How to Value-Price Durability

ABC_light_bulb_mar_2_141009_16x9_608.jpgRecently I had a conversation with a friend (let’s call her Helen) who wanted to buy a new iPhone, however she was frustrated that the iPhone 8 offers little in enhancements from her current iPhone 6.  She was contemplating ordering an iPhone X.  When I asked why Helen needed a new phone at all, she said her current battery would not hold a charge.  When I said she could simply replace the battery, she responded, “I just want a new phone.” Although her current model has all the functionality she wants or needs, Helen is willing to pay something between $700 and $1,000 to upgrade.  Our conversation got me thinking about the age-old problem of value pricing something that is very durable.

Three years ago, I read an article about a GE lightbulb that had burned continuously for 100 years.  I don’t know how many similar bulbs are still operational, but the buyers of them certainly received substantially more in value than they paid.  However, that does not mean GE had a poor pricing strategy. 

A product that never needs to be replaced, or will last a very long time, potentially has a very high value to customers.  It should be a straight-forward process to calculate the present value (discounted future cash expenditures) of alternative products that will need to be replaced in X years, plus the present value of the cost of shopping for and physically replacing those alternative products.  The sum of those costs should be the theoretical value of the infinitely durable product.  Unfortunately, in the case of customers like Helen, setting a price equal to that present value will not work.

Some customers simply want new designs or new features.  Some customers also don’t want to be seen as being behind the times.  (Have you ever teased anyone about still using a flip phone?)  In either case, they are willing to pay something to have the newer model, even though their old product provides all the functionality they want to use.

Similarly, the automobiles of today are extremely well engineered and will last a very long time.  Although it happens occasionally, it is uncommon for a car engine or transmission to completely fail before 100,000 miles.  In fact, many cars last more than 200,000 miles.  Yet, the average car buyer keeps their car for under seven years.  Many of us know people who change autos every two or three years, because they want a new model, or they want to take advantage of new technology.  Those customers don’t place as high a value on durability as they do on style and features.

Another challenge in value-pricing very durable products is convincing customers they really will last that long.  Consumers are naturally and rightly skeptical of manufacturer claims about how long something will last.  In order to convince them, manufacturers added warranties, which are promises to pay for the repairs if the product breaks within the warranty period.  In 1999 Hyundai became the first automaker to offer a 10-year powertrain warranty.  That enabled them to convince car buyers that Hyundais were quite durable, and they sold many more cars than they otherwise would have. 

With those examples in mind, here are some suggestions to make sure your pricing strategy captures the value of your products’ durability:

  1. Identify the differences in durability versus alternative products
    1. Customers can’t be expected to figure it out on their own
    2. Make it easy for them to compare
  2. Quantify how much a customer would save from buying your product once versus buying multiple alternatives
    1. Calculating the net present value (NPV) of those future purchases is easy
  3. Discount your NPV calculations to allow for the introduction of new technology
    1. Customers understand technology changes and they will not want to lock into something that precludes them from capitalizing on the new tech in the future
  4. Segment your customers and offer alternatives
    1. Early adopters and customers who depend on tech will pay more for the flexibility of upgrading to the new features and benefits as soon as they are available
      1. New models of iPhone every year help create buzz and cachet for may buyers
      2. Microsoft Office365 enables customers to always have the most current features of their software
      3. Two and three-year car leases offer the ability to upgrade quickly
    2. Offer easy-to-use regular maintenance for buy-and-hold customers
      1. Ease of obtaining maintenance is often a critical part of preserving the longevity
      2. The Apple Store is available to replace batteries and screens, not just to sell new products
  5. Back up your claims with warranties
    1. Extended warranties can capture the value of longevity for customers who tend to keep their assets longer

It is not realistic to think you can capture the full value of a product that will last forever.  There are too many reasons for customers not to believe such a claim, or even to care about it.  However, these steps can help you identify which customers value durability versus those who don’t, and they can help you capture what customers are willing to pay.

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