Hearing Charles Arthur, Technology Editor with The Guardian, talk about a “price umbrella” intrigued me. He mentioned these two words in relation to the launch of the iPad Mini and I wondered how a price umbrella works. This is what I’ve since learnt:
- Price umbrella – This term refers to the pricing effect typically created by a market leader. As long as competitors set their price for a similar product within the ‘umbrella’, i.e. at or below the price set by the market leader, they will be able to compete within a specific market space. In other words, by setting high prices, a company can leave room for competitors to come in and compete at a lower price point.
- How to avoid a price umbrella – Ryan Jones has done a really helpful analysis of 3 common steps involved in avoiding the creation of a price umbrella: (1) create a new, cheaper product line (2) keep selling old hardware and (3) get someone else to subsidise the product. Offering different versions of the same product is probably the most obvious way of eliminating or at least lowering the price umbrella.
- Apple’s iPad Mini and the price umbrella – In his blog post, Ryan Jones has visualised Apple’s approach to avoiding a pricing umbrella very neatly (see Fig. 1 below). This graph illustrates perfectly how different versions of Apple’s devices (at different price points and with slight variations in product specification) help in lowering the price point, making it much harder for competitors to enter the market. However, with the iPad Mini currently priced at £269, there’s enough room for similar tablets to compete in the market; enter Google’s Nexus 7, Barnes & Noble’s Nook Simple Touch, Amazon’s Kindle Paperwhite and others.
Main learning point: I now know what a price umbrella is and how companies can leave precious market space for competitors to enter if they’re not careful. Even a dominant force like Apple is not exonerated from this pricing effect as is currently demonstrated by its iPad Mini. However, companies like Apple have become extremely good at continuously innovating and introducing new product versions at lower price points.
Fig. 1 – Apple’s Price Points for the iPhone, iPod and iPod (taken from http://www.iamconcise.com/main/the-reason-for-the-ipad-mini.html)
Related links for further learning: