Is the Apple Vision Pro worth the cost?
Right now, everyone is talking about Apple’s Vision Pro.
If you haven’t already watched the full product demo, you’ve probably at least seen snippets on social media or heard it come up in water cooler conversations.
The augmented reality headset promises to take us in the era of spatial computing, by seamlessly blending digital content with our physical space.
One major thing that comes up in conversation when talking about the Apple Vision Pro is the price. And, how could it not?
At $3,499, the eye-watering price tag is equal to three weeks' pay for the average American or six weeks' pay for an average EU citizen. It’s enough to make you wonder who will actually be able to afford it when it launches in early 2024 — especially if that recession we’ve been hearing about actually hits.
But, how do companies come up with their prices? And how exactly did Apple arrive at the number $3,488? To answer these questions, let’s take a look at the two most common ways companies price their products: cost-plus pricing, and value-based pricing.
1. What is cost-plus pricing?
This is when you look at how much it costs you to make a product and then add a fixed percentage on top to get your final price. Simple, right?
Cars, bike locks and pretty much anything sold in a department store are examples of cost-plus pricing. It’s a popular pricing strategy in eCommerce and retail because it’s straightforward, predictable, and — by definition — profitable.
The reason this pricing is most widely used is because of its simplicity. Intuitively, we think prices are based on costs. And many businesses just follow this logic. When they create their first product, they calculate their costs and add something on top to cover all admin costs plus some profit.
But, cost-plus pricing can also be pretty shortsighted, because it doesn’t take into account external factors like competitors and consumer spending habits. When manufacturers try to squeeze out their rivals purely on price, it can very easily become a race to the bottom.
2. What is value-based pricing?
As the name suggests, this is when companies set their prices based on perceived value to the customer. The production cost doesn’t factor so much into the equation here. Rather, it’s all about the amount a customer is willing to pay for the value it creates in their life.
Many SaaS companies (like consumer apps) adopt this strategy because they don’t actually cost that much to produce, but they can add a lot of value to the customers’ life. The same applies to luxury goods, like sports cars and designer bags. It’s not necessarily that they cost that much more to produce than their cheaper equivalents — they just have more aspirational brand associations.
Value-based pricing is appealing to companies because the revenue potential is big and you don't have to compete on price. But, you need a rock-solid brand, differentiated product, and clear value proposition to pull it off. Plus, you need to understand what value you are creating in customers’ lives. And that’s what many companies just never set out to figure out.
But that’s what we, designers, are here for! With our research skills and empathy, we are in a great position to understand the value our products and services bring. So, we can help companies understand the true value that we create.
3. Why this matters for designers
Apple is well known for its value-based pricing strategy. But given that the Apple Vision Pro is a completely novel product, it’s probable they’ve opted for cost-plus pricing initially while they work out its true value in the market. While only Apple can say for sure what their pricing vision is (pun intended 🥁), there’s a lot we can learn from this conversation around cost.
Know your numbers: It might sound obvious, but it’s crucial to be familiar with your manufacturing costs. You don’t want to deploy value-based pricing, only to find out that the perceived value is lower than your costs. Ouch!
Commit and iterate: You don’t have to stick to the same pricing approach forever. But, you do need to have a strategy (that’s not just coming up with a random figure in your head that sounds good) to launch with, so you can collect data and reconvene.
Design for value first: The decision to opt for cost-plus pricing or value-based pricing is for companies, not consumers. Customers always buy based on perceived value, no matter how ‘cheap’ a product is. It’s why someone can hesitate about spending $10 on a T-shirt but happily splash $100 on fancy stationery if that’s important to them.
Luckily, we are in a perfect position to determine the perceived value — because we do talk to customers! Many business people aren’t good at that. Not at all! So, that's how we can use one of our superpowers, empathy, for more impact in a business setup — helping with pricing.