Ignore the Price Tag
The initial $100 price tag of the XO Laptop from Nicholas Negroponte’s One Laptop Per Child (OLPC) created quite a furor when it was first announced three years ago. At the time, the cheapest laptops were hovering around $400 to $500.
This subject has been rehashed many times in the press and the blogosphere, but reading a recent report on Total Cost of Ownership (TCO) for computers deployed in schools in India prompted me to write about the pricing debate and what can be learned from it. A longer version of the report can be found here.
The report was prepared by VitalWave Consulting, a firm specializing in consulting and research for technology companies growing businesses in emerging markets. They performed a study in India, funded by Microsoft, on the TCO of computers deployed in schools. They built a model that took various factors into consideration when estimating the total cost of owning a computer over a period of time.
Purchase cost, maintenance, support, training, replacement cycle, and electricity cost are just a few of the elements they factored in. They looked at desktops, laptops, and ultra low-cost laptops like the XO and Intel’s Classmate PC. The report also compares the differences between TCO in India and TCO in a “global” model.
For those unfamiliar with the TCO concept, it is mostly used by IT professionals in larger companies who understand that the overall cost of a computer is not just the initial price and that variances can cause large fluctuations in the overall cost over time.
The eye-opening finding in VitalWave’s study is that the TCO of an ultra low-cost laptop (like the OLPC’s XO) in Indian schools over five years is a staggering $2,700 when compared to the %7E$180 initial price tag. This finding created quite an uproar when OLPCNews reported on the study. Many quibbled with the assumptions and found it hard to believe that a Linux-based machine costs the same as a Microsoft machine. I have no interest in adding to that debate, and I have no interest in taking sides in this discussion.I do believe the study raises important issues in the $100 laptop debate. The $2,700 figure is not surprising to anybody familiar with the concept of TCO. The problem is that most people on this planet are not familiar with it.
Following are my recommendations based on the implications of the TCO report.
Never pre-announce a price
Nine times out of ten the price will be wrong. Negroponte pre-announced the price of the XO at $100 and then got slammed for it with copious negative press when he couldn’t meet that target. That made it miserable for all other PC companies trying to sell to education. In a meeting I had with the Minister of IT in Cairo to discuss Intel’s Classmate PC, he said he wasn’t interested in it unless it was $100.
Do your research on what the actual end-user price will be
The price for the XO and Classmate PC communicated in the press was the price BEFORE shipping, duties/tariffs, VAT/taxes, distribution markup, and various other costs. Even if you added all those factors, the price can vary greatly country to country, so decide carefully on what price you communicate. If you find significant variations, err on the side of being cautious.
For example, Intel CEO Paul Otellini insisted that he wanted to communicate a price for the Classmate PC when it was first launched at the World Congress of IT in 2005. I recommended against it, but I’ve learned the hard way you can’t argue too hard with your CEO. I told him to say it would be about 20 percent below the cheapest Intel-based laptop available, a number I was comfortable with after doing the analysis could be adjusted country to country.
Use TCO to your advantage, if you can
TCO can be a powerful marketing tool if your product has a clear advantage in long-term cost savings. These could include lower maintenance costs, longer replacement cycle, lower power usage, etc. A good example is NComputing, which has a thin/network computer solution that allows seven users to use one PC for about a $70 purchase price per user and uses only a few watts per user. They have a TCO calculator that allows users to do their own calculation of cost savings vs. buying seven PC’s.
If your TCO is crap, then don’t market it/ but know what your TCO is exactly, and create talking points for when your competitors bring it up to put you at a disadvantage. And beat up your engineers to enhance your TCO advantage.
Know your supply chain costs
You should know every costs from components and manufacturing to every cost that gets added once it ships from your dock. Have someone evaluate cost-cutting measures at each link in the supply chain. The hardware business is a cutthroat business with razor-thin margins, and everyone is looking to get an advantage somewhere. Never put your eggs in one basket.
Pricing is not absolute. There is no “real price” because time and a zillion other factors can alter it. But it is something everybody wants to know (especially the press). Pay close attention to the choices you make when “marketing” the price of your product, and if you are selling computers, have a dedicated individual or team whose sole mission–is to analyze and cut what costs they can out of the supply chain.