Taking Xiaomi and Hammer as examples, we can explain the two pricing logics of products

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There is a classic textbook in American marketing called “Basic Marketing”, which proposes a classic 4P theory, namely: Product , Price, Place and Promotion.

This theory explains from the perspective of management decision makers that marketing behavior is essentially the strategy and combination of these four core elements.

The other three points are fine, but as far as the price strategy is concerned, I find that domestic entrepreneurs usually do not pay attention to the price factor or often simplify the price factor.

In fact, pricing is a very core and important part of business strategy, which requires a large set of logic to support it, and there are many tricks to it. Today, I will start from the pricing logic of the familiar mobile phone brands Xiaomi and Hammer, and analyze in detail the logic and thinking of product pricing.

Cost pricing strategy: Xiaomi

Timing

If your product enters a huge incremental market, adopting a cost-based pricing strategy can help you quickly capture market share and form economies of scale. The economies of scale can then force upstream component suppliers to make price concessions, thereby gaining profit margins.

Taking Xiaomi mobile phone as an example, when Lei Jun chose to enter the mobile phone market, it coincided with a new round of mobile phone replacement trend in China, and a large number of consumers needed to change their mobile phones (from feature phones to smartphones).

At that time, there were a large number of knockoff phones. Although they were cheap, the experience was too poor and could not meet the expectations of users. The other option, Apple phones, had a market price that was too high, which discouraged many people. This was when Xiaomi's opportunity came...

Marketing channel changes

The change in marketing methods has led to a radical change in the cost structure of mobile phones, which is one of the core reasons why Xiaomi phones can be priced based on cost.

• In the past: Mobile phone cost = production cost + channel circulation cost + advertising cost + store profit
• Now: Phone cost = production cost

In the past decade, the rapid rise of online e-commerce channels has enabled Xiaomi to directly eliminate its two original cost centers: channel distribution costs and store profits.

You have to know that in the Nokia era, setting up offline direct stores or establishing a multi-level distribution sales network would require a large portion of the profit margin to be allocated to channels and stores, but Xiaomi chose to build its own mall, directly eliminating these two major costs.

At the same time, the rapid popularity of new media (Weibo) and a series of self-media marketing by founder Lei Jun and others have greatly reduced the product's market advertising costs, allowing Xiaomi mobile phones to achieve the goal of mobile phone cost = production cost, and can be sold at cost price, quickly occupying the market at a low price.

Changes in profit structure

The change in profit structure is one of the reasons why Xiaomi phones can be priced at cost. As we all know, the core founding team of Xiaomi Technology originally worked in the Internet industry. Most of China's Internet products first provide free services to gain a massive market, and then make profits through other value-added services, which is what we often say "the wool comes from the pig." Lei Jun copied this strategy to Xiaomi.

With the advent of mobile Internet , mobile phones are no longer just a piece of hardware for making calls. They have become the entrance to software services, including MIUI, mobile stores, and various pre-installed software. There is a whole new profit space here.

• Past: Mobile phone profit = hardware sales profit
• Now: Mobile phone profit = hardware sales profit + software service profit

Market reaction

As expected, most Chinese consumers are quite sensitive to prices. Xiaomi mobile phones, which are priced based on cost, were well received by consumers when they first came out. They quickly gained ground, with shipments rapidly climbing to tens of millions in just a few years.

Even standing today, looking back at history, we will still marvel at Lei Jun's unique vision and courage; his accurate judgment of the trend of mobile Internet and his insight into the essence of the industry are unique.

Summarize

1. Analysis of the advantages and disadvantages of cost pricing

• Advantages: quickly occupy the market and fight against follow-up competitors
• Disadvantages: Consumption is price sensitive and brand premium space is weak

2. When is cost pricing adopted?

• The incremental market is huge and it is necessary to expand the market
• When customers are extremely sensitive to product prices
• When costs can be reduced through economies of scale

Pricing skimming strategy: Hammer

Unlike the cost-based pricing adopted by Xiaomi, another mobile phone manufacturer, Hammer, has a pricing strategy that is exactly the opposite. It adopts the most common pricing strategy in the market: skimming pricing.

The characteristic of skimming pricing is "open high and sell low". When the product is first launched on the market, there is a large premium space. As time goes by, the price is continuously reduced and sold off to ensure maximum product profits.

Why does Hammer smartphone use skimming pricing? There are some basic objective factors.

Strategic timing

Luo Yonghao's Hammer phone entered the smartphone market relatively late. A large number of smartphone manufacturers have already appeared in the market, including Xiaomi, Meizu, Huawei, Lenovo, ZTE, HTC , etc. There are many giants and the competition is unprecedentedly fierce. There are not many opportunities left for him in the market...

At the same time, the first wave of domestic consumers replacing their phones has passed, the market dividend is no longer there, and the logic of quickly occupying the market through low prices has become invalid; in terms of communication channels, although Luo Yonghao has a certain influence, Weibo has begun to enter a downward channel, and the self-propagation effect has slowly begun to decline...

Brand Features

Based on the above changes in the market environment, Lao Luo decided to start from his own resources. As a KOL who is extremely controversial in himself, Lao Luo has a large number of fans following him in the blog era. These fans believe in Lao Luo and recognize the values ​​he conveys.

What they value when buying a Hammer phone is not the product's price-performance ratio or running score, but their recognition of Luo Yonghao's values. Their purchase is based on Luo Yonghao's personal charm and value beliefs. This group of people is not sensitive to price.

In response to the above situation, Luo decided to design a mobile phone that placed great emphasis on craftsmanship and aesthetics. The product UI style was skeuomorphic, making it unique in the flat mobile phone market. Even if Luo's personal charm was put aside, there was no mobile phone on the market at that time that could compete with Hammer, so Hammer had the confidence to set a high price.

Enterprise characteristics

Luo Yonghao lacks the corresponding supply chain experience in making mobile phones, and the mobile phone industry is an industry with extremely high requirements for the supply chain. In the early days of the business , the production capacity of Hammer mobile phones was limited (constrained by the supply chain), and the skimming pricing strategy was adopted. Setting a high price could not only avoid risks (inventory pressure), but also maximize profits (cash), and suppress the purchasing demand of some non- target users , ensuring that the current supply capacity is sufficient to support it, achieving three goals at one stroke.

Market reaction

The initial price of Hammer when it was launched was over 3,000 yuan. Many people think that the price is too high and should be lower, or should wait until production capacity is increased before selling it. Through the enthusiastic purchases by the first batch of fans, Hammer quickly recovered most of its costs and alleviated the problem of insufficient production capacity. After that, the price was gradually lowered to attract more purchasing users and maximize the profit of the products.

When Hammer was first listed, Luo's skimming pricing strategy maximized profits; the clear market strategy and clear market positioning showed his sophistication as a businessman.

Summarize

1. Analysis of the advantages and disadvantages of skimming pricing

• Advantages: Quickly recover costs, reduce risks, harvest value layer by layer, and ensure maximum profit
• Disadvantages: High requirements for brand potential, relatively segmented target groups

2. When is skimming pricing used?

• Stock market
• Target users have low price sensitivity
• The products are highly differentiated and have obvious advantages
• Insufficient supply

Conclusion

The high-price strategy of the Hammer phone is not to improve its status, and the subsequent gradual price cuts are not a slap in the face. Meizu phones cannot imitate Hammer, and the new Nokia cannot adopt Xiaomi's strategy. Whether it is cost pricing or skimming pricing, it is all determined based on factors such as market conditions, product positioning, and resources at hand.

There are no so-called fools in the business world.