Premium Pricing Just Doesn't Last

People do want to shop on price, but they want a discount on the brand they know. That's why they'll buy a laptop for $20 less on Amazon than at Best Buy, but they probably won't buy a non-name brand laptop.

I don't even think his examples are compelling. There were action cameras before GoPro, there are alternative cameras on the market now. Some have different form factors, some are cheaper, some are better. At the end of the day, GoPro is plastered all over every action sport competition and their daily video email gets millions of views. That's harder to replace than the actual tech - especially when the product itself needs to be redesigned every 18 months.

Also note that "come in under the incumbent's price" is a bad startup strategy. The incumbent has economy of scale & bulk pricing advantages the startup can't match. The only way to do it is to build a different product that is so much cheaper to make that you can squeeze the same margins in a lower price tier. If that's possible, then it means GoPro has shot over what the market needs. In that particular case, I don't think it is true today. It might be true someday.

In AWS's case, I actually think the competitive play is on the higher end. Everyone is trying to undercut AWS's price (generally by giving it away for free). I feel that the last 20 years has shown trying to get under Amazon or Walmat's price is a bad strategy. How can anyone get under their price at smaller scale without taking a "strategic" loss or having 0 margins? I'd rather compete on the high side by offering better docs / UI & UX / support and not be competing completely on the price of hardware.

Remember computers in the hey-day of the PC? Every two years brought a huge tangible improvement. Programs made for new computers just wouldn't run on old PCs, or if they did would be unusably slow. That ended sometime around the release of the Core 2, except for niche users (gamers, developers, etc.)

It's the same thing for phones right now. A phone that is more than a few years old just feels like a piece of crap to use; it's slow, the screen is poor, and it doesn't support new features. Good times for manufacturers! (Though we are very rapidly getting to the end of this cycle, IMHO).

Same thing applies to AWS, brought up as an example in the post. The base price is not really the issue -- AWS prices fall slower than Moore's law and it is still more expensive that bare metal. It's the new toys you get every year that make AWS attractive. AWS keeps providing more and more pieces of your infrastructure at attractive price points with less admin overhead. At some point they'll have reimplemented everything the modern company needs and then they too will be subject to more serious competition.

Smart phones are still driven by bling and snobbery so if you have a $900 phone you get $900 of snob value, an $1800 phone gets $1800 of snob values, etc. Same for "luxury" cars -- if you have a Cadillac it had better be your second or third car because you'll still need a ricer to get to work for the days your car is in the shop.

There is a vibrant market for cheap phones and a vibrant one for expensive phones but nothing in between because the main value expensive phones has is as a positional good.

Similarly, there is a lot of hating on tablets because tablets aren't connected with the cell phone plan boondoggle economy, but rather they are driven by economics and people just don't want to pay hundreds and hundreds of dollars. It isn't such an exciting biz to be in precisely because it is competitive.

A. Is the product/service something approximating a commodity?

If the answer is yes, then certainly premium pricing is not sustainable. In the case of cloud services it's not quite a commodity, but ultimately if the [cloud] service meets the customers technical and service/support requirements the main differentiator is going to be price.

B. How high are the switching costs?

Once a customer has invested in a certain product or product ecosystem, how expensive is it for them to switch? With Apple vs Android the costs are not necessarily high, but it takes a decent amount of work to transfer media and adjust to new ways of doing things. For some customers that may not be worth it.

C. How big of a factor is branding?

See Apple, GoPro, Amazon, BMW, Mercedes, Coach, etc. With a physical product the brand is often a such large component of the buyer's decision that even if there is a cheaper similar product it[the cheaper item] doesn't even get consideration. A Hyundai Genesis has many of the same luxury features as a BMW 5 series but is much cheaper. But, probably 90% of the time, the person considering a 5 series is never going to even set foot in the Hyundai dealership.

In the IT context, the choice might be between a well-known software vendor and a much-cheaper alternative. But enterprise customers typically are going to go with the name-brand option, even if they don't need all the bells and whistles it provides. Many shops don't need something like Salesforce but they pay the premium just the same.

