Why Prices On Gadgets (Except The iPod) Vary So Much From Site To Site

from the shopping-around dept

Browsing through a comparison shopping engine for electronics will sometimes reveal a surprisingly wide dispersion of prices for some gadgets. The very same product, say a new HDTV, may sell for hundreds of dollars less at one site than it does at another. A recent academic study looked into this phenomenon and proposed an interesting theory for why this occurs. Basically, if all online retailers held their prices stable, then shoppers would fall into a groove, leaving some sites as winners, and some as losers. So for retailers to ensure that they’ll get business, they must constantly tinker with their prices and create the type of environment where shoppers will do comparison shopping, and buy from a lesser-known site, as opposed to always just buying from Amazon. The seemingly ironic outcome, according to the study’s authors, is that prices in constant flux is actually a state of equilibrium online.

The author of the above piece then looks at one item whose price never varies, that being the iPod. Here it’s a very different situation. Apple tightly regulates the price of the iPod, so that retailers can’t squeeze the margins at its own store. And it can get away with it, because iPod buyers typically won’t settle for anything else but an iPod. The brand is so singularly hip that, like a pair of designer jeans, competitors can’t hope to compete on price. Since tastes change, and all brands are subject to some entropy over time, it’s unlikely that Apple will always have the luxury of ignoring price competition. But in the meantime, retailers are happy to abide by the price restrictions for the privilege of carrying the popular item. Another way in which Apple has benefited by dominating and tightly controlling its market is that it doesn’t have to compete with four-year old, first-generation iPods lingering around on stores, competing with the newer models it rolls out. As for the TV and computer industries, you can still easily buy new products that would have been the vanguard just a few years ago, now available on the cheap. So, if you’ve really procrastinated with your Christmas shopping, or you still haven’t found the right price on what you want to get, unless you’re buying an iPod, you should keep clicking the refresh button on your browser up until the last second, and you just might score a deal.


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Comments on “Why Prices On Gadgets (Except The iPod) Vary So Much From Site To Site”

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33 Comments
The Tod says:

Same as real shopping.

Retail stores are like this too. You go to one that carries, lets say a blender, and it’s $55. You go to another store and it’s maybe $45 there. From electronics stores to other every-day retailers, that’s just how it is. You’ll notice though that most of the products will be about the same price in retail stores though, as most investigate each other’s prices to make sure they are within a reasonable competitive margin.

You shouldn’t expect anything more or less from online retailers. They have the same goals and obviously some of the same techniques. Get used to it, that’s why there’s sites like http://www.boddit.com 🙂

Casual Observer says:

Actually, Joe, being hip has nothing to do with the price retailers charge. The real reason price doesn’t vary on the iPod is because of the actual cost retailers pay Apple for the device. The margin is so small, that retailers cannot afford to reduce the price any more than three or four dollars. Very little money is made on the iPod itself, the idea being that the profit can be made up for on other items, such as accessories.

Retailers are more than willing to accept this fact, simply because in retail, the first goal is get the customer in the door. By offering an iPod, they can certainly do that.

As usual, TechDirt misleads and misinforms.

Taarn says:

Re: Re:

I don’t think that the article is saying that being hip has anything to do with how the retailers price things. It’s saying hipness is why Apple can afford to so closely regulate things and keep the margins so tight etc. iPod is practically the other word for MP3 player in many peoples minds, so Apple doesn’t have to worry about their pricing, they can keep it right where they want it and people will pay.

Before saying that “…TechDirt misleads and misinforms.”, read the article again and see if maybe you’re not just misunderstanding the authors point.

zeroJJ says:

Another theory...

Then there are the online retailers that aren’t necessarily trying to compete. They just throw up common items – albeit way overpriced – and just sit back and wait for the big fish to come to them. Granted they probably won’t be getting serious sales numbers, however for the few items they sell, the high margin will make up for it.

Just browsing some of the “stores” on amazon – like this “discount” store:
http://www.amazon.com/b/ref=olp_offerlisting_23/102-6051340-5508134?ie=UTF8&me=A3SL5YM9D23385

700 dollar inkjet printers, 30 bucks for a 25ft measuring tape…!

My Theory says:

That report sounds like BS to me… I bought my i Pod in June or July on sale at Circuit City $50.00 cheaper then anywhere … even from Apple so I don’t think Apple controls anything.

A lot of the price differences have to do w/ shipping as well, a TV may be cheaper at store X but you pay for shipping, at store Z it is more but you get free shipping….

I worked at a supply warehouse where we had a deal worked out w/ UPS where we shipped products for pennies on the dollar… Now when we advertised our product we could always have the lower price because our shipping prices were next to nothing.

If we were selling TV’s and it was $200.00 to ship and insure it but it cost us $10.00 to ship and insure it that’s why we beat everyone else not because what that report says.

Eric Samson says:

Re: Re:

Actually, I worked at a computer store for a long while, and Apple does control pretty much everything about the price: the profit margin for the iPods (ever since the first generation) was anywhere from 3% to 4,5% – there is no way that Circuit City was offering that price and still turning a profit. Loss leaders are an entirely different beast, though. So even if Apple can’t really say “You will not sell our iPods at less than the MSRP”, it can (and does) say “If, and only if, you are willing to lose money, go right ahead and sell our products at whatever price you want.”

The same can be said for consoles. I remember when we got the price sheets for the PS2 and we realized we were making less than $6 on the console itself.

Compared to books (40% retailer profit margin) and CDs (usually around 15%), high-demand gadgets are much closer to grocery-store style profits (2-4%). Of course, that only works out well for the grocery stores because they sell a crapload of products, whereas making 2% profit on a PS2 when a store gets only 12 units at launch, is more than a tad ridiculous.

Roo says:

iPod pricing set by Apple

This post misses the real reason that the iPod price varies very little. It’s called Minimum Advertised Pricing. Under U.S. competition law, a manufacturer can not dictate the price at which a merchant sells their product. BUT, there is a way around this.

Apple sells the the iPod to stores for very close to the “manufacturer’s suggested retail price” (MSRP). They then offer a series of rebates and marketing dollars to the dealers, but only if the advertised price, including the pricing “advertised” on the product display, in the weekly flyers, and online, matches the MAP price. Map is generally set be within $3-$5 of MSRP so they can tinker a bit (e,g, Walmart can use $197.88 instead of everyone being at exactly $199.00). But the net effect is that retailers sell the iPod for an amount close to what they pay for it.

Then at the end of the quarter, they bill Apple outrageous fees for putting the iPod in their weekly ad or in other promotional vehicles.

When Apple pays these funds, it makes the dealer whole; maintains the price; and since “unauthorized” dealers don’t get these back-end dollars, allows Apple to control the retail price.

Note that in most countries, this is considered to be iliegal price fixing (collusion). But here in the U.S., it is quite legal.

Roo

Jay says:

Price fixing requires two products.

Price fixing is when competitors collude to manage prices. If Honda, Nissan, Subaru, and Toyota got together – that would be price fixing. Two Honda dealers are not selling competing products, they are selling the same product.

Note: while price fixing is illegal, price leadership is not. Price leadership is when competitors match prices without collusion. One airline raises prices, and the others follow. If they don’t, the first airline may be forced to rollback prices.

Price fixing is when you go to get estimates to have your car repaired; one estimate is high, and the rest are astronomical. Your neighbor takes his car the next day; same thing except the shop offering the high estimate has changed.

Price leadership is when the insurance company says we will pay so much, and the repair shops all individually agree to do it for that price. IF one shop would charge less to get more business, and the others followed suit, or IF one insurance company B paid more, and repair shops stopped doing business with insurance company A – it’s all legal unless the justice dept. can prove collusion between either the repair shops or the insurance companies. That usually requires somebody squealing first.

Anonymous Coward (user link) says:

I agree

While there may be situations when a store can run a special deal on an iPod – VERY RARE – your analysis is very true. A quick look at shopping.com on HDTVs really brings this out in a big way. However, I am not sure most users are comfortable buying from lesser known retailers versus Amazon. Also a quick look at deal sites, even community deal sites like http://www.dealplumber.com reveals almost no deals on the iPod, and justifies your post easily.

Roo says:

Price Fixing

JAY wrote:
“Price fixing is when competitors collude to manage prices. If Honda, Nissan, Subaru, and Toyota got together – that would be price fixing. Two Honda dealers are not selling competing products, they are selling the same product.”

Jay,
I agree with your opening statement, but I have to disagree with your second.

If two Honda dealers agree to never sell an Acord LX for less than $X; that is price fixing. Indeed, it’s the definition of price fixing. The only other factor affecting a sucessful prosecution is whether the cullusion had the effect of reducing competition or increasing overall prices in the market. e.g. if they were the only Honda Dealers with a few hundred miles, it would be easier to prove harm than if they were in a large city with five Honda dealerships.

Roo

Trey (user link) says:

Re: iPods

This just goes to show how little you know about business. Apple cannot “fine” a retailer for selling a product below MSRP.

In fact Apple has no say in what any retailer sells an iPod at other than their MSRP *hince the SUGGESTED part* and what they charge the retailer for the unit (the retailer generally won’t want to lose money on the product, though they often do).

Dru Richman (user link) says:

Prices

Apple, unlike other manufacturers, strictly controls the price of its products. The bottom line of this sales philosophy is that ‘every’ Apple retailer is on a level playing field. Just because Retailer A buys $20 million in iPods and Retailer B buys $20 thousand, doesn’t mean that Retailer A can sell his iPods for less money. What that does means is that the retailers will, out of necessity, have to offer more value to the customer. That value can be additional products, goods, or services.

