I dont have so much of a problem with the chip per se, but I just dont see how one can defend it at the price. I think that is proven by the precipitous price drops starting to show up.
Ah the price. It's actually a smart move (from a capitalist's point of view, but since we're all capitalists here (free economic system, right?) perhaps we should say it's the best move from the bean counter's point of view).
It's a thing called "capturing the consumer surplus", and I have no idea if I can do the concept justice in a forum post, but gosh darn, I'm gonna try to explain it anyway!
I don't want to come across as patronizing, but since being an economist isn't a pre-req for being an extreme PC enthusiast, I'm going to assume anyone reading my post has no economic background whatsoever (I'm sure though that most of you have at least taken a class or two in college, or have had some practical exposure due to the office, etc)
I. Pricing
So the Sales Division (SD) says, "Hey, there's this ugly slump in sales! We absolutely can't afford this, because we like to eat and all, and so do our families. Do something, Product Division!"
Product Division (PD) says, "We have no new products, although last week Engineering said they could 'make' a new thing with more voltage and higher clocks. It's gonna be pretty hot and consume 1.21 gigawatts from the flux capacitor alone."
SD : "Perfect! We wanted a lower tier, but a higher tier is even better! Halo product! E-peen! Package it as some breakthrough! 5GHz!"
And so we have a new product (well, two, but let's pretend there is only one). Dubbing it the 9590. Now, the problem the Sales Division and Product Division (and their financial / cost accounting division, whatever) has is how to price it.
Let's start at an arbitrary point, say, $1000 dollars for a CPU that according to Engineering will consume 1.21 gigawatts but be around 10-20% faster than the current high-end Piledriver.
According to the data points that Sales and Product has, they'd sell 3 units at $1000. They ask their financial / cost accounting guys: "Hey, can 3 units sold cover the costs of this play and give us bonus monies?"
Numbers are crunched, and bean counters get back to them: No.
Alright, so what to do? Do we abandon the endeavor since the accounting guys said no profits to be had? Hmmm...
Well, what happens if we lower the price to $900? Well, those 3 people who would buy it at $1,000 will definitely still buy it at $900, so we already have at least 3 people as well. Presumably, a few more - who balked at $1,000.00 - would be enticed to buy the thing. So we'd have, say, maybe 10 buyers at $900.00, compared to only 3 at $1,000.00... and so on and so forth until they get a chart like so:
Price : Forecast
$1,000 : 3
$900.00 : 10
$800.00 : 100
$700.00 : 200
$600.00 : 300
$500.00 : 400
$400.00 : 550
$300.00 : 800
(Of course, these figures are all made up for the sake of this free lecture).
If they consider that the lowest price is $300 ($200 is out because that's the 8350, they say), then they'll find that they sell the most units at $300! Eureka! They are all set to offer it at $300 since that'll sell the most units.
II. Maximizing Profits, not Units Sold
Unfortunately, the cost accounting guys tell them that their rationale is a little off. A business isn't interested in maximizing
units sold, per se. Rather, they are there to maximize
profits - which sometimes means maximizing units sold, sometimes just really jacking up the price.
For this purpose, let's just say that each unit sold takes a good round figure like $150 to create and sell (our simplified Cost of Goods Sold, or COGS). The cost accounting guys show them the profit calculations:
Aha! Although it sells only half the units as the $300 price point, selling for $500 is actually
more profitable as per their own forecast that the cost accounting dudes used!
Properly schooled, Sales and Product hurriedly give the thumbs up to a $500 price point.
Perfect, right? What else could possibly be lacking here?
III. Consumer Surplus
Sales and Product hurriedly write their report so the executives can greenlight the project. In a very non-subtle way, they also hint that they prefer their bonus monies - as a result of this sure-fire successful project - in the form of cash, instead of a paid vacation to Hawaii.
The CFO looks through everything, sees the chart pasted above from the bean counters, and grows uneasy. If we offer the product at $500, we have atleast, according to Sales and Product, 300 customers who would have gladly paid more, but now would not have to. He whips out his LibreOffice Calc spreadsheet (AMD has no money for real Excel, right?
) and further tortures himself with just how much money is lost by not offering the product at higher than $500:
The CFO doesn't like what he sees. By offering it solely at a $500 price point, the forecast also shows that $63K of potential profit was foregone. This $63K is the total of what consumers would have willingly paid for anyway, but then the product was priced lower than their limit, so they happily kept the change and kept their wallets fatter than expected. The capitalist spirit in the CFO hates that thought, it chilled his spine and made him sweat cold little beads.
Gosh darn it, if customers are willing to spend that extra money, then I want to get it, give them to me! He shouts this back to the cost accounting dudes, who then meet with Sales and Products again.
This potential profit ($63K) that is lost is called the
consumer surplus. They (consumers / customers) would have spent that money on your product gladly, but due to your set price, they just gladly went home with extra money.
IV. Capturing Consumer Surplus
This is where ridiculous launch prices come in. And if you've been following me so far, you'd understand this goes not just for the 1.21 gigawatt CPU's in question, but for practically every product - which for us notably includes GPUs.
If I were in the CFO's place, using the chart above, I would ask them to launch the product in question at $800, to be able to capture the consumer surplus which amounts to a significant 5-digit figure profit. Then, lower the price point (several steps in several months, or just one step, whatever they decide) to be able to eventually reach $500 price point which is the most profitable price point.
This is just one way that shows
capturing consumer surplus.
Now, go back to months or years back, when you may have ranted about ridiculous launch prices of a new line of video cards. Card X launches at a ridiculous $499 (and you then dutifully ranted at the AT comments section how you will never buy Card X for that ridiculous price), then gets price-reduced to $399 after several months, then gets price-reduced again to $349 few months later, before ending with a final cut at $329 ~1.5 years after the launch.
Those price-cuts are a technique to capture consumer surplus. Sure, if they launched at $329 to begin with, you wouldn't have ranted about it. But the bean counters, the dutiful, business-minded capitalists that they are, don't want the potential profits at $499, $399, and $349 to go to waste - after all, while you may have passionately ranted about it, there are others who wouldn't think twice about $499 for Card X. The company wants their money, so they take those first, before taking the monies of those who would only spend $329.
Same here. We can assume that the 9590 was priced at a ridiculous $1000 before offering it at the actual profitable baseline price point of $300, is because they saw it was a waste to just offer it at $300 right off the bat if there are people who would gladly pay the $1000 for it. They want that consumer surplus, and if it indeed exists, it is their duty to get as much of it as possible.
There you go. I've oversimplified some of the concepts, but I hope I got the point across. When we enthusiasts rant about ridiculous prices, what we are really ranting about is
businesses being businesses. They are merely capturing the consumer surplus to further increase profit from the baseline "most profitable price point".
Cheers!
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