Replacement Value: Be A Comparison Shopper!

Less than two years ago, the literary world cheered when Amazon released the Kindle, its original lightweight electronic book reader. Finally, the e-book would replace the printed word!

Then they took one look at the retail price and stopped cheering. $399? That was more than 10 times the price of a new hardcover bestseller! Would any one actually spend that amount of money on a book display gadget?

A year later, the world plummeted into a Great Recession; gross domestic product collapsed and unemployment soared. So what did Amazon do this past week? They introduced a deluxe version of the Kindle … and raised its price to $489!

Hello, Pace University!

Once again, critics gasped and squawked. $489? Would any one pay $489 for a device that simply displays images of book, newspaper, and magazine pages?

Before we assume that Amazon CEO Jeff Bezos has lost his mind, though, let’s ask ourselves a few brief questions. Where did Bezos announce this new product? Why did he select that location? Who is his target audience? And – here’s the big question – if his target audience decides to pay $489 for a deluxe Kindle, what will the device replace when they use it?

Let’s start with the answer to our first question: Bezos launched the product at Pace University in New York City. Why? Because the new Kindle has a large screen and can display e-textbooks easily.

Yet it can display e-newspapers and e-magazines easily as well. So why not launch it at the New York Public Library? Or in the New York Times building? Or at Conde Nast? Why target students and not other readers?

It’s the Replacement Value, Stupid!

Sure, the new deluxe Kindle can display newspapers, but how much money are newspaper readers paying for their product? Well, if they’re reading the online version of the New York Times, they’re not spending a penny. And even if they pay full price at a newsstand, beginning next month, they’ll only spend $2 per copy. So the cost of a deluxe $489 Kindle is over 200 times the cost of a newstand copy of the Times, and infinitely larger than the cost of free online access.

But what about university students? The deluxe Kindle is designed to provide them with electronic products that can replace their textbooks. At the present time, they spend almost $200 on each book, plus the cost of study guides, sales taxes, and other assorted fees and expenses.

So, let’s think about these costs in terms of replacement value. The cost of an original Kindle was more than 10 times the cost of each hardcover book that it was designed to replace. And the cost of the new Kindle is more than 200 times the cost of each newspaper that it is designed to replace. However, the new Kindle is merely 2 to 3 times the cost of each textbook that it is designed to replace.

That makes the new deluxe product a bargain purchase at $489. After all, for college students who are required to purchase 4 or 5 textbooks each semester, it pays for itself after a single trip to the bookstore. That’s why Amazon is targeting students, and that’s why Bezos made his announcement at Pace University a few days ago.

Choosing A Replacement Target

Sometimes success is simply a matter of choosing a replacement target wisely. For instance, are you a coffee lover? Then perhaps you should consider McDonald’s recent success with your favorite beverage.

Until recently, coffee was simply another item on the menu; then McDonald’s began to position it as a replacement for Starbucks’ brew. They renamed it McCafe, and posted billboards that declared that Four Bucks Is Dumb for a simple cup of java. Suddenly, after being positioned as a replacement for a Starbucks product, McCafe soared in popularity.

That’s a good example of product positioning; now would you care for a bad one? Then consider the luxury box seats at the new Yankee Stadium, the most expensive of which were originally priced at $2,500. Why would any one pay that much money for a ticket to a ball game? Well, the Yankee brass positioned their product to be far more than a game; their fans were buying into unique dining options as well, served in luxury suites with teak arm chairs, personal concierge service, and a private entrance, elevator and concourse.

Unsurprisingly, there was scarce demand for this product, and the Yankees were forced to slash their prices by 50%. Why was there so little demand? Well, the team decided to position their product as a luxurious night on the town instead of a simple night at a ball game. That placed them in direct competition with a Broadway theatrical experience. And even though a steak dinner in Manhattan now costs $300, Broadway orchestra seats now cost $200, and post-theater drinks now cost $100, a luxurious night in the Bronx under the Yankees’ original pricing strategy cost more than 4 times a replacement night under the great white lights of Broadway.

So in the spirit of the Great White Way, to predict whether your show will be a hit or a flop, try thinking like a comparison shopper. Is your product’s price superior to its replacement value? If your customers are going to evaluate your pricing strategy in these terms, you should obviously do the same!