pdantic
02-02-2003, 07:23 PM
Warning: This is a long post! [/:)] (Frank, if you'd like to just have a link to this, I've put it at http://www.pdantic.com/reviews/segpricing.htm as well)
The other day there was a thread on SegwayChat talking about the high price of the HT right now ($4,950) and how people were aghast at the price when they heard about it. I started thinking about life cycle pricing while I was taking a walk at lunch one day, and it occurred to me that if the pricing of the Segway HT follows other technological innovations we can probably expect to see the price drop to about $250 or less within five to ten years!
I don’t pretend to be an economist; I’m an engineer by training, have an MBA, and I currently work as an I/T Project Manager. But life cycle pricing is rather simple to understand if you look at it in terms of another tech device that is currently becoming a commodity – a DVD player.
When DVD players first hit the market, there were a lot of people who said they’d never make an impact on sales of VCRs. After all, when you could go down to Wal-Mart and pick up a VHS VCR that could both record AND play for less than $100, why would anybody in their right mind spend $1000 or more on a DVD player?
That was the price of one of the first DVD players I looked at. I waited for the price to drop to about $750 before I bought it. You can now pick up a DVD player with much better functionality at Wal-Mart for $75!
The initial market for DVD players was like the Segway HT market is right now – made up of people who are early innovators and who like to have the latest & greatest thing. During the introduction of a new technology, the early innovators serve a wonderful function. They provide a way for the developer of the new hardware to start paying off R&D costs, they usually help develop the market by spreading the word about the benefits of the new technology to the rest of the world, and their feedback can provide valuable input about what functions are good or bad with the new product.
You can definitely see this in the Segway HT world at this point – pt, Frank and the rest of the lucky winners spent $4,950 a pop for their Segways, but they’re helping to get the word out to the rest of us about how cool the HT really is. My guess is that the rumored $100 million development cost for the Segway technology is about right, but that a lot of that cost was probably swallowed by investors who expect to make their big bucks down the road and also by risk-sharing partners who will make their money by supplying parts for the Segway HT and its progeny.
In other words, the folks who make the batteries, electronic components, sensors, and even the tires probably spent their own money developing those parts for the Segway HT at little or no cost to Segway, hoping that the future sales of the HT would more than make back their investment. For example, Michelin realizes that Segway HT tires are a consumable that will need to be replaced every 5,000 miles or so. They put in a couple of million dollars into developing a tire that meets Segway’s specifications and then reap the benefits once there are a few hundred thousand (or several million!) people all in need of replacement tires in a few years.
The other suppliers of development money for the Segway HT were the investors, including Dean Kamen himself and others like Steve Wozniak, Jeff Bezos, etc… You can bet that these folks are probably hoping for widespread adoption of Segway technology, as they stand to make some big dollars down the road!
OK, so if we assume that a lot of the initial R&D cost of the Segway HT was “picked up” by investors and risk-sharing partners, why are the I series Segways selling for $4,950? At this point in time, there are other costs that need to be covered; the factory, the employees who are building, selling, and providing training for the Segway, etc... In addition, the components that make up the Segway HT aren’t cheap right now. Those risk-sharing partners may have developed the components at their cost, but they still have to manufacture those pieces and cover the cost of making them. With only a few thousand Segway HTs in the world at this point, the cost of components is as high as it will ever be.
Now, let’s fast forward to six months from now. All of the units sold through Amazon to be shipped in the March – July, 2003 timeframe have been shipped, and hopefully there are quite a few buyers. Segway announces the p series device at a lower price (let’s say $2,950) and lowers the price on the i series slightly to $4,495. By this time, all of the early adopters have had anywhere from a month to 7 months to enjoy their ride, they’ve thrilled many of their friends who are all now anxious to buy an HT, and sales start creeping up. Most of the manufacturers have probably paid off a good portion of their initial R&D costs and their production volume has risen, so their cost per unit drops. Most likely they’ve all signed some sort of supply contract with Segway that will force them to sell components to Segway at lower costs as time goes by, so Segway is able to produce the HT at even less cost.
During this entire time, the supply of Segways is increasing. Kinks are worked out of the manufacturing process, it takes less time to produce an HT than it originally did, and they’re starting to flow out of the factory very quickly. Labor costs and fixed costs are spread over a larger volume of product, so the cost per unit falls.
