The brilliance of Apple’s Watch pricing strategy

Smart watches are already a commodity. I can find a dozen from no name Chinese manufacturers to big companies like Motorola, Samsung, LG, etc. Prices range for these devices from as low as $40 to around $300.

Apple hits the market with what is arguably nothing truly revolutionary (its not, Garmin has watches with similar functionality, so has Motorola or Samsung), but Apple has already proven they can sell these like no one else. Apple made an interesting move when it started marketing the watch a few months ago, it focused on how the watch made your life better. It was marketed purely as a lifestyle gadget, not some revolutionary life altering thing. This allows Apple to not have to compete on purely functionality (which could be a terrible arms race they’ve managed to ignore in the Android space).

The real genius of Apple’s strategy with the Watch is the pricing though. By telling the market that this is a luxury good, priced from $349 and going all the way up to $17,000, Apple is saying they’re nothing like the Android watches that all hover around $200-300. Apple has planted their flag in the high end of the market, they are the Mercedes of smart watches. By anchoring their price in a completely different bracket they effectively changed the conversation surrounding their product. No one will compare a $10k Apple Watch to a $249 Samsung gear watch, as they won’t even be considered in the same conversation. This now effectively lets Apple make incredibly high margins on what could have otherwise been a commodity product.

We’ve already seen this works, the product hasn’t even shipped to the masses yet, but it has already reportedly sold 2.5Million units, more than all the android smart watches COMBINED in the last year. Apple changed the story altogether. Brilliant move Tim Cook, brilliant move.

Everything you’ve read on pricing is wrong

How to price freelance web development services (this applies to any knowledge based services business really).

When I started doing web development work ten years ago, I did my cursory google searches and found a few articles highlighting how to figure out what to charge. Opinions varied from hourly to fixed rate billing to blended fees to how to come up with each one. ALL of the price suggestions had one common factor, they were rooted in cost. This is where the root of the problem lies. According to Professor Vohra, whose book I recommend grabbing if you’ve got a chance, cost based pricing means you’re leaving a ton of money on the table. We need to shift your mindset to value based pricing.

Let’s start with the methodology you’re likely to be taught from all the basic tutorials on pricing. They say start with a target revenue in mind. Let’s say $50,000 USD is what you want to make per year. There are realistically a maximum of 2,000 billable hours per year (50 weeks * 40 hours per week), as you want to allocate at least 2 weeks of time off. So remember your new cost is $50,000 (your desired income), so to work backwards from there that means you have to bill $25/hr to achieve that, assuming 100% fill rate of your time. Realistically you’re not going to be able to fill over 80% of your time as billable (that’s what everyone says at least). So that means you’re now down to 1600 billable hours per year. Now your rate is up to $31.25/hr just to keep your $50k gross income target.

So far this math is super easy, it gets you to a target, and assumes so few variables its incredible. Sadly life isn’t that simple, because you’re going to have to spend money to get to $50k, and you’re also going to have to pay taxes and other expenses on that 50k (another entire can of worms).

So many of these examples assume you throw a shingle out there on the side of your home-office and the clients will roll in. They also assume a constant flow of customers, these customers are free to acquire, and new projects keep rolling in. In reality, none of these models work well, and definitely shouldn’t be used as defacto guides for establishing your pricing. After you factor your tax burden, office expense (even if its home office), equipment, marketing, and any other expenses, that $50k you theoretically grossed is withered down super fast. Of that magical $31.25 (I say magical, because your first year out, you’re unlikely to bill even half your time), you’re probably going to be left with less than half after expenses and such. So imagine you’ve taken home $15/hr for a year’s work, this leaves you in the low-20s earnings wise, without factoring in living expenses.

Now that you’ve understood the fallacy of these simplified cost based models, let me hammer it in a bit further. Suppose your new client comes in, you’ve spent a bunch of money on marketing to get them, and they hire you to build out an e-commerce site for a few grand. If you’re doing it based on cost, you’ll bill them for a couple weeks time, maybe a month, and then never hear from them after; so you made $5k on the high side based on your rate. You just delivered to THEM more VALUE than you received in monetary VALUE compensation. Now there is an inequality in the value exchange going on. You exchanged years of your training and education for a temporary exchange of value that will likely drive more value long term to them than to you. So when you go to price your project, you need to think about how much VALUE are you giving them, and what will they derive from it. Treat something like an e-commerce site the same way a company would invest in building a physical store. What value are they going to derive from building that location vs your ecommerce store?

Do you really think it costs $20k MORE to build a BMW 5 series car vs a BMW 3 series? No, the price difference in cost is likely a couple grand in extra metal and plastic. The 5 series presents a different VALUE proposition to the customer though.

