more research and understand their audience. If you want to appeal to a broader audience who cannot afford the flag-ship product then do provide something they can afford in the first place. Apple did it well by discounting previous generations of their products – these products sold well everywhere – including markets such as India. If you can’t do that, or do not want to – think hard why you would want to introduce this “in-between” product – which literally has no where to go.

RIM – a fall from grace

Two news articles piqued my interest last week. First was Marissa Meyer’s (the CEO of Yahoo) announcement that all employees would now be provided by free smart-phones and accompanied data plan. This would be along her priority that Yahoo would have to be a major player in the mobile world by 2015; in order to do so would require that employees use and understand user behavior to create a compelling mobile value proposition. What was telling were the vendors chosen Apple, HTC, Samsung or Nokia….. but no RIM. On top of this Yahoo would now discontinue IT support for the Blackberry platform.

The second was thescripted and belted out by RIM executives for the Blackberry JAM developers’ conference.

I have seen performances, but perhaps never something that sounded so desperate an effort to keep the few developers who haven’t deserted them – as yet. The company has now literally put all its eggs in one basket focusing on the BB10 launch promised for next quarter. If I was a shareholder I would have to ask CEO Thorsten Heins if this is the best punch that he could pack. I am also a bit mystified on their selection of their CEO in the first place – given that he came from Siemens who themselves do not have a stellar track record in this regard and hasn’t done anything radical enough to shake up a company which perhaps desperately needs just that – a different way of looking at their business.

This is just what I will try to postulate; perhaps not rocket science but drawing it up from first principles and positioning it against current competitive trends in this space.

What has been BB’s strength, the USP which drew enterprise customers in hordes during the boom years? It could be summarized as the phone with its ubiquitous keyboard as well as the BBM messaging and email platform offering secure communications prized by enterprise customers. This was the firm belief that this capability would not be replicated and stuck to their strategy over a decade. A decade is light years in the fast moving telecom space. Fast forward a decade later and touch screens are the order of the day with technologies such as swype making typing easier. At the same time 3^rd party companies have come up with compelling solutions which offer similar levels of security but are compatible across multiple platforms and/ or are available at a lower price point. Perhaps they do not maintain the BB legendary watertight server structure but for a majority of the populace this is just good enough. At the same time the shift in behavior has ensured that bring-your-own-device (BYOD) is gaining popularity and enterprises are pandering towards the preferences of their employees who prefer an Apple/ Android phone with thousands of apps to the Blackberry. To its own consternation Blackberry has been unsuccessful in wooing developers its platform – ‘no developers – no apps’. On top of this one USP was the ability compress data in order to squeeze data in older 2G – 2.5G network. With the emergence of 3G/ 4G networks media is now the primary bandwidth hog – email is no longer a red flag item. So now RIM is left with a device which few want, with an app platform which looks like a desert compared to the rest and with messenger and secure email no longer being the preferred service. I will admit that I do not have any deep insights into BB10, but perusing the news and blogs leads me to many skeptics and a few optimists. Perhaps it is drawn from past history with many promises and a track record of under-delivery.

So what could RIM do? On talking to present and past BB users one gets the feeling that although people have gotten past the desire for the handsets (now preferring the iPhone and devices from the Samsung/ HTC universe) there is still an appreciation for the neat and effective BBM and email service. Could RIM drop its pretense of being a device company and migrate along with the rest of the world into being the ‘multi-platform app’ for enterprises. Such an app (or an ecosystem of apps) would leverage the ‘security and trustworthiness’ of RIM, would appeal to the broad range of former RIM BB users who loved the service, but perhaps are now users of different handsets.

Of course, this is no Blue Ocean, but RIM does have the background, the brand and the history to deliver such a service. It would mean a harsh restructuring of the company, but RIM would be able to survive – find its mojo and hopefully emerge as a phoenix in the expanding and lucrative billion dollar mobile enterprise universe

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours