I'm not sure Google has much of a market for a $299 media player (with the AppleTV and Roku players being under $100), but it's noteworthy that the new Google Nexus Q is made in the USA (see picture at left of the bottom of the device, click for a larger view).
See this CNET article: Google shows Apple: We made ours in the U.S.A.: Google is making stuff in the U.S. Will Apple follow suit? Also see this TechCrunch article on this topic.
As the article points out, labor costs in parts of coastal China have risen to $3 to $6 an hour. That means the labor cost disadvantage for the U.S. is far reduced.
Google won't say where exactly the products are being made in Silicon Valley. The Nexus Q is certainly going to have far lower production volumes than Apple products… since this is a very new product, Google points out the speed advantages of having production located so close to the design team.
From TechCrunch:
There was a time when electronics were made in the U.S. Early computer giants such as HP, Dell, even Atari made their products in the U.S. The promise of cheaper labor lured these companies elsewhere.
Yep, I helped start one of those Dell factories in Austin in 2000 where desktop computers used to be made (labor cost was a VERY low percentage of the total cost).
This is part of an exciting “reshoring” trend that's being fueled, in many cases, by Lean practices.
The Q's higher price is a direct result of assembling it in the U.S., says Google.
That's where Google is wrong. It's basic economics that prices are set by the market — not by costs. If your product has higher costs built in, customers aren't automatically going to pay more unless you have a monopoly.
If Google were utilizing Lean thinking, they would realize the math (taught by Toyota in their books by Ohno and Shingo):
- Prices are set by the market.
- If the market price for a device like this is $100, then you have to engineer the total product cost so it can be profitable at that price.
It's old thinking (in manufacturing, especially the defense business, and in healthcare) that we get to charge “cost plus.” It's old thinking that you take your costs and add in a profit you feel entitled to… and that's your price. But that doesn't work.
The world runs by “Deserved Profit = Market Price – Actual Cost” not “Price = Cost + Desired Profit.”
On another note, I was excited to see on Friday when my first copies of my new book Healthcare Kaizen arrived that the shipping label said they were printed in Michigan, my home state. I have known for a few months that they were going to be printed here. There's a lot of cost pressure in the publishing industry that is driving printing offshore… as we've seen in other industries.
We can only hope that companies look at the “total cost” 0f producing offshore. Labor costs might be lower overseas (and, again, that gap is shrinking), but there's lots of inventory in the supply chain… and that supply chain is less responsive. If my books were printed in, say, India, then it would have taken a lot longer to react to any unexpected increases in demand. The book would have out of stock more often… which would possibly cost the publisher sales (or delayed them). I'm glad the book is being produced in the U.S.!
I hope Google does well with their domestic production.
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Here is an NY Times blog post (with a link to a story) on the Q:
http://bits.blogs.nytimes.com/2012/06/28/daily-report-for-google-and-others-devices-made-in-the-u-s-a/
I agree with
“Deserved Profit = Market Price – Actual Cost”
not
“Price = Cost + Desired Profit.”
But what I see glossed over by many lean folks when they present this is volume. The iPhone could sell 10,000 at $2,000 in addition to an carrier subsidy. They can sell millions at a much lower price point. Market price is a movable thing (depending on volume).
Also the 2nd formula is fine for deciding what products to build (theoretically – you have to be guessing at the values). But it is totally fine to say we need a price of $350 for x product for us to decide to offer it.
The task is then to guess right. If $350 is not going to work you give up – or more likely go back to the drawing board. Can we make it better for just a bit more and then sell it for $400? Can we re-engineer certain things and lower the price to $250 and even if that means we had to get rid of the ability to use wifi will that work in the market?
It definitely can be sensible to say we can’t make x for less than $400 – we are not pricing it at $300. It might mean we can only sell 10,000 instead of 30,000 if we priced it at $300. But since at $300 we are losing $100 a unit high volume isn’t great.
I think “If the market price for a device like this is $100, then you have to engineer the total product cost so it can be profitable at that price.” is very well said. Again volume is still a big issue.
Sometimes there are price cliff points – I can’t imagine selling a tablet that isn’t hugely better than the iPad on specs for more than the iPad price. So above that level the volume may be miniscule. But I think often there are not cliff points.
And the company does get to set the price. The market then decides to buy or not, and buy in what numbers. An iPhone probably sell very few at $3,000 a piece higher than they are today. How many they sell at $100 more or $100 less may be significant but they would still be huge sellers at either of those prices. So that “market sets the price” idea is not 100% accurate (I don’t think anyway). I do think the first formula is a better concept than the 2 formula. But it is something that is maybe 80% accurate? And the 2nd isn’t totally worthless (it is just that it should be looked at more as a should we offer this product or not decision).
This things also have big long term versus short term considerations. Apple started pricing many things in a way which makes it really hard for competitors to undercut them. Apple, almost for sure could charge more for the laptops they sell and the iPad and iPhone. But if they did they make it easier for a competitor to compete on price. This pricing decision is an Apple decision not a market decision. The market weighs in after Apple make the pricing decision.
But the price point for a kinda ok tablet at $199 – maybe will work? Fire seems to be doing ok, for a pretty small, kinda lame, really cheap tablet.