D. How price sensitive is the target customer?

Depending on the customer and the market, sometimes the customer doesn't really care if there is a cheaper alternative. They're happy with what they're doing and the price difference might be a rounding error to them so they just stick with what they've always been doing.

So yes, premium pricing can't last for some scenarios but that's hardly a rule.

In the case of AWS, prices are cheap. But once you've built your software to use all of the proprietary AWS services, it's not economically feasible to switch to another cloud provider. You're locked in.

This works similarly for Apple. You do pay more for the product, but it's not trivial to switch to a cheaper Android device after plugging into the Apple ecosystem.

GoPro clearly can't continue to win technologically (what comes after 4k?), and they don't have an ecosystem to lock you in.

I had bought Sony and Canon DSLR in the past. THIS IS PREMIUM. Several thousand dollars each.

My Gopro does things NO OTHER CAMERA in the thousands category could do. In fact , the people at Canon, Nikon, and Sony disable features on the hundred dollar category so it does not compete with the thousands.

E.g You want instantaneous electric controlled shutter on your NEX X Sony camera? Sorry, you need to pay thousands of dollars. You want uncompressed HDMI video output? Same answer. They have an HDMI port!!, they simply disable it!! They provide you with crappy analog output.

With my GoPro, I can do it all way cheaper, smaller, lighter, great video, and rock solid. Connecting it to a HDMI grabber provides amazing quality. You could stabilize it with cheap motors as it is so lightweight. Control via the Web?,mobile phone?with my own apps? no problem with the GoPro.

I love this camera so much, and hate the others. If Gopro decided to make a DLSR, I would buy it. The other companies could burn in Hell, they had abused so much.

It definitely has one aspect of a Truism [1] - no-one really looks at the underlying assumptions. The biggest assumption in much of the tech industry is that you're aiming for mass market - the consumer tech brands like Facebook particularly have that assumption - other people follow sometimes without understanding the implications.

If that's your focus, and you have limited differentiation your pricing has to reflect that over time replacements will come in and undercut you. That's the GoPro example he's using, where the parameters of his comparison are the "components of the hardware camera".

What he's missed is that Apple and plenty of others (think every car brand) have shown that brand and real differentiation can prevent new entrants from being able to provide an equivalent that is good enough. The point is that the customer has to believe that product A and product B are comparable - and that the parameters may not just be the bits or atoms.

For example GoPro's brand speaks to "action sports" and being active, they have software and communities that people want to be in. It's perceived as something that 'active people' use and has brand cachet. So the 'replacement' has to capture all that value, not just the hardware costs. Frankly, they've absolutely eaten the lunch of much bigger hardware companies who have far more economies of scale.

The AWS example is even less clear cut. Since Amazon is a retailer we can assume their strategy is mass take-up, and we know that their general pricing strategy is for people to "believe" they are cheapest. But, we also know that Amazon practises differentiation, we've seen that with Kindle and Amazon Prime. If you look at the AWS services you can see they are aiming to provide a highly differentiated service aside from "simple" IaaS. We also know that as a retailer Amazon uses extremely sophisticated pricing strategies. At this point I would think that Amazon is continuing to drive down the cost of basic IaaS due to economies of scale which makes it very difficult for competitors to get started, while keeping the cost up of 'value-added' services which provide differentiated service and make the whole service a lot more sticky. They will probably do Amazon Prime like things with their whole portfolio over time.

There are plenty of businesses where the strategy of being cheapest is right, but it's not the only approach.

[1] http://en.wikipedia.org/wiki/Truism

There is an emotional factor, where customers associate their own identity and how they see themselves with the brands. That is what allows premium pricing to last.

The nice thing about customer service, is that its monetary value is very hard to quantify, making objective comparison difficult. So there's always room to charge extra.

Therefore, open source licenses will eventually converge to permissive, like MIT or BSD style licenses.