Now you’re thinking, but Brian, I just read 800 of your amazing words, and you didn’t give me an easy answer!?! What gives? Well in the end it IS useful to understand your baseline costs, but once you establish that, you should disconnect that figure from your pricing. If you base your price solely on cost, and create your value propositions purely on time/costs, then you’re forever destined to compete on cost.

So here is my advice: figure out your value proposition, learn what your competition is charging, study how they are positioning themselves, and then make yourself unique. How do you price a unicorn anyway? It’s definitely not priced the same way as a horse but with an extra cost for the horn right?

2015 Tech industry predictions

So continuing my yearly habit of making wild guesses of what I think we will see in the market, here goes the 2015 predictions. In case you’re curious I think I’m over 60% winning lifetime on my predictions.

Twitter keeps losing money & fires CEO
Losses will shrink a bit, but still be in the hundreds of millions. Costolo’s time as CEO is limited, not much he can do, and whoever replaces him will be stuck with a largely futile attempt to right a sinking ship. Twitter is still important, it has hundreds of millions of users, but its tough to monetize them.

Twitter tries to be more like Facebook
Watch as Twitter decides it needs more things for people to do on its site (even though mobile is where it should be focused, who uses their site anymore?) and adds video and other profile page like stuff that Facebook has had for a while. Video, longer than vines, but shorter than youtube is going to be their gamble. Primarily they see the rates Youtube gets on video ads and are clearly jealous.

Uber growth slows from TONS of new competition aka this is the year the taxis wake up
Uber is under fire in so many places that it’s no surprise their lawyers are burning through those billions that they raised. If you notice Lyft has been much more cautious in expanding, has only raised 1/6th of what Uber has, and likely has a much more reasonable burn rate. Companies with big mobile footprints are launching competitors in their app, Line which has a huge presence in Japan rolled out Line Taxi in their existing app and partnered with two Japanese taxi companies to power it (very simple business extension). What if WhatsApp decides to do this or Viber, you’ve suddenly got a billion people in emerging markets with gps and the power to hail a taxi or private chauffeur. The cheapest scalable option is to partner with local taxi companies rather than building your own fleet like uber/lyft. Uber also needs to be careful about cutting rates too far, or quality will diminish and the drivers will quit.

Facebook crosses 1 Billion mobile users
This may have actually happened depending on the overlap in audiences between WhatsApp and Facebook and Instagram. Wouldn’t surprise me if FB buys another smaller niche mobile app with growth in markets they aren’t big in yet or in a demographic they are afraid of losing. Maybe Yik Yak, definitely not snapchat.

Snapchat gets SOLD to Google or Microsoft
Facebook passes, Yahoo can’t justify the price, so the old stalwarts who like buying things after they’ve peaked dive in and throw $9-12B at the company (despite it doing under $50M in revenue). Once this happens the kids stop sexting using snapchat.

Wearable devices apart from Apple Watch don’t hit mainstream.
I’m guessing we see 5 million Apple Watches sold (effectively a $2B business in year 1 for Apple). The next biggest player in the market won’t be Samsung though. The number two in the market will be Fitbit, who will be bought by Samsung in Q4 for somewhere in the $10B range (4 years worth of total market sales).

Drones go the way of 3D printers
Never get into mainstream, except as toys for kids (so not real drones, just cheap quad copters). 3D printers never made it mainstream (yet, I’m guessing 2016 for that), mainly because good ones were too expensive and not user friendly, same goes for drones. Next gen drones will need to have lots of computer assistance to make them viable and easy to fly for average consumers. Industrial drone use is a different story, that makes a lot of sense.

Bitcoin doesn’t hit $1000 this year.
One thing many of us are forgetting is how much influence the automated trading bots on Mt Gox had on prices. Those bots drove the prices up artificially. There is a natural equilibrium in the bitcoin price/value range, but its closer to what we have now vs what we saw in november of 2013. There will eventually be a point found that is profitable for miners to keep mining, and traders to keep using it, which will result in longer term stability.

Instacart has a big year
I love the idea of Instacart, also the fact their CEO is former Amazon logistics team is a big plus. I see them raising another round middle of the year, though they just raised a huge $210M round in December 2014. They will expand into a dozen cities this year, which will incite a huge war for groceries between the top players (Safeway, Kroger, Publix, Walmart, etc). This may even drive Walmart further into same day delivery from its stores, but likely not in 2015. The demographic differences between a Walmart customer and Instacart are huge, so its more likely going to eat into companies like Whole Foods and other higher end or mid-range grocers (could be an opportunity for postmates).

