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Comment by apl | Hacker News Reader

I understand that this raises eyebrows, but it's hardly fraud.

Do people actually think that retail price is a function of production/R&D cost? It's not, never has been. Dropbox charges 20$ for something that consumes marginally more ressources and incurs identical R&D costs when compared to the 10$ product. Chip manufacturers do this all the time. Discounts for electronics and groceries are fully artificial.

A much more realistic model is price as whatever the market can bear. I sincerely doubt that there is a moral obligation to set price points in any other way.

[This may be relevant: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...]

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I do think this is fraudulent, and I think the comparison falls down: A customer buying the 20$ dropbox account knows exactly what he is spending his extra 10$ to get, and it is worth it to him to do so. Even if objectively, 10$ may seem like excessive premium.

Sennheiser in this case is being fraudulent by claiming that there is an actual difference between the two models while in reality they are exactly identical apart from a tiny piece of foam clearly put there only to defraud customers that want better sound and are prepared to pay for it.

To quote the amazon page for the 595's:

"The HD 595 is the top-of-the-line headphone of the audiophile 500 series range, boasting a new level of comfort and sound quality. Features include our E.A.R. technology and a highly constant,compressed cellulose fleece to reduce total harmonic distortion. Velour ear pads and high-quality leatherette headband both provide outstanding comfort."

compared to the 555's:

"A comfortable, high-quality headphone system"

Don't you see how this is fraud at work? Nowhere in the description of the difference between these models is the piece of foam mentioned or hinted at. To the contrary, the description of the 595's indicates that they include ADDED technology to improve sound quality and comfort. Which is full-on lie.

No, pricing is not connected to incurred cost. That's not the issue.

Nowhere in the 595 description do I see wording to the effect "exclusive to this model". Nor do I see anything in the 555 description that says it is missing features of other headphones in the line up. So where is this full on lie?

It's more a lie of omission. The 555 headphone produces the frequencies desired, but the company withholds them from the customer with a piece of foam.

If there's something you're not telling someone, which would really piss off that someone, you may be guilty of a lie of omission.

How so? Since the 555 and 595 are in the same series of headphones they should be more similar than dissimilar. Much like processors or graphics cards in the same line, it starts off as a good way to sell defective high end parts as middle to low end parts. Then as the process gets established high end parts are crippled to keep up with demand for low end parts.

How is this in any way different than MS and Windows Home vs Premium vs Ultimate? The code / SW you purchase is exactly the same no matter which version you buy, but MS markets them as entirely different products. You then need to pay extra to unlock features that are already built in. Does MS need to mention that there's crippling going on? Sure, you could go in and hack your way through and patch things up to unlock it, but most people don't have the time for that.

Try this thought experiment.

Would you feel better if they were both identical, except for labelling, but carried different prices?

In a well-functioning market, the price should be driven by competition towards a level a bit above the production/R&D costs, at least over enough of a time horizon. Of course, plenty of markets aren't well-functioning, and I wouldn't be at all surprised if high-end audio equipment were among them.

I agree it's not fraud, though, at least unless their advertising materials made false claims about the products' differences. For example, if they claimed that the higher-end headphone removed certain artifacts, but didn't disclose that they had created those artifacts in the first place, that would be misleading at best...

For commodity products, yes.

Luxury goods have never been "well-functioning" markets by the definition you appear to be using.

Hence the surprise of many consumers, I believe. They're actually being sold a luxury product, whose price is based a lot on branding/status/etc., but they believe, or want to believe, that they're buying a product whose price is based on the quality/cost of its inputs (and/or design, or manufacturing). So, 2x as expensive headphone is expected to be made out of better components, or constructed with a more expensive method, or something, and people are dismayed when they find that that isn't the case.

It is somewhat unfortunate as a consumer that the market has turned out that way, rather than as a more competitive market. It makes shopping for audio equipment a lot more time consuming, because prices don't have much to do with either production cost or quality.