Case in point – Look at MacMall or MacZone. Both offer iPods at the same price that Apple dictates. But they offer incentives (free cases, shipping, engraving, speakers, etc) to get the customer to purchase from their company. iPod prices stay the same, but the customer benefits.

rockfan says:

forget ipod

i’m gonna be blunt, ipod sucks. i honestly use my psp for music play. it was cheaper, easily used, and has more features. i dont know of an ipod model that browses the internet (in fact i’m using psp to write this), or output high end graphics. the screen size is also better(+widescreen), try watching a full length movie on thses little ipod screens.

sure the ipod holds way more songs. but honestly, after several years of downloading music, that much music is just too much. even for somebody like me who has music playing whereever i go.

so yes it is about hip-ness. ipod would not have been so success full if it wasn’t hip. hip is the only advantage its got

Roo says:

Can Apple

Trey wrote:
In fact Apple has no say in what any retailer sells an iPod at other than their MSRP

Trey, this is only partially true. Apple can’t legally force anyone to sell the iPod at a particular price, but they can withhold Market Development Funds from sellers who post prices below their MAP level.

A dealer might have to pay $97 to buy an example product that carries a $100 minimum advertised price, as set by the manufacturer.

They can sell it for whatever they want. But if they post or advertise a price below the MAP threshold, the manufacurer can withhold marketing funds which could easily amount to $10 or more. But if they forfeit the MDF rebate money then they’re left without anywhere near enough gross profit.

Thus, under Apple’s MAP program and similar programs put in place by other manufacturers, the MSRP has become quite a bit more than a mere “suggestion”. The dealer has a VERY strong economic incentive to follow the manufacturer’s MAP pricing rules.

In addition, a company that breaks MAP program rules can be deauthorized (that is,not allowed to buy the product from the manufacturer or its wholesalers). The threat of deauthorization for breaking MAP is ilegal; and VERY common.

Roo

Artful Dodger1 says:

It's all about the trendy thing

Most products compete on price alone and even some stores -witness Walmart’s tag “We sell for less.” Not better. Not even OK. Just less. Customers anticipate that the quality they buy for less will be OK, otherwise less may get you what you pay for.

Apple is not interested in competing on price. They sell the Apple image and run on the reputation of the product and the peer pressure it carriers. This is same as designer jeans or a particular shoe model, which have such a huge image that customers will pay whatever it takes to get it.

At the moment, Apple has yet to face any competitor for that image. Someday they will. No designer product stays on top forever. Apple combats this by introducing new models on a regular basis. Honestly, most of them play MP3s the same as the older ones. It’s all about freshening the image.

Apple also has a huge advantage: they do not keep the supply chain saturated with old product. When a new model is coming out, they usually let the old one sell out or dry up and then the new one pops out everywhere. This is why and how Jobs intro’s a new SKU at a convention and it’s suddenly in stores. Nobody else does that. When a manufacturer announces a new product or shows it off at CES, it ships months later. Not same day. The main thing here is that a dry supply chain avoids having old stock sitting around competing with the new one, and it keeps shoppers from saying “hey, I should wait because the new one will be out soon.” aka the Osborne effect. This keeps the price up and doesn’t allow the shopper to wait.

Image + marketing strategy. That’s why they get the prices they do.

People who truly know Apple know how to get deals. 1) never buy Rev A Apple products. Let someone else be the bug-finder. 2) Buy from Apple’s refurbished goods store -the MacbookPro I’m using to write this came from the refurb store and saved me almost 900 bucks off the “new” price, and it has the warranty and everything. 3) Scam a student discount somehow. Some schools also offer discounts across the Apple line. It can be 10-30% in some cases. Well worth it.

ToyMaker says:

I have worked in consumer electronics for many years, and the short answer is the margins. Many consumer items have a 50% margin, dealer buys it for $100, retail (MSRP) is $200, but all dealers have a break even point, depending on their operation from 10% to 25%, (internet only to brick and motar stores). So they are happy to make some small net profit of 8-10%, so this results in large discounts from retail. That is why you can see half off prices at clearances, getting their cost back. But items like the iPod that have so little margin can not discounted because there is no margin to give away. Costco sells at 8%-14% above their cost, so you can look at any item and get a rough idea of the cost.

In retailing there is a third price that is used, “street price”, and this is what the item typically sells for.

MSRP is often used to “place” the product in a perceived quality level, so the brand owner says – brand X is the target competition, and I want people to think I am just as high quality or higher, so he sets his MSRP at 5% above the MSRP of his target. But maybe he sets his dealer cost at less, resulting in a street price which is a little less than the target, so the consumer sees this more “expensive” product for less money and thinks it is a good deal or he should at least check it out.

A lot of this has changed today thanks to the internet were you can quickly see what the “street price” is for a product and that is what it is worth, I think many consumers don’t look at MRSP any more. They look for prices that are better than the average selling price as being the best deal.

Anyway, my 2 cents.

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