Sofa Analytics No. 244. Three costs of one smartphone at the same time

Hey.

Why are Android smartphones getting cheaper so quickly, while iPhones remain at the same price for a year? This question was asked by a journalist of a federal publication, the answer was banal and lay on the surface. But after thinking a little, I realized that the overwhelming majority of people do not see the forest behind individual trees, sincerely believe that the pieces of the mosaic add up to their full perception of the market picture, which, of course, is not the case. The differentiated cost strategy is not a trivial thing, it solves a seemingly unthinkable problem of how to simultaneously sell the same product at different prices for the end consumer. It sounds like something impossible, because the buyer, in theory, should always choose the lowest cost, it is in his interests, right? Ask any person what they will choose, a product at the maximum cost or exactly the same product at a lower price, and the answer will be obvious. But the market is all the more interesting because it allows you to come up with the incredible and bring it to life.

Let’s remember how big manufacturers sold smartphones five years ago. For example, Apple released iPhones at a fixed cost and kept the price unchanged throughout the year until a new model came out. After that, the price of the previous model decreased, it received a discount, and thus the life of the device was extended. Some models had a life cycle of two years, some sold for up to four years and received a consistent price cut once a year. Android smartphone manufacturers, for example, Samsung, used a price reduction strategy throughout the year, the model received a quarterly discount, and by the end of the first year came with a significant price reduction of 20-25%. Reducing the cost for any manufacturer is attracting a new audience, those who could not (as an option, did not want to) buy a smartphone for 50 thousand rubles, but are ready to consider it for 45 or 40 thousand rubles. The market is very simple: the lower the cost of a product, the potentially more people will be able to afford it. The strategy of Android manufacturers is interesting from the point of view of capturing the market, which is what happened, since Apple was unable to go beyond 15% in unit terms in global sales, while Android is the dominant platform in the whole world and this cannot be changed in any way.

Samsung’s products are direct competitors for Apple’s flagships, but the previously chosen discounting strategy for a year does not look so attractive for some buyers, since they perceive the purchase of a smartphone as an investment and try to sell it in a year with minimal loss. Five years ago it was possible, today the market does not work like that, both the iPhone and Android smartphones lose a lot in value in the first year. This was influenced by the development of trade-in, the secondary market has completely changed. Having completely captured the segment of Android flagships worth more than 60 thousand rubles (97% of all sales), Samsung decided to change its pricing strategy and apply differentiated cost. The idea behind this approach is somewhat unique because it sounds incredible. You need to give consumers a few different prices over the course of the year, but still keep the original cost of the product, plus or minus, at the same level (as Apple does). But in order to expand their audience of shoppers, they also need to be given discounted prices and maximize their sales. Let’s see how this can be implemented in practice, consider each of the stages of the product’s life.

Product announcement, start accepting orders – three prices for the buyer

The moment you announce a new product, you need to give different price proposals, to push buyers to choose your product. Samsung has borrowed a well-functioning trick that has become prevalent in China – collecting limited-time pre-orders and additional gifts. Let’s see how this looks like with the Galaxy S21.

Until February 4, the buyer can place a preliminary order for devices of the 21st line, while receiving wireless headphones and a tag for finding things as a gift.

Sofa Analytics No. 244. Three costs of one smartphone at the same time

The cost of wireless headphones is 14 or 18 thousand rubles separately (Buds Live or new Buds Pro, smart tag costs 2 rubles. Perhaps you do not need these gifts and you want a discount on the device, but the fact is that a significant number of people consider this the offer is profitable, the volume of pre-orders is growing every year, and their number exceeds sales of new products without such an offer at least twice.

It turns out that we have the first cost of new products, which includes gifts. This price is lower than the cost of the device. For example, the basic version of the Galaxy S21 costs 74 rubles, but with gifts its cost is perceived by the buyer as lower (savings of 990 rubles – Buds Live and a label).

Those who want to purchase something exclusive are offered certain body colors, they are available only in the Samsung brand store.

Sofa Analytics No. 244. Three costs of one smartphone at the same time

Splitting a regular model by color (shared and exclusive) allows for a split by cost. So, those colors that all retail players have can receive discounts, marketing activities, exclusive colors outside of this activity and are sold at a higher cost. Here we get a division into two prices, although for the manufacturer it is de facto the same product, only the color is different.

In parallel, a trade-in service is offered, for which the manufacturer gives an additional guaranteed discount of 15 thousand rubles.