The problem is that the companies producing luxury goods benefit from providing as little information as possible to their customers. It would be better for society if the companies with the most knowledge of how to produce a particular type of good could be incentivised to educate consumers rather than to capture as much consumer surplus as possible with dubious market segmentation partly based on keeping people ignorant.

This seems to me why people complain about IP laws. They encourage one type of good behaviour - innovation - but also discourage another type of good behaviour - sharing.

I cannot think of any other market with that much voodoo and obscure "magic" as high end audio equipment or (especially) guitar tube amplifiers.

And they make sure to keep their selling arguments to "musicality", "passion" and "emotions" because that is something you can easily sell, it gives you a very unique selling position and is virtually impossible for the customer to measure and compare.

  In a well-functioning market, the price should be driven by
  competition towards a level a bit above the production/R&D costs

The main issue is that R&D is largely a fixed cost. It takes the same amount of engineers to write the Bing engine or the Dropbox I/O layer, no matter how many users are using it.

How do you decide the strategy for recovering a fixed cost of millions of dollars from the price of the individual product? Price all DropBox accounts at $10 and you may not have enough margin dollars per account to cover your R&D. Price all DropBox accounts at $20 and you may not have enough volume to... cover your R&D.

Assuming the incremental storage for 50 GB costs $2, it's ok to recover $8 and $16 respectively for fixed costs. Just because they are fixed doesn't mean that the user shouldn't have to pay for them, or that it should pay in the same amount. You could argue even that the R&D should be paid in a 2:1 ratio as well by those benefiting from 100 GB versus those benefiting from 50 GB. It's the risk of the entrepreneur to decide where to set the bar so that, at the end of the day, the margin multiplied by the volume recovers the fixed costs.

Competition driving the price towards a level a bit above the R&D (fixed) costs doesn't work at all for products where the marginal cost is trivial but the R&D expenditures are huge. Why Ask, with 1-5% market share, cannot compete with Google Search, which has more than 60% in the US market? Crawling the web, building the index and removing spam costs more or less the same in terms of R&D if you aim for an approximative identical standard of search quality in the search engine. But having a market 10 times greater or 2 times greater (in Google versus Bing) means that one allows himself 10 times or 2 times the total fixed costs at equal levels on a per user basis. No wonder Bing losses millions while Google uses the ad revenue to subsidize its other operational branches.

The problem is that customers don't understand the possibilities well enough to pay on commission. Right now, software companies are forced to dump a ton of money into a product, and then use the finished product itself to educate users of the benefit of the product, at which point they can begin selling it.

In a "well functioning market" buyers would be aware of what sort of product could be built with what sort of development time, and would pay for the work. (I think this is what's happening with Minecraft - the people who bought the Alpha see themselves as funding its development).

My take on it, anyways.

While I bought Minecraft with the understanding that it wasn't done and I was helping support Notch as he continued to develop it, it's not a practice I'd do for a non-game product. I've spent well over $13 on games and had them turn out to not be fun, or only amuse me for a few days. If Minecraft didn't pan out, I've barely lost anything. If it turns out well, it will be more than worth the money.

Were it something important that I needed for my job, or were the cost less negligible, there's no way I'd throw a bunch of money at something and hope the inventor/developer/designer finished it adequately. If someone walked up to you and said "I'm going to build an electric car to compete with Tesla Motors, give me $80,000 and you can have the first one" what would you tell them?

EDIT: Kickstarter too. I've invested small amounts of money in things that I think are worth supporting, with the hope that they get finished well. But I'm not counting on it. It's a risk vs reward analysis that I'm willing to try, but only on small scales.

There's clearly people willing to pay the full price for the 595. If there wasn't, they would have cut the price already since it takes almost no effort to do so. People pay for the perceived value of the product, not the value of the underlying costs plus some margin.

Pricing based on cost is irrelevant because that has nothing to do with the value created or what people are willing to pay. E.g., why did Sony and MS sell the PS3 and 360 below cost for so long? Well, no one would have paid the $1000 plus margin that Sony would have needed.

