A man drives into a gas station with an almost empty tank. A service guy approaches. “How much is one drop of gas?”, asks the man. “One drop?”, chuckles the service guy, “Free, I guess”. “In that case”, says the man, “drizzle her full!”.
With high end VR devices such as the Oculus Rift and HTC Vive shipping, we are starting to see more price point data for hardware, software and content. The importance of how the industry prices has many faces — experimenting with business models, starting to bring cashflow to our businesses, and positioning with consumers.
Since the rise to fame of YouTube, consumers have been trained to expect content to be free (with the occasional toll of watching a 5 second ad before they skip). To this extent, YouTube’s model is driven by ad revenue, since there is significant user volume that consumes that content.
Virtual Reality consumer base, however, is not nearly big enough to support an ad-revenue based economy. How soon will it be before that’s viable? Well, adoption rate is something we have a lot of historical data about.
On one hand, we can see that the adoption rate of major technological innovations accelerates with time. This is due to the fact that the world is better connected, distribution systems improve and people in general have more money. On the other hand, even with Smart Phones (fastest adopted tech), it still took several year for 25% of the population to start using it. Even if VR propagates faster, it would still be 2–4 years from the first consumer product (2015), before 25% of the market adopts it, meaning 2017–2018.
VR Price Points
HMD — The market spans from top-market devices such as the HTC Vive ($799), Oculus Rift ($599) and PSVR (launching fall 16' for $399), mid-market solutions such as Samsung GearVR ($99), MergeVR ($99) and whatever Google might be announcing soon, and low-market devices such as Cardboards ($5-$10) and even a free option with “Magic Window” (watching 360 degree content using mobile devices without a headset).
For content, the top of the market early experiences for the Vive and Rift priced at around $25-$50 (The Climb, Project Cars, Hover Junkers), GearVR games at $5-$15, and cardboard apps for several dollars. All platforms also feature casual content for free.
Market Positioning Preserves Margins
I have a friend who blew a tire on his BMW and was astonished to find that a new tire costs $400. When voicing how upset he was for having to spend $400 on a single tire, his friends told him “What did you expect? It IS a BMW”.
The most compelling take away from the chart above is that the positioning of devices is preserved for the content for that device. Meaning, the same content would be priced differently on the Vive and on GearVR, since Vive is a better system. Higher positioned devices usually enjoy better profit margins, which means that margins are also preserved for content and accessories.
Eroding Margins To Force Adoption
Earlier this year, Samsung offered a free GearVR headset for anybody pre-ordering the Samsung S7/S7 Edge device. Only last week Zeiss One announced they’re giving away 30,000 of their OnePlus Loop VR Headsets. In 2015 the NYTimes gave away 1M cardboard viewers, and in April of this year another 300,000, bringing the total to 1.3M. The goal is clear, get as many people as possible to become VR consumers, and the inertia created would be so strong, everybody else would follow.
But that is fake adoption.
In an attempt to accelerate adoption, companies compromise their margins and are even sometimes willing to take up a loss, with the promise of more people consuming VR bringing future dollars. However, this is a double edge sword. Consumers then begin to expect things to be free, or very close to it. The problem is that that’s only thinking about the first step — bringing consumer on board, and not about what happens after they have that access.
We need to think beyond the cost of the device, and start thinking about customers’ lifetime value.
Think “Customer Lifetime Value”
Customers’ Lifetime Value (CLTV) is the amount of money customers spend over their lifetime as consumers. It is the device, the apps, accessories and everything related to them being a customer of the platform. For example, in 2014, Fortune published a report stating that Apple users CLTV is x4 that of Android users.
Customer’s lifetime value has 3 phases: Acquisition, retention and loss. Since it is so early in VR customers lives, we’re not thinking past the first phase, but can’t ignore the effects it has on the other phases as well.
While giving away millions of VR cardboards democratizing access to 360 content, eroding margins on higher value/cost devices brings about a risk of positioning the platform low in customers’ minds. If we want to build a sustainable industry that supports viable businesses, if we want to attract the right creative, technical and business talent, we cannot operate without margins.
Solving The Margins Problem
Instead of creating false adoption that would create zero margin customers, we need to create true adoption by having patience, creating 10x experiences and valuing our work.
We should accept the fact that technology adoption has a natural cadence to it. First, the innovators group takes on, then the early adopters, early majority, late majority and laggers. It’s unnatural to force the late majority/laggers (my wife, for example) to be an early adopter. They won’t engage/experiment/endure like early adopters.
True adoption takes time. I believe VR might be faster than any tech that came before, but it would still take years. If we mark March of this year as the first time high-end HMD’s are commercially available, it can take up to 2018–19 to gather 25% of consumers.
This means we need to be ready for a long term play. Build businesses that are lean, explore alternative revenue streams such as branding content, and raise the right type of money (strategic) without a 5–7 years exit strategy.
Create 10x experiences
It’s said in the valley that in order to make people change their behavior, we need to provide 10x experiences. It can be of value, cost, experience, efficacy, or any other metric you choose.
The real way to fuel adoption is to create 10x experiences, things that cannot be made any other way. The lowest hanging fruit is gaming, but sports, music live streaming and travel experiences can fit the bill.
Value your work
Lastly, for VR to be a real industry with longevity, and not a marketing play or a fad, we need to attract the right people and the right money. Those two follow businesses that are profitable and sustainable. To build robust businesses, we need to create incredible content, but price accordingly.
Agree? Share! Disagree? Comment below (and share) :)