2015 is the year of living like a rich person using mobile
Back in the day you needed to have dedicated staff if you wanted to lead a life of opulence, now you can have a chauffeur summoned on command, chef cook for you at home or get food catered to your house instantly, on demand maids, dry cleaning, dog walkers, and more. If you’re looking for ideas on what can be “Uber-ized” look at what services only rich people had 20 years ago (or today in third world countries), and figure out how to provide those on-demand or as a subscription.

2014 Predictions Recap

So my buddy Theo asked me yesterday if I was going to do a follow up predictions post this year. He then politely reminded me of my wildly inaccurate bitcoin prediction :-/ So I figured I should at the very least give myself grades on the predictions from last year before I make new ones for 2015.
To see last year’s predictions go here

So here they are:
1. Amazon takes on chromecast/roku/apple tv.
I nailed this one on the head, if you count the Amazon Fire TV stick. Which I bought for $20 on pre-sale. Regular price is $40-50 like I had predicted. The Amazon Fire TV box is also selling really well compared to roku/appleTV/chromecast.

2. Apple TV comes out and is clear.
FAIL. This didn’t happen. I have different reasons for why I think that may be the case, one big one being that TVs are becoming commoditized. Apple would want to have 8K or very least 4K TVs, and there isn’t enough content out there readily available for them yet. They are moving a lot of Apple TV boxes though. Either way this was a miss.

3. Facebook crosses 1.4B users.
According to Facebook’s own stats page, they had 1.35Billion users in September. No clue on how their growth went during the last 3 months, or if the WhatsApp users or Instagram users are counted into this total. Technically I missed on this one, but was very close.

4. Bitcoin passes $2500.
WOW I got this one wrong. This morning (Jan 4) BTC was hovering around $260. When I wrote the $2500 number I was super bullish on it and it was hovering around $1000. I no longer feel bullish on btc as a currency, or even an investment. I think we’ll see it hover in the 300-400$ range for a while, which is actually unprofitable for mining which could result in it crashing if the miners stop mining. I do see a lot of potential in the technology, but less so in mainstream adoption happening in 2015, and even less so in it displacing a major currency.

5. Amazon takes on payments.
So Amazon did make some moves to roll out square competitor solutions, and also competing with stripe for web based credit card processing. They never did roll out mainstream payment options with big established merchants. It could be just that its such a thin margin business that it wasn’t worth their investment?

6. 7-11 takes on Fedex and UPS
This never happened. Aside from amazon lockers 7-11 added, nothing interesting came out that company this year. I probably assumed the cost of doing anything of this scale was lower than it actually turns out to be. Plus the staff requirements would change 7-11 drastically.

7. JetBlue and Virgin America merge
This never happened either. The fact oil prices plunged in the second half of the year probably helped both firms financially, and perhaps even saved Virgin America which was on the verge of bankruptcy. With less impending doom, I don’t think we’ll see this happen. JetBlue is expanding through LatAm now, and VA probably will add more routes this year. I still think it makes sense, similar cultures, similar planes, lots of consolidation going on in this market (AA + UsAir, SouthWest + Airtran, etc).

8. Same day delivery expands from lots of e-commerce players
So this was a hit, and a miss. We didn’t see Whole Foods roll out delivery, but we did see third party companies tackling this (instacart, postmates, wunwun, etc). We also saw Amazon do same day delivery in NYC, and expansion of Google same day delivery in SF.

9. Twitter will post disappointing revenue figures
Yup this continues to be true. Twitter has lost tons of cash every quarter since their IPO. I bet we see Dick Costolo lose his job before June 2015. I’m still bearish on them (I don’t own their stock, or have any positions on it).

10. Many big box stores start downsizing their stores.
This happened a lot. Sears/Kmart shut a bunch of stores, and repurposed the square footage in a number of others to sublease the space or other real estate plays. We also saw companies like ToysRUs & BestBuy focus on smaller footprint stores.

Stay tuned for 2015 predictions coming soon.

Helping tourists understand Miami with Flipkey

So the fine folks over at Flipkey, a TripAdvisor property, emailed me a few weeks ago and asked if I would like to help tourists get a better understanding of Miami, so of course I said yes. I get emailed questions all the time about what to see or do, so I figured I might as well answer them out in public.

Flipkey is building out city guides for a lot of their popular destinations, and Miami just happens to be one of them. Flipkey’s Miami guide can be found here.

Join me tomorrow at 3pm I’ll be co-hosting FlipKey’s #TakeMeThereMiami Twitter chat on Tuesday, Nov. 18, 2014. Ask questions with the #takemetheremiami hashtag and a handful of local Miami experts will be responding.

Follow along by doing a search on twitter, following the @flipkey account, or following me @brianbreslin

Co-Hosts: @BrianBreslin, @The305, @jenniferhuber@NCarvalheiro, @miamicheap

Brand Participants: @ViatorTravel & @AirfareWatchdog & @VacaHomeRentals