After the first year or so, provided there aren’t a lot of idiots in city offices writing laws to ban Segways from city sidewalks, sales continue to climb. Other companies, now seeing that the Segway HT is not just a flash in the pan, decide to join the market. Dean Kamen licenses the technology to a few other companies or someone else develops their own similar technology without infringing on the Segway patents. With competition starting to hit the market, there is a bit more supply than demand, so prices drop even more until the market soaks up that extra supply. Perhaps one of the licensees figures out a way to extend range with the same batteries, or uses a hydrogen-fueled Stirling engine for extra range. Someone comes out with an off-road “Sport Utility HT” that is specially made for riding on rough trails, another comes out with an HT that has a collapsible canopy for rainy/snowy weather. Through competition and further innovation, the market continues to expand and diversify, and costs decrease even more.
In a perfect world, this trend would continue until you get to the point that the Segway HT becomes a commodity product. This is the case where you’re able to go over to Target and pick one up off the shelf for $250 or less, and just about anybody who wants one can buy one.
This has happened time and time again in the consumer electronics world. I recall spending just over $3,000 for my first 512KB “Fat Mac” and a dot-matrix printer in late 1984; now you can purchase a 3.06 GHz PC with Windows XP, a 17” flat panel LCD screen, a 120GB hard disk drive, 1 GB of RAM, and a combo inkjet printer/scanner/fax machine for just over $2,000. The first VHS VCR I bought cost me about $1,500, you can get ‘em for less than $50 now. I bought a four-function calculator in 1973 that cost $200 and used up a set of AA batteries every two hours or so; you can now buy a solar-powered scientific calculator for less than $10. My first PDA (an Apple Newton MessagePad I purchased in August of 1993) had a 20 MHz CPU, a monochrome screen and less than a meg of RAM; for about the same price you can now get a Pocket PC with a 400 MHz CPU, a full-color screen, and 64MB of RAM.
We can only hope that the Segway HT catches on the way that many of these consumer products did, and that in another couple of years we’re all gliding around and watching our cars collect dust…
Steve
www.pdantic.com
Automobiles:
"They contained the seeds of their own destruction. Eighty million steel juggernauts, operated by imperfect human beings at high speeds, are more destructive than war."
-- Robert Heinlein, "The Roads Must Roll"
The other day there was a thread on SegwayChat talking about the high price of the HT right now ($4,950) and how people were aghast at the price when they heard about it. I started thinking about life cycle pricing while I was taking a walk at lunch one day, and it occurred to me that if the pricing of the Segway HT follows other technological innovations we can probably expect to see the price drop to about $250 or less within five to ten years!
I don’t pretend to be an economist; I’m an engineer by training, have an MBA, and I currently work as an I/T Project Manager. But life cycle pricing is rather simple to understand if you look at it in terms of another tech device that is currently becoming a commodity – a DVD player.
When DVD players first hit the market, there were a lot of people who said they’d never make an impact on sales of VCRs. After all, when you could go down to Wal-Mart and pick up a VHS VCR that could both record AND play for less than $100, why would anybody in their right mind spend $1000 or more on a DVD player?
That was the price of one of the first DVD players I looked at. I waited for the price to drop to about $750 before I bought it. You can now pick up a DVD player with much better functionality at Wal-Mart for $75!
The initial market for DVD players was like the Segway HT market is right now – made up of people who are early innovators and who like to have the latest & greatest thing. During the introduction of a new technology, the early innovators serve a wonderful function. They provide a way for the developer of the new hardware to start paying off R&D costs, they usually help develop the market by spreading the word about the benefits of the new technology to the rest of the world, and their feedback can provide valuable input about what functions are good or bad with the new product.
You can definitely see this in the Segway HT world at this point – pt, Frank and the rest of the lucky winners spent $4,950 a pop for their Segways, but they’re helping to get the word out to the rest of us about how cool the HT really is. My guess is that the rumored $100 million development cost for the Segway technology is about right, but that a lot of that cost was probably swallowed by investors who expect to make their big bucks down the road and also by risk-sharing partners who will make their money by supplying parts for the Segway HT and its progeny.
In other words, the folks who make the batteries, electronic components, sensors, and even the tires probably spent their own money developing those parts for the Segway HT at little or no cost to Segway, hoping that the future sales of the HT would more than make back their investment. For example, Michelin realizes that Segway HT tires are a consumable that will need to be replaced every 5,000 miles or so. They put in a couple of million dollars into developing a tire that meets Segway’s specifications and then reap the benefits once there are a few hundred thousand (or several million!) people all in need of replacement tires in a few years.
The other suppliers of development money for the Segway HT were the investors, including Dean Kamen himself and others like Steve Wozniak, Jeff Bezos, etc… You can bet that these folks are probably hoping for widespread adoption of Segway technology, as they stand to make some big dollars down the road!
OK, so if we assume that a lot of the initial R&D cost of the Segway HT was “picked up” by investors and risk-sharing partners, why are the I series Segways selling for $4,950? At this point in time, there are other costs that need to be covered; the factory, the employees who are building, selling, and providing training for the Segway, etc... In addition, the components that make up the Segway HT aren’t cheap right now. Those risk-sharing partners may have developed the components at their cost, but they still have to manufacture those pieces and cover the cost of making them. With only a few thousand Segway HTs in the world at this point, the cost of components is as high as it will ever be.
Now, let’s fast forward to six months from now. All of the units sold through Amazon to be shipped in the March – July, 2003 timeframe have been shipped, and hopefully there are quite a few buyers. Segway announces the p series device at a lower price (let’s say $2,950) and lowers the price on the i series slightly to $4,495. By this time, all of the early adopters have had anywhere from a month to 7 months to enjoy their ride, they’ve thrilled many of their friends who are all now anxious to buy an HT, and sales start creeping up. Most of the manufacturers have probably paid off a good portion of their initial R&D costs and their production volume has risen, so their cost per unit drops. Most likely they’ve all signed some sort of supply contract with Segway that will force them to sell components to Segway at lower costs as time goes by, so Segway is able to produce the HT at even less cost.
During this entire time, the supply of Segways is increasing. Kinks are worked out of the manufacturing process, it takes less time to produce an HT than it originally did, and they’re starting to flow out of the factory very quickly. Labor costs and fixed costs are spread over a larger volume of product, so the cost per unit falls.
After the first year or so, provided there aren’t a lot of idiots in city offices writing laws to ban Segways from city sidewalks, sales continue to climb. Other companies, now seeing that the Segway HT is not just a flash in the pan, decide to join the market. Dean Kamen licenses the technology to a few other companies or someone else develops their own similar technology without infringing on the Segway patents. With competition starting to hit the market, there is a bit more supply than demand, so prices drop even more until the market soaks up that extra supply. Perhaps one of the licensees figures out a way to extend range with the same batteries, or uses a hydrogen-fueled Stirling engine for extra range. Someone comes out with an off-road “Sport Utility HT” that is specially made for riding on rough trails, another comes out with an HT that has a collapsible canopy for rainy/snowy weather. Through competition and further innovation, the market continues to expand and diversify, and costs decrease even more.
In a perfect world, this trend would continue until you get to the point that the Segway HT becomes a commodity product. This is the case where you’re able to go over to Target and pick one up off the shelf for $250 or less, and just about anybody who wants one can buy one.
This has happened time and time again in the consumer electronics world. I recall spending just over $3,000 for my first 512KB “Fat Mac” and a dot-matrix printer in late 1984; now you can purchase a 3.06 GHz PC with Windows XP, a 17” flat panel LCD screen, a 120GB hard disk drive, 1 GB of RAM, and a combo inkjet printer/scanner/fax machine for just over $2,000. The first VHS VCR I bought cost me about $1,500, you can get ‘em for less than $50 now. I bought a four-function calculator in 1973 that cost $200 and used up a set of AA batteries every two hours or so; you can now buy a solar-powered scientific calculator for less than $10. My first PDA (an Apple Newton MessagePad I purchased in August of 1993) had a 20 MHz CPU, a monochrome screen and less than a meg of RAM; for about the same price you can now get a Pocket PC with a 400 MHz CPU, a full-color screen, and 64MB of RAM.
We can only hope that the Segway HT catches on the way that many of these consumer products did, and that in another couple of years we’re all gliding around and watching our cars collect dust…
Steve
www.pdantic.com
Automobiles:
"They contained the seeds of their own destruction. Eighty million steel juggernauts, operated by imperfect human beings at high speeds, are more destructive than war."
-- Robert Heinlein, "The Roads Must Roll"