StellarPeers is a community platform that helps professionals prepare for interviews. We think the best way to prepare, is to work through questions and practice mock interviews as much as possible. We meet weekly to discuss product management interview questions on product design, product launch, strategy, marketing, pricing, and others. Last week, we worked on a product execution question.
Like many other product questions, deciding on a pricing strategy starts with the business goal. Your business goal determines whether you will use an offensive or defensive pricing strategy. An offensive strategy looks to steal market share from the competition or eliminate it altogether while a defensive strategy looks to maintain your market leadership.
After defining the business goal, you need to think of other parameters that will influence how you will set a price and product/business activities you need to put in place to support that pricing decision.
Below are the key parameters you need to keep in mind and how they can influence your pricing decision:
- Business goal: Is the objective of setting a price to increase market share or profit or something else? A lower price increases market share, while a higher price increases profit.
- Differentiation: Is the product highly differentiated from competitors’ products or are they similar? Highly differentiated products can justify higher prices than competitors.
- Market evolution: Is the market still forming (emerging), have dominant players already emerged (growing and mature), or is the market already in decline? When the market is still forming, customers have not yet formed an opinion of the products, therefore companies can set prices based on value perception; once dominant players have formed, pricing will depend on the business goals and product differentiation.
- Cost advantage: Does the company have cost advantages over competitors? Without cost advantages, a company cannot compete by continuing to lower prices, because this would just continue to erode profits.
- Risks: What are the risks of your pricing strategy? How are competitors going to respond? Can the company sustain lower prices? Can the company continue supporting its differentiation to justify premium prices?
Below is a suggested structure on how to answer a pricing question:
- Define a business goal the company wants to achieve when pricing a product.
- Describe the state of the market: how are competitors pricing their products and what is their business goal?
- Describe the differentiation between the competitive products and yours, if there is one.
- State what your strategy would be for pricing in order to achieve the business goal. Some possible strategies are: offensive and defensive.
- Be the price leader: when the market is mature, there are fewer differentiations and you decide whether to compete solely on price (mature market).
- Price low to penetrate and grow market share (growing market).
- Price below cost to discourage competition (growing market).
- Compete on the basis of price/performance ratio (growing to mature market).
- Use promotional discounts to accelerate purchases (growing to mature market).
- Use price to segment the market.
- Use premium pricing (skim the market) to maximize profit.
- Use value-based pricing to price at the highest customer perceived value (only works when there are no competitors yet or when the product is highly differentiated).
- Use bait-and-switch pricing to draw attention to a lower price offering and later upgrade customers to a higher priced offering.
5. Come up with a price or price range and explain your logic at arriving at that price.
6. Comment on possible risks.
7. Wrap up
INTERVIEWEE: Historically, Apple’s strategy in pricing has been to maintain high differentiation of their products in order to ask for premium prices. It is a strategy that favors profit over market share. Consumers associate Apple’s brand with high-premium prices because they are used to Apple’s innovative product designs and quality. Therefore, pricing a future Apple Home device should follow this same high-differentiation-premium price strategy to preserve the brand’s leverage.
Let’s talk about the state of the market and competitors’ product prices. Amazon started the speaker home assistant market about two years ago with the launch of the Amazon Echo. And Google followed suit a year and a half later with the Google Home device. Currently, Amazon Echo is priced at about $180, while Google Home sells for $120. With a lower price, Google is looking to grow its user base and market share. They want to influence those users that are intrigued by these devices and a lower price is the right incentive to convince customers to buy.
For Apple to enter this market with a high-premium priced product, it needs to differentiate its product in a way that justifies a higher price. Amazon Echo and Google Home hardware are not that different. They both have medium standard quality speakers and their designs are not dissimilar. But what differentiates Amazon Echo and Google Home is really the services that back their devices. In the case of Amazon Echo, it is the Amazon online store; the largest online store in the world with the highest customer service trust. Users can use the Amazon Echo to shop for practically anything they need. Google Home on the other hand, differentiates itself by having the world’s best online search engine at its disposal and the most popular apps available, like Gmail, Google Calendar and Google Maps that many people use daily.
