But I’ve already paid!! Sony innovates around willingness to pay

In teaching business strategy I spend a bit of time discussing the thorny issue (for firms and scholars) of willingness to pay.  A huge challenge for firms is successfully offering a product or service that customers are willing to pay for, and at a price that allows the firm to make a profit.  There are numerous dimensions in terms of product attributes that customers might consider, and all within a context of competing products and services, and inevitable spending constraints.

One possibility I hadn’t thought about much until today is the issue of a firm’s capacity to alter the product itself post-transaction.  I do live in the vain hope of added benefits (flight upgrades, additions of secret superstar acts to concert line-ups, or a hidden track on a CD), but I wouldn’t expect a firm to actively remove a feature I had already paid for.

Sony have done just that. This week they dropped a bombshell, announcing that they were removing a feature of their Playstation 3 gaming console, namely the scope to run other operating systems through the console. Their rationale is that this will prevent game hacking, but this is not like a patch fixing a software shortcoming, but rather the wholesale removal of functionality.

I am curious as to the legality of altering a product offering ex post, and also to the likely damage to the firm’s reputation in terms of the customer perception of their product offerings.

If I can’t be sure I can keep what I paid for, surely what I’m willing to pay for this gamble will fall?

Thanks to Rui for bringing the announcement to my attention.

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Kinda like an iPhone

Given I’ve been teaching about Willingness-to-Pay and firms making decisions about the level of benefits they offer potential customers (a.k.a. The Value Proposition), it was intriguing to see this quote regarding the market for counterfeit iPhones:

“The customers) generally want to have something that looks like the real thing, so they can say that they have an iPhone”.

The article was heralding the push to shut down the importation of fake iPhones into Australia.

I am curious as to which features this segment is valuing (i.e. is willing to pay for) in the fakes and which they are not.

Are these fakes anything more than a normal 2G phone in a fancy case?  Or do they have 3G capacity?  Or, even worse are they nothing more than a shell (like a toyphone that toddlers wonder around with)?

Do they have any “apps” and user-friendliness?  Or would a purchaser just pretend to be touching and dragging stuff around?

What might Apple learn from consumers’ behaviour here?  Should they seek to address some of these lower-end users’ needs?

Would a genuine iPhone model with pared back features and lower price broaden their market penetration?  Or might it hurt their brand caché? Is there a Shuffle equivalent opportunity in this market?

Simply an issue of willingness to pay

A key issue for firms is ensuring they deliver a product consumers find attractive, i.e. something for which they are willing to pay. When we discuss the generic business strategy choices (i.e. differentiation, low-cost, focus), we are principally concerned with whether firms have the product features that best match with consumer preferences. To differentiate is to find those dimensions consumers will pay more for. To build a low cost advantage is to understand the minimum requirements consumers have and making sure you at least meet these.

Firms too often, in the face of lower sales growth and market maturity, try and add more bells and whistles in the hope of attracting upgrade purchases.

This feature inflation approach is fraught with danger, as any such adjustments are likely to be generating unnecessary costs, thus reducing margins or forcing a higher price. Indeed, with many goods, the new attributes may reducing the consumer experience.

This article argues that 2008 has seen the rise of the simpler product. It argues that consumers have chosen those goods that trimmed back a lot of the standard features and focused on what consumers most wanted. The two examples given are the Nintendo Wii (which I have discussed before) and the Flip video camera. The latter retails for around $130 in the US and is ludicrously simple to use (that’s it on the left).

This is a more subtle approach than some dichotomous low cost vs differentiated world. The firms involved here have calculated the willingness to pay along a variety of features and responded by removing the costly and underutilised. The streamlined products have become more attractive to a bigger audience. This is the approach being taken by netbook manufacturers (the nifty shrunk laptops) and Tata with their Nano car.

What’s next for simplification?