Rafi Mohammed

Kodak: I Apologize For My Pessimism, Your New Pricing Strategy Will Definitely Shake Up The Market

Posted on February 8th, 2007 (0 Comments)

A few weeks ago, I wrote a blog expressing pessimism over Kodak’s new inkjet printer pricing strategy. With new details of Kodak’s price strategy and product emerging this week, it’s clear that Kodak has the potential to, using a Clayton Christensen metaphor, “disrupt” the inkjet printer industry and its pricing model.

Today, inkjet printers use what is commonly referred to as a razor/razor blade model (note, this term is a misnomer, I’ll address this in tomorrow’s blog): sell the printer cheap and make your money on inkjet refills. As William Bulkeley noted in his February 6 Wall Street Journal article (“Kodak’s Strategy For First Printer – Cheaper Cartridges”), today the ink in inkjet cartridges is priced more per ounce than perfume or caviar. Thus, it should be no surprise that the number one complaint amongst inkjet consumers is “it’s too expensive to print my pictures.”

Kudos to Kodak for offering a new pricing model to address this consumer opportunity. This week Kodak introduced a new line of printers that are priced at about $50 more than comparable printers. Here’s where it gets interesting, Kodak is pricing replacement ink cartridges at half of what rivals price their cartridges and in addition, offering more ink in each cartridge. Boy, that’s a significant price and value change! Using these discounted print cartridges and volume paper packages, Kodak claims that its prints can cost as little as 10 cents each – which is much lower than the 29 cent cost of current home printers and 19 cent retail store prices. Of course, given my interest in pricing and profits, I wonder why Kodak didn’t price its cartridges so the cost per print would be, say 14.5 cents (vs. its current 10 cents) – even at this price, it could claim a 50% lower price per print relative to rival printers (29 cents) and still handily beat retail store prices (19 cents). With a net profit margin of less than 1 percent ($17 million in profits on $3.82 billion of revenue for Q4 - 2006), every penny counts for Kodak.

This new pricing model is attractive for three key reasons: (1) High volume users will immediately understand the savings, (2) Even low volume users may psychologically prefer Kodak’s pricing model – it’s a lot easier to press the print button at 10 cents a picture than at 29 cents, even if I did pay $50 more for the printer, (3) With lower costs, consumers will print more often. Kodak’s new pricing strategy is akin to the Costco model – pay more up front and receive lower prices on every shopping trip.

Kodak’s value is not limited to low prices, the company claims to offer a superior product. For example, its ink is purported to offer more vivid colors and be longer lasting relative to competitors – the company claims its revolutionary ink will last for 100 years compared to the 15 year life of ink used in printer cartridges today.

As I’ve laid it out, Kodak’s value proposition certainly sounds attractive. But how long can the company sustain its eye-catching per print price differential relative to competitors (10 vs. 29 cents). How are rivals going to react? I can assure you that companies like Hewlett Packard aren’t going to sit on the sidelines watching customers defect. Jim Forrest, an analyst at Lycra Research claims that current manufacturers make as much as 75% profit from printer cartridge sales. That’s a lot of margin to play around with! You may be thinking since it’s premium priced, Kodak will make money off of the printer. Nope - analysts estimate that Kodak will not start making money until a customer has purchased 4 printer refills (thus, the printers must be selling at a loss).

Here’s my forecast for future ink refill prices: d-e-e-p d-i-s-c-o-u-n-t-s. They don’t call me the Carnac of Pricing for nothing…so start snapping more pictures. The upcoming price war is going to make it a lot easier to hit that print button! And for Kodak, even if rivals come close to matching prices, its high quality still makes it a strong contender in the inkjet printer market.

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