Costs don’t drive pricing, willingness to pay drives prices.
I remember 1989. Yes. I’m that old? I was selling automatic test equipment to the semiconductor industry, and I heard this story on the radio that changed the way.
I thought about pricing and costs forever. Intel built the 46 DX, which is the very first dual-core microprocessor in the world. Very expensive.
Of course, AMD decided they were going to create a single core version and they charged a much lower price.
“We should stop overemphasizing our costs, especially when we’re trying to set pricing. It’s really about customer value.” – Mark Stiving
So they’ve taken a lot of business away from it.
Yeah. Intel’s thinking ‘Hey, we better do something’.
So Intel creates a single-core version of their microprocessor and they charge a price more competitive with AMD. And so now they’re not losing quite as much business. Now, this story makes all the sense in the world until you learn how Intel made the SX.
They first made a DX, a dual-core processor, and then they took an extra manufacturing step with a laser to disable the coprocessor. It actually costs them more to build an SX, a single-core version than it did to build the dual-core version.
And yet they sold it at a much lower price. Well, how does that possibly make sense?
It makes sense because. Our costs. Aren’t what drives our customer’s willingness to pay?
It’s the value to the customer that drives their willingness to pay.
We should stop overemphasizing our costs, especially when we’re trying to set pricing. It’s really about customer value.
We hope you enjoyed this podcast. If you see have any questions or feedback please email me firstname.lastname@example.org.
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