iPhone, Nano and Pricing Models

Niranjan Rajadhyaksha — Sat, 16 Aug 2008 04:01:00 GMT

American consumers spent more on fuel than on cars in May and June, says Bloomberg in this story.

"Prices of cars, particularly on a quality-adjusted basis, have been trending lower for many years, and the price of gasoline is obviously hugely higher over the past few years,'' said Dana Johnson, chief economist at Comerica Bank in Dallas. "The two trends have crossed.''

With variable costs (fuel) rising faster than fixed costs (cars), I wonder how this will change the dynamics of the global auto market. What do consumers really prefer: cheap cars or cheap fuel?

This is a choice Indian consumers will soon have to deal with, as Tata Motors starts selling the Nano. What the company has actually done is to bring down fixed costs for wannabe car owners even as variable costs go up because of high petrol prices. (Ok, I know that global crude oil prices have fallen sharply over the past month, but they are still far above their multi-year average.)

The Nano could be an interesting strategic counterpoint to what happened in telecom. There, the explosion in demand for mobile telephones was led by the steep fall in variable costs (the price of a call) while the fall in fixed costs (the actual phone) was far more moderate, especially in the early years of the telecom boom.

Steve Jobs is going the other way. His pricing model for the 3G iPhone involves a cross-subsidy: the cost of the phone is being subsidised by telecom operators who will charge more per call. Or, in other words, fixed costs will be held low while variable costs will be pushed up. This has allowed him to slash entry costs for consumers.

So which strategy makes sense: what Jobs and Tata are trying to do or what Sunil Mittal and Mukesh Ambani did?

A B-school case study in the making?

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An Awkward Corner : cars

iPhone, Nano and Pricing Models