Apple has done well create products for prices much above what people thought was market price. It turned out people were willing to pay more for a great product.
You can notice that we are trying to sell this car for $35,000 and we are hardly selling any. Ok, lets make it $30,000 and see what happens.
When setting what prices you will try to sell for, looking at your costs is a perfectly sensible thing to do. Once the market tells you that you are off, you need to adapt to the market. It isn’t super easy though. Often you can think the market failed to appreciate the value we offered because we messed up x feature and with y missing it was an issue and people will buy only black from Apple but they won’t accept that from us (or whatever). What we need to do is fix those mistakes. The pricing given those mistakes the market sets below what we expected but that isn’t really a pricing issue it is really a damaged offering issue. Eventually mis-understanding pricing may become obvious, but it often isn’t.
Anyway, my main point is just that the “market price” isn’t some easy thing to know. It isn’t like looking up the freezing point of water. I do agree with the “formula” I just think the way it is presented is often not as useful as it could be.
“Market price” is often pretty well known, based on competitors. Most of these products are sub $100. Google is WAY off the mark, unless they can convince the public that there is 3x the value in their product (and Google has a poor track record with this sort of thing… see “ChromeBook”).
If you wanted to compete with Prius, you wouldn’t come to market with a $60k hybrid car that had very similar specs.
You said early in your comment market price is dependent on volume… it seems more that COST is volume dependent (spreading out fixed development costs, etc.). I think you were more correct later on when you said basically that.
There are no easy answers on pricing. You’re right that there are long-term and short-term considerations. The formulas I shared are conceptual frameworks that I’ve found helpful. You’re right, it’s not like looking up the freezing point of water at a certain altitude.
I do totally agree that I can’t see how this product from Google will be successful. It seems lame and too expensive.
Their $199 tablet seems like it has a much better chance of success to me.
Of course, I didn’t really see iPad being some huge deal. I was way wrong on that. iPhone did seem pretty awesome from the start.
I do agree it is sometime pretty easy to get a decent idea of acceptable market prices. But people that try to compete with Apple or Toyota are often very annoyed that the market treats their “equivalent” product, at a cheaper price with much less volume. This feedback from the market has to be accepted (for which, understanding the 2 formulas is a great reminder). The intangibles are often very significant in the marketplace.
Those companies often put themselves into a bad situation. Decades ago HP was respected and trusted. Now people are so tired of all the bad dealing they have had over the last 20 years they won’t pay what they will for something from a company they respect. This often results in the companies making their products cheaper (flimsier, lame components…) to be profitable given the market distaste for their experiences. And what does this do? Makes things worse. Now they are even less willing to pay.
If you have the right understanding you can see this risk in taking the view of the 2nd formula. But it isn’t easy to see this slippery slope if you don’t already have an appreciation for: long term thinking, customer focus, systems thinking, providing value, going to the gemba… If you just look at spreadsheets you don’t know the business. And sadly that seems to be the case for many.
Yes, there’s a huge difference in:
1) Engineering out cost in a smart way that doesn’t harm the customer (and even provides benefits)
2) Just cheapening out a product by cutting corners, cheapening materials, killing quality by offshoring to a crappy manufacturer
Great point.
I think you are both correct: the price is set by the market and the producer. The market has a perceived value of the product and the producer will only sell it for a profit. Somewhere in between is likely the price.
When I look at the Nexus, I see a very different product then the AppleTV and Roku. With the Q, I see something that can integrate with my Android phone, work computer, home computer and TV and I probably don’t have to install a proprietary software system that will only allow me to purchase media through their store at relatively fixed prices. Rather, I can run it through an open source cloud and even develop apps that can be used by my device. And all of my android devices can be shared with the Q. The case shell acts as a dial control for the device, and LEDs interact with the media. The AppleTV doesn’t seem like it is as “universal” as a Windows or Android device, maybe I’m wrong, but that would certainly lower the value of the device in my mind. Also, I’m not sure if it can be operated by an iPad or iPhone? And the Roku seems like it is a stand alone device, sort of like those Atari comeback devices with flash games loaded in the joystick with A/V cable plugs to plug into any TV. The Roku is alone in the cold, lowering its integration value further. For these reasons, labor costs aside, I can see why the Q is of higher value from both the consumer’s and producer’s view. Is the labor content higher for the Q vs. Apple vs. Roku? I can’t see how it would be lower. Does it justify the price? Well, Google didn’t say where it was being made. Are they operating an assembly plant which would imply a higher fixed cost of producing?
Not trying to defend Google, just offer up some consumer perspective on this, while knowing that it still does cost more to produce here in the U.S. even thought that gap is closing as other countries become more industrialized or unstable, causing us to pull manufacturing back within our sphere of local control.
Am I willing to pay $300 for the Q? Nope. But I’ll give it a second look when it comes down a bit in price.
Peter Drucker’s view in “The 5 Deadly Sins” of Business:
LINK
Wise words.
Google is delaying the launch, if this ever really comes to market fully:
Google Pushes Back The Release Of Its Bad Attempt At An Apple TV Killer, The Nexus Q
Read more: http://www.businessinsider.com/google-delays-nexus-q-2012-7#ixzz22n0ClDIi