On the other end, do you really think that bottle of Coke you buy is priced anywhere based on the cost of manufacturing? The ingredients in that cost about $0.02, but they charge $1 at the store. The 20oz bottle has maybe an extra couple cents of cost, but they charge twice as much.

To your point, Ask could have 5% share of volume, but if their ad platform was better to the point that they could charge 10x what Google could, they would be doing pretty well.

Re: Coke... They dong come anywhere near charging 2x as much for a 2x larger size.

I remember one day going into the convienience store near my office and finding that all the coke prices were identical, 1.69 iirc. The small bottle, the widemouth litreish one, the two litre, all the same price.

-sigh- ipad 'autocorrect'

s/dong/don't/

1) they do at movie theaters, restaurants, a lot of places. a 12 pack costs more than a 6 pack. etc, etc.

2) you still get the point. it's then even more clear that it has nothing to do with the underlying cost.

This is classic market segmentation. The R&D costs are sunk, the marginal cost is low, there's only so many people who will buy the things for $350. If only we could sell some for $150 without pissing off the people who paid $350 or doing a whole new R&D cycle, there's lots of people who'd buy them for $150.

The real question that they should be asking is should they have just sold them all for $150 and not risked the bad PR? They may have sold enough at the lower price for it to come out a wash, and not be embarrassed by something like this.

"not risked the bad PR"

The risk was minimal. Everybody does it. The odds of them getting targeted weren't significant, given the pool of possible targets. You could spend every hour of every day cataloging all the places this occurs. And this still is yet to be a big deal, even.

(Please note that when I say everybody does it, I mean simply that everybody does it, no more, no less. I'm not passing judgment about the virtues or lack thereof. It's just the truth. Oh, and everybody doesn't literally mean every single person, but this is a well-established meaning of the term.)

Everybody does do, but audiophiles are a tricky bunch to market to. Stuff like this really gets their attention. If they found out that they could buy their $350 headphones for $150, they might not buy either because they're "not expensive enough to sound good."

It could turn out well for them; all these people thinking they are hacking the system to pay $150 and save $200 when in fact both sets are actually worth $15 or less.

I'll bet none of them could tell the difference between with foam and without foam, either.

I doubt this is true. See those holes near the bottom / on the back of your computer speakers? Play some music and shove your thumb in them while it's playing. You'll hear the difference.

Air needs to move for sound to exist, even in the direction away from your ear. If stuff's in the way, the sound's going to be muffled.

There is a huge difference. I have a pair of Grados with hard, open foam pads. They came with soft, closed foam. The closed foam covers the speaker and you get muffled sound. I am not an avid audiophile but I have mixed music for my church some years in the past.

There's nothing wrong with market segmentation, this is simply a poor implementation. Adding a piece of foam to cripple the sound makes the consumer feel ripped off.

In my opinion, this type of crippling is okay, but with one condition: The consumer must be allowed to make this mod. Of course it is pretty legal in this case, however, I see this freedom as similar to the freedom to circumvent DRM, which can contain harsh penalties.

The real point is that blog posts like this make your company look bad. Consumers are fine with you jacking up the price so that the cost of production and R&D isn't significant, but if you do anything to intentionally make a product worse then people will really get riled up, as it looks like you're intentionally destroying value.

It may make some people regret buying the high-end product, but it makes the lower-end product more attractive. And besides, other companies get away with doing this all the time. In fact one of the selling points of the dual-core Amd phenom II chips is that you have a decent chance of easily turning it into a quad-core chip for free.

I suspect that the intersection of headphone purchasers and blog readers is low enough that there will be negligible impact on their sales.

...as it looks like you're intentionally destroying value

Does it looks like? They're doing it!

I completely agree that price is a function of perceived value. However, this scenario smells like they are misleading consumers in a legally grey area. This somewhat reminds me of the case a few years back about the scam of daily contact lenses. Basically it was revealed that the daily contact lenses from Bausch & Lomb and Johnson & Johnson were exactly the same as the weekly/monthly disposables which pissed a lot of people off and got them sued. Not sure but wasn't there a recent backlash about processors being crippled and then "unlocked" for higher power if they paid additional fees? http://www.dailymail.co.uk/health/article-357082/Contact-len...