Sofa Analytics No. 244. Three costs of one smartphone at the same time

This is a hidden cost reduction that allows you to turn in any phone to get an extra discount. It turns out that this is another price that the buyer can get.

Many buyers live in captivity to stereotypes and do not want to figure out how to get the best deal (“I don’t want to mess with trade-in, this is some kind of scam!”). As a result, hidden price cuts are not the dominant value proposition, although in theory they should be extremely popular.

Modern marketing is the construction of mathematical models, it is impossible to perceive this or that value head-on. I often hear wild theories and comparisons from buyers, for example, the Internet price of a model in a store, where it is promoted at the expense of the store itself, is taken out as the cost of this model for the entire market. For example, Vasya Pupkin sells iPhone 12 Pro for 85 thousand rubles, someone immediately scribbles headlines that the cost of new iPhones has dropped dramatically. Unfortunately, this has nothing to do with the market and the situation on it.

It is important for a manufacturer to evaluate how the price of a product is formed, to understand what cost in sales will take what share. For example, in pre-orders, you can adjust the number of gifts, limit them depending on your needs. It is impossible to take the maximum or minimum cost of the same Galaxy S21 and say that it is true for the entire market. The calculation model looks very simple, S21 with gifts has such and such a value for the company, a trade-in offer gives such and such a value, and then the proportion and volume of sales are formed. Usually these are several calculation models, forecasts that take into account different sales scenarios, optimistic and pessimistic. Depending on each scenario, the average cost of the Galaxy S21 for the company may differ markedly, but this is always the amount less than the wholesale cost of this device for partners.

The first sales were noisy, and the price returned for a while to the maximum level. Those who did not have time to buy by pre-order will have to pay the highest cost. This is the base price and will not change much throughout the year. The trade-in offer and additional discount remain, so this is an additional price level that always exists.

Through marketing campaigns throughout the year, the price of the product will be reduced to one level or another. Let’s take a look at the Galaxy S20 Ultra, during the year discounts on this device ranged from 15 to 20 thousand rubles. These are temporary promotions that give a different price level for those who are not ready to buy the device at full price.

Sofa Analytics No. 244. Three costs of one smartphone at the same time

The disadvantage of this approach is in the linear perception of discounts by people, that is, in their view, the price should not decrease temporarily, but linearly and go down all the time. For example, if the S20 Ultra costs 100 thousand rubles, and within the framework of the promotion 80 thousand rubles, then the repeated promotion, which gives exactly the same discount, is not perceived as a reduction. But this, in fact, is a marketing game, so as not to give such discounts all the time, but to limit them and push people to use them – either you buy or you will not get a good value. Exactly the same idea in pre-orders.

Playing with prices allows you to simultaneously receive a product on the market that offers different price levels with complete identity of its characteristics. For example, the Galaxy S21 is the same no matter how you buy it. It is curious that the opportunity to get different prices has a side effect – a reduction in the gray market, the cost of models on it decreases. The reason is that there are low prices from the manufacturer, comparable to the gray market.

Now, let’s compare this approach with what Apple is doing. In fact, the price is the same for most of the year, no gifts, no noticeable discounts. Retail chains make discounts at their own expense, but they are minimal and do not greatly affect the perception of the product, do not expand its audience. Formally, we can assume that Samsung’s approach is aimed at maximizing audience expansion. Surprisingly, another thing is that, despite frequent promotional campaigns, discounts, the level of sales at the maximum price during the year is up to 50% of all sales! That is, many people are not looking for benefits (you can save 15-20 thousand rubles at least), but buy the device here and now. Considering that the cost of the same flagships is more than 70 thousand rubles, this approach is surprising. People are not looking for a great deal, they don’t need it, or they don’t know about it.

There is no point in discussing which approach is better, because every company is focused on being successful in the market. Samsung’s share in Russia is about 30% in piece terms and the same in money, Apple’s share in pieces is about 10%, in money terms – about 37%. The second numbers are easy to explain if you understand how each company forms its prices, which we talked about. As a buyer, I like the fact that there are different price levels and I can choose the one that is more profitable for me. To do this, you do not need to make any special efforts; it is enough to keep an eye on the next marketing campaigns from time to time or buy goods with a pre-order.

Tell us about your strategy as a buyer. Are you looking for discounts or not, are you buying a product at full price and consider it normal, or are different price levels good? Do you want Apple to adapt the same approach for the Russian market?

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