Price Inflation of Technologies at Release and Cost Reduction Arcs
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Definitions
Technology price inflation may be defined as the tendency for technology companies to set their product price points at a premium during the first few months of a product's life cycle. The primary purpose of this business model is to single out early adopters of the technology as individuals prone to go out of their way with both time and money to experiment with new technologies and be at the front of the pack for product adoption.
A cost reduction arc on the other hand, is the tail end model that follows a preliminary product inflation period and sets the downward trend for both pricing and promotion. Generally, the most efficient reduction arcs will allow a company enough time to develop and refine their products in a manner which allows them to pass along the savings from more efficient manufacturing, as opposed to taking direct cuts in profit or even producing losses from lowering the price of an item.
Overview
The reason product inflation periods and their subsequent cost reduction arcs are so very important to technology companies is because the price points set for these periods will determine both the short term and long term profit, adoption, and overall success of their product. If the initial price point during a product's inflation period is too high then you can see poor adoption from tech savvy consumers which could trickle down and create a negative situation with the general populace. If you set the price of inflation too low then your company is undercutting their own business and not being as profitable as ultimately possible.
Conversely during the reduction arc period of a product if a company does not perpetuate perceived value with price drops, bundles and other promotions, than the consumer will move to another product with better features and more competitive pricing. A technology business cannot maintain product pricing at the same point for the entire production cycle because there will always be some new technology just around the bend that will be smaller, faster, sleeker and priced more effectively.
History
Inflation of prices in general has been something that the American population has had to deal with for practically our entire history as a country. General inflation however is more dependent on basic economic factors and principles, where as inflation of pricing for products at release is more a direct result of consumer demand and wide scale anticipation. It should also be noted that at times throughout history consumer demand has been the sole driving factor in a product's artificial cost inflation.
One distinct example of this situation would be the iPhone when it was initially released. Not only did Apple have the ability to set a product premium during the iPhone's release window due to the fact that it was incorporating brand new touch screen technologies, but additionally consumer demand was so high that even a secondary market on eBay opened and early consumers were able to profit from this demand by marking up the product to even higher prices than that of its street value.
This type of secondary market and artificial inflation has happened many times in the past few years with a number of different products such as game systems, phones, ipods and numerous others.
Examples
Playstation 3
November 17th 2006 - The PS3 is released in America with two different versions available to consumers. [1]
20GB version for $499.99
60GB version for $599.99
September 1st 2009 - The PS3 Slim is introduced for a reduced price. [2] The unit is "33 percent smaller, 36 percent lighter, roughly as tall [as the original unity], but thinner, with a matte finish all around." [3]
120GB slim version for $299.99
160GB version for $399.99
iPhone
June 29, 2007 - The iPhone is released in the United States. [4]
$599.99 for an 8GB model + cost of service plan
$499.99 for a 4GB model + cost of service plan
September 5, 2007 - The iPhone gets a price reduction and its smaller model is discontinued. [5]
$399.99 for the 8GB model + cost of service plan
July 11 2008 - iPhone 3GS released.
$199.99 + cost of service and data plans
Possibilities for Future Exploitation
In the future I believe that we will continue to see technology companies exploiting the fact that they can charge a premium in the industry for early adopters. It's the nature of the beast that there will always be something bigger and better just around the corner waiting to be released, and additionally because of this their will always be consumer demand that will feed into product release price inflation. All one needs to do is look at the slew of new products currently on the market to realize that this practice is still going on and will continue in the future.
References
Altizer, Roger. "Playstation 3 (PS3) Revealed Before E3." About.com: Playstation Games. May 2007. About.com, Web. 4 Nov 2009. <http://playstation.about.com/od/ps3/a/PS3SpecsDetails.htm>.
Dumpala, Preethi. "Sony Finally Cuts PS3 Price: Now $299." The Business Insider. 18 Aug 2009. The Business Insider, Inc., Web. 4 Nov 2009. <http://www.businessinsider.com/sony-cuts-price-of-ps3-to-299-2009-8>.
Kerris, Natalie. "Apple Sets iPhone Price at $399 for this Holiday Season." Apple.com. 05 Sep 2007. Apple, Web. 4 Nov 2009. <http://www.apple.com/pr/library/2007/09/05iphone.html>.
Menta, Richard. "iPhone: Hundreds Come, Lines Orderly." MP3newswire.net. 29 Jun 2007. MP3Newswire, Web. 4 Nov 2009. <http://www.mp3newswire.net/stories/7002/iphone-line.html>.
Peckham, Matt. "GDC: Sony Reveals PS3 Slim, Slashes PS3 Price to $300." PC World. 18 Aug 2009. PC World Communications Inc., Web. 4 Nov 2009. <http://www.pcworld.com/article/170393/gdc_sony_reveals_ps3_slim_slashes_ps3_price_to_300.html>.
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