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The Concept of Value, or Why Price Cuts Can Fail
What makes a product valuable to a consumer? The answer is simple: if a product satisfies the needs of the consumer, then the consumer will consider the product valuable. On the other hand, if a product does not satisfy the needs of the consumer then it is not very valuable to them at all.
In order to develop a successful product, companies need to ensure that the services offered by their product are what consumers deem valuable. If they can do this they have a product that is valuable to consumers and is likely to do well. If there is a mismatch between the services offered by the product and what consumers consider valuable then the product can struggle, regardless of the effort spent marketing and developing it. The ongoing conflict between the PS3 and the Wii demonstrates this quite clearly.
The PS3 is undoubtedly an impressive piece of equipment. Not only does it offer superior graphics, it is also capable of playing Blu-ray disks. What does this tell us about how Sony perceives the market? The inclusion of superior graphics suggests that Sony believes that consumers value graphics. Similarly, the inclusion of Blu-ray playing capabilities, suggests that Sony believes that consumer also value the ability to play Blu-ray disks.
How well was the PS3 sold? The answer is: not very. This suggests that Sony may have misread what consumers need that is, it may have misjudged what consumers deem valuable. However there are others who do not think that Sony has misread the market. Instead, they argue that the PS3 is valuable to consumers, that consumers do value superior graphics and Blu-ray. What has happened, they argue, is that the price of the PS3 exceeds the value placed in it by consumers. Cut the price, it is claimed, and sales should increase dramatically.
On the face of things, there is nothing obviously wrong with the price-cut argument. However it makes an assumption. Namely, it assumes that what Sony considers valuable (superior graphics, Blu-ray) is what the consumer considers valuable. If this assumption is false and consumers do not consider the services offered by the PS3 to be valuable then no amount of price-cutting will help. Paying half price for something that is worthless to you is still paying too much. So has Sony misread the market? The answer to this question lies in the Wii.
The Wii is undoubtedly inferior to the PS3 in terms of the graphics that it can provide. Nor can it play Blu-ray disks. In fact, it cannot even play DVDs. Yet it has consistently outsold the PS3 since its launch and shows no signs of slowing down. Why? Look at how the Wii is marketed. The ads for the Wii focus not on the game being played, but more often, on who is playing the game and how they are playing it. The Wii sells itself as being approachable and family friendly. It is seen as easy to use and social. These are the qualities that Nintendo thinks consumers deem valuable. The response of the market has been unequivocal: Nintendo was right.
This is not to say that graphics do not matter. They do. But above a certain point, increases in graphics quality cease to matter. While no one would pay several hundred dollars for a console incapable of producing better graphics than the NES, it seems that the graphics of the Wii are, by and large, considered good enough. If superior graphics did matter, if there was no ‘good enough’ threshold, then the PS3 would be a success and the Wii a failure. The graphics of the Wii, while not spectacular, meet the needs of consumers.
Similarly, if Blu-ray was what consumers valued then the PS3 should be in front of the Wii. It is not. This suggests that Blu-ray is not valuable to many consumers. There are several possible reasons for this. Firstly, the improvement in sound and picture quality offered by Blu-ray requires specific audiovisual equipment. To the majority of consumers who do not have this equipment or are unwilling to invest in it, Blu-ray has no value. Nor is there reason to suspect that this story will change in the near future. The jump in sound and picture quality between VHS and DVD was vast. The jump from DVD to Blu-ray is nowhere near as large. The slow uptake of Blu-ray even after the demise of HD-DVD suggests that for many consumers DVD is good enough. The extra sound and picture quality of Blu-ray offers little value to them because DVD meets their needs.
Blu-ray does not only offer greater sound and picture quality it also offers larger storage capacity. In gaming terms this equates to potentially larger games. If larger game size was valuable to consumers then again, PS3 should be on top. But this is not the case. It is likely then, that as with graphics, there is a game size threshold. The games on the Wii are not always as large or as complex as their PS3 counterparts but for most consumers they are large and complex enough, as demonstrated by Wii software sales. Therefore the potential for larger games offered by Blu-ray does not translate into greater value as perceived by consumers.
Given all of this, what effect will a PS3 price-cut have? The answer is: not much. The values offered by the PS3 (i.e. the services it provides) are not what consumers deem valuable. Paying half price for something without value to you is still paying too much. If this seems unbelievable, consider the Xbox360. Despite some of the models of the Xbox360 being at or below the price point of the Wii it has not made any significant inroads into the Wii’s sales lead.
To finish with a somewhat trite example, consider two ice cream companies. One of them makes vanilla and the other makes strawberry. Both of them want me to buy their ice cream. Unfortunately for the vanilla company, I like strawberry ice cream. They can cut their price in half, even put in real vanilla and it will make no difference. I do not value vanilla, but I do value strawberry.
