Power

Component costs are rising. Gadget makers are getting creative to avoid price increases.

The global chip shortage is causing component costs to go up, so hardware makers are finding new ways to keep their prices low.

An employee changes a price placard in the grocery section of a Wal-Mart Supercenter.

Chips are getting more expensive, but most consumer electronics companies have so far resisted price increases.

Photo: Chris Hondros/Getty Images

How do you get people to pay more for your products while avoiding sticker shock? That's a question consumer electronics companies are grappling with as worldwide chip shortages and component cost increases are squeezing their bottom lines.

One way to do it: Make more expensive and higher-margin products seem like a good deal to customers.

Roku, for instance, decided not to raise prices on any of its existing products. Instead, it introduced a new premium dongle called the Roku Streaming Stick 4K+ this week that's $69.99 — $20 more than last year's Streaming Stick+, whose successor, the less costly alternative to the new 4K+, is now being branded Streaming Stick 4K.

Hardware makers have long used so-called "good-better-best" pricing strategies to differentiate product tiers. Pricing structures generally relate to actual differences in product features, but often the way things are priced is because of what pricing experts describe as the Goldilocks effect. "Goldilocks didn't want her porridge too hot or too cold," said pricing strategy consultant Rafi Mohammed. And just like in the fairytale, offering three pricing tiers will steer buyers away from the lowest-priced option. "People will choose the middle product," he said.

Roku actually already offered good-better-best pricing; the company has been selling an entry-level streaming adapter for $30, a midtier model for $40, and a $50 top-of-the-line streaming stick. With the addition of the new $70 Roku Streaming Stick 4K+, spending $50 on what used to be the high-end choice suddenly seems like a much better deal. This makes the $70 product an important part of the lineup, even if few people end up buying it. "Sometimes, you have to use this as an anchoring," Mohammed said.

Roku isn't the only company that has been quietly shifting the goalposts on what a good deal looks like. After increasing the price of its full-sized phone by $100 last year, Apple kept prices for this year's iPhone 13 unchanged. However, Apple did use last week's hardware event to introduce a new top-of-the-line option, with the iPhone 13 Pro Max now being available with 1TB of onboard storage for $1,599. It's the most expensive iPhone ever, and it makes some of the company's other devices look like a steal.

A lot more affordable, but still priced with the same logic, is Amazon's newest streaming stick. The Fire TV Stick 4K Max will cost $54.99 when it goes on sale next month. That's just $5 more than the company's regular Fire TV Stick 4K, but even those few extra dollars give Amazon a lot more room to play with discounts. At the time of writing, the 4K stick was retailing for just $39.99.

Amazon has also been using anchoring as a pricing strategy at the bottom end of its lineup. Last year the company introduced a Fire TV Stick Lite that's virtually identical to its baseline Fire TV Stick, but ships with a less capable remote control. Inferior products that are marketed clearly as such can create goodwill with shoppers, Mohammed explained. "People don't want to feel ripped off," he said. "In their mind, they code this as being very fair."

Not every company is going with these kinds of lineup tweaks to make up for component-related cost increases. Sonos raised prices for the majority of its products this month, and is now asking consumers to pay as much as $100 more for some of its devices. Sonos CFO Brittany Bagley had teased the price increase during the company's fiscal Q3 earnings call last month, during which she also admitted that chip shortages were having a notable impact, both in terms of margins as well as inventory delays. "We, and others across the industry, are seeing significant increases in constraints on a variety of components," Bagley said.

That kind of transparency can be important. "No one wants to hear we raised our price because we need our stock price to go up and we need to make more profit," Mohammed said. His recommendation to companies considering a price increase is to communicate openly about it, but also use it as an opportunity to fine-tune pricing for every product. "Doing a price increase across the board just doesn't make any sense," he said. "Some of your products, over time, may have become more valuable than others. Maybe [you] mispriced something. With this price increase, you can also capture additional value for products that you hadn't priced correctly."

Tracking the real impact of the chipset shortage on big consumer electronics companies can be challenging, especially when those companies constantly fine-tune their pricing and model lineups even during good times. With a shopping holiday named after its subscription program, Amazon has long been a master of targeted and strategic discounts. Not including limited editions, Amazon has sold seven different versions of its streaming adapters since 2019, which have seen more than 60 multiday price cuts in 2019 and 2020 alone, according to data from Amazon price-tracking site Keepa.com.

On average, Amazon has been discounting each of its streaming products around eight times per year for multiple days at a time. The company's streaming sticks in particular are seeing price cuts almost every month. However, even a tech giant like Amazon has not been immune to COVID-induced shortages. When the pandemic hit the U.S. in full swing in March 2020, the company paused discounts across its entire streaming device portfolio. For almost three months, people could only buy Fire TV products at full price.

Finding the right response to the chip crisis hasn't been easy for Roku, either. "It's been a challenge," admitted VP of Product Strategy Mark Ely during a recent conversation with Protocol. "We didn't want to increase pricing." Roku has long relied on using streaming hardware as a way to attract an audience that is then monetized via advertising and other services revenue streams, and the company has been warning its investors for months that it is selling some of its streaming hardware below cost in response to higher component prices.

"The rules of math still apply," Ely said.

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