Agreed it's not fraud... But wouldn't it be (morally? commercially?) better to sell one product at the mid-point?

I know in a limited range it's good to have a better and a worse to sell the median, but that doesn't apply here. They have many models above and below these two.

It's all about what's called the consumer surplus. If someone is willing to pay $350 for a pair of headphones, but they only paid $200 because you didn't have a $350 offering, you just lost $150.

The trick is to effectively capture that surplus without pissing off your customers or making them feel they're being ripped off.

What I was thinking, put another way, is that they are taking a risk with these two price-points doing this and getting caught out.

There is no need when they have headphones much cheaper, and MUCH more expensive than these two.

I do agree with your reasoning if the above wasn't so.

Are they really getting caught? Near as I can tell, there are no penalties for this sort of behavior, and for every person who is willing to rip open a $150 pair of headphones to get them working like the $350 pair, there's someone who has no idea how headphones work, but is still willing to pay top dollar for the best they can get. And odds are these people won't even be aware of this blog post.

I sincerely doubt that there is a moral obligation to set price points in any other way.

and who claimed that? there is however a moral obligation to not lie to your customers.

if anything, the crippled version is actually more costly to produce, since some R&D went into making it crippled.

I can't really see any lying being done here. Is microsoft lying to people when it's selling windows 7 home edition to people for less money than the ultimate edition even though it wouldn't cost them any more to make copies of the ultimate?

I think it is pretty well understood that the manufacturing cost of the Microsoft products are close to zero.

When I buy headphones I expect more than a license to use technology.

Technically, they aren't lying about the product here. The foam in the 555 model degrades the performance, compared to the 595. It is a lower performing product, and it's pricetag reflects that.

I do, however, find it ironic that the $199 555 model physically contains more "parts" and more manufacturing costs than the $349 595 model.

Curious if anyone has thought about the correlation between shareware/trialware software and these headphones, being that HN readers are generally more software than hardware people. I mean, the only difference between my 30 day trial of Something.app and the unlimited version is a 32 character string, and depending on my current morality level, I could find any number of those strings floating around the internet.

Yes, but trialware publishers are up-front about this difference. Sennheiser was not.

Why are they required to be up-front about this?

> I do, however, find it ironic that the $199 555 model physically contains more "parts" and more manufacturing costs than the $349 595 model.

That's true, but imagine what they could do differently. They could have a whole separate assembly line to make the cheaper headphones out of different material, for example. But ironically, this might actually drive up the cost of both headphones, since they'd lose the economies of scale that they have now.

I agree that it seems wrong to intentionally make your headphones worse, but it might be the most cost-effective way of producing a cheaper set, given that you're already making the expensive model.

> there is however a moral obligation to not lie to your customers.

Why do you believe that? A company has no moral obligations to its customers in any way.

Company doesn't have legal obligation to not lie (in most industries anyway).

However everything we humans do has moral implications, and company that lies is clearly behaving in immoral way. Then it's up to a customer to decide based on her morals what is the right approach to dealing with such company.

A company can't be immoral, no more than an axe can be immoral.

axes aren't made out of people, unlike companies.

Companies are not some organic-made-out-of-people creatures. Where did you get that idea? Seriously, why do you think that?

think what? of course company's registration certificate and brand name cannot be immoral (unless registration states "we kill people" and brand name is something like Murder-by-Order"). things are not what makes companies, are they?

A company has no feelings, no concept of regret or remorse, it simply lacks consciousness. Without this you cannot have morality. A chair, an action, not even an animal can be moral or immoral.

you still don't understand that by company I mean people it consists of?

Oh please. You can't just make up your own definitions of words and then use those definitions in discussions. There is a definition of what a company is, and it's not 'people it consists of'. The wikipedia article about Company is actually quite correct.

Can a machine that eats babies, whose owner isn't really interested in it one way or another but does happen to recall that it was left switched on in a public place, be immoral?

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