Case Study #2 :D. Motors : Note on marketing strategy , HBS Note by Robert J.Dolan

Summary: The main component of any smartphone is its display screen, replacing a broken display could cost almost 50% of the phone cost and many times is the reason for buying a new phone altogether. To protect this screen, investment in a protective screen guard costs a mere 150/-.Now if a new company comes up with a protective screen guard that provides 3X protection compared to a normal screen guard but costs 3000/-( 20X)? would people still buy it? Is it a logical decision to buy it? Is it priced correctly for the value it provides?

???Referencing from the original case which was about oil replacement( synonymous to display) required for a machine( synonymous to phone) and a new alum( synonymous to screen protector) which when mixed with the oil can extend the life of the oil. The alum product failed miserable due to its pricing strategy and they never understood the reason because calculations proved that they were adding value to the customer for the price point they provided.

Calculations:

• Assumptions
• Cost of Phone: 30,000/-
• Cost of display replacement : 9000/-
• Average 2 drops a year which might break the screen glass
• Normal Protective Glass: Saves the phone for 2 times
• Expensive Protective Glass : Saves the phone 6 times
• Customer replaces the broken display first time and the phone itself the second time
• Customer does not replace the Protective glass after every drop
• Prices are indicative and cheaper options may be available?

Case with Normal glass

Initial Protective Glass cost : 150/-

In 1 year :Cost of display replacement:0/-

In 2 years :Cost of display replacement: 9000/-

In 3 years: Cost of phone replacement 30000/-

Overall Cost : 39000/-

Case with Expensive protective glass

Initial Protective Glass cost : 3000/-

In 1 year :Cost of screen glass replacement: 0/-

In 2 years: Cost of screen glass replacement 0/-

In 3 years: Replacing the phone itself 30000/-

Overall Cost: 33000/-

Value add due to expensive protective glass: 6000/-

* calculations in the original case were more complex and technical, referenced it for better understanding

Key Takeaways

1. Baselining in Pricing: If an alternative is available , we subconsciously compare the price of the product with the alternative, in this case although the product offers greater value in the long-run for its price, its pricing was never acceptable to the consumer for its perceived value( 3000/- for a protector versus 9000/- for a display replacement or 150/- for a low quality display protector) hence perceived the protector as expensive..
2. Customers don't want to work hard and do the math before buying your product: It costs a fortune to educate the customer, any pricing strategy that hopes the customer will take effort to calculate the value it provides is bound to fail.
3. Customers' willingness to pay can vary across categories(discretionary vs necessity, luxury vs utilitarian)
4. Investing in Quality Products helps but if you are going for cost over quality be ready to put the effort( in this case replace the? protective glass after every fall i.e buying and installing 3-4 low cost protective glass over the life of the phone)