So how can Apple differentiate a future home device? Let’s talk about some ideas.
Offer superior quality sound speakers with beautiful unique industrial design. Amazon Echo and Google Home speakers’ technology is average at best. They are not meant to compete with high quality speakers like Bose. Here is an opportunity for Apple to target the super high-quality sound segment that is willing to pay for quality and design.
Improve Apple’s AI technology to identify a person by voice. Neither Alexa nor Google Assistant is able to identify a person uniquely by voice; thus personalization of content or services is not possible yet on these devices. If Apple were able to do this, it would set itself apart.
Integrations of voice command with AppleTV will help users get used to using Apple’s voice technology, lowering the friction of buying an Apple Home device. The TV room is the main gathering place for most families. If Apple voice technology is the preferred voice interface with a TV, it would ease the decision to buy an Apple Home device.
Integrate Apple’s Home device with Apple HomeKit to make it more useful to households that are using third party home control devices that work with Apple HomeKit.
Integrate Apple’s Home device with all the other Apple assets like iTunes Store to increase its usability.
Support competitive music streaming services. Customers favor choice and convenience over anything else, so leaving out competitors services is not a good idea.
Provide multiple content options that users can query and search to maintain high engagement with users. Apple should partner with publishers and other popular content owners.
Provide a very competitive search engine technology. An intelligent assistant without the ability to search content is a dead start. So this is a must-have condition.
Additionally, one of the most important differentiators for a home device is really to support a killer use case. Today, only 3% of Skills in Amazon Echo and Actions in Google Home apps get return visits after the first week of use, so I think users have not found a relevant use or killer app for these devices yet. I think a use case that is going to make the difference between losers and winners is human conversation or interaction. The Space Odyssey 2001 movie showed us way back in the 60s what the killer use case is going to be: the conversational interaction between a person and a computer program. The day the home assistant can play chess with me or tell me where my loved ones are and what they are doing, is the day I will go and buy that device. So, the key is going to be AI technology. All these players are focusing on AI, but the technology is not ready yet to support this use case.
Of these ideas to differentiate the Apple Home device, I would prioritize offering high quality speakers technology, connect voice command to Apple TV and improve voice identification. I think the high quality speakers, in particular, would justify a higher price; the voice command AppleTV would not be that difficult to implement, and voice identification would be a clear winner over Amazon and Google.
Finally, I think that in addition to a premium priced Apple Home device, offering a lower priced device will enable a bait-and-switch strategy that could hit competitors on the low end and win on the high end. A smaller device with less powerful speakers, priced lower than the Amazon Dot, at $40 vs $50 for the Dot, could be offered as bait to entice customers that are on the fence. The Amazon Dot is the lowest priced device from Amazon, which is less powerful than the Amazon Echo. Once customers like the smaller Apple device but realized they want a more powerful speaker system, they would be more willing to buy the higher priced speaker, also because they have already invested in learning how to interact with Apple voice agent. The premium Apple device would be comparable to a Sonos Play:5 speaker in terms of sound quality. The Sonos Play:5 speaker sells for about $500, so I would add $100 more to that price to account for the additional AI benefits and sell it for $600.
The obvious risk in this type of premium pricing strategy is that customers may not value the Apple Home to justify the premium price. Or customers may not see a real need for the additional AI capabilities beyond the speaker quality.
In summary, were Apple to launch a competitive product in the intelligent speaker market, my recommendation would be to keep the high-differentiation/high-premium price strategy. In this strategy, high differentiation is key, and I proposed some ideas on how to create differentiation. I recommended offering high quality speakers comparable to Sonos; providing voice identification, something Alexa and Google Assistant have not solved; and integrating voice assistant technology with AppleTV among other recommendations. For pricing, I recommended a bait-and-switch pricing strategy, offering a smaller entry level home device at a low price, and a high-premium device that has top of the line speakers. People on the fence will be attracted to the smaller priced device at first, but in time they will likely upgrade to the more expensive device that offers high speaker quality. I would sell the entry level device at $40, which is at a lower price than the $50 Dot device from Amazon in order to offer a better deal at the low end, and would price the high-premium device at at $600.
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