# Stop & Shop’s mesmerizing 1% gasoline giveaway

Stop & Shop, the northeastern U.S. grocery chain, has created a fascinating loyalty program tied to gasoline. If you use a loyalty card to buy groceries, you can later swipe that card at participating gas stations for supposedly big savings. Here’s the pitch:

“Save 10 cents per gallon for every 100 Gas Rewards points.
Earn 1 point for every \$1 you spend with your Stop & Shop card.”

I love this (and, confession, I use this), because nothing feels better than pulling up at a gas station, flashing my Stop & Shop card, and seeing the price per gallon fall. But one day, I did the math … and realized all of this effort was saving me only 1%. In aggregate, I calculate Stop & Shop only gives away 0.25% of all its grocery revenue to fund this program.

What gives? This tactic is called “price obscurity,” a version of price framing in which the true value of a bundled product and its price is obscured by making it complex. This Stop & Shop program feels like a huge savings, when really it’s tiny.

Here’s the math. Look closely at the promotion, and you’ll notice the discount is broken into two lines:

Save 10 cents per gallon for 100 points …
… earn 1 point for every \$1 you spend (on groceries).

Hm. Humans aren’t good at mentally calculating currency exchanges, and a double exchange is even trickier. It’s no mistake that the marketers broke this promotion into two lines that are hard to connect. So let’s move the equation into one line. We’ll also need to revise the second line to \$100 in spending, so it will match up with the first. Finally, we’ll reverse the order, starting with your grocery purchase so it makes more sense:

Spend \$100 on groceries = 100 points = 10 cents off per gallon.

That’s better. But wait. What is \$1 in grocery spending worth then? If we factor it all down by 1/100…

Spend \$1 on groceries = 1 point = 0.1 cent off per gallon.

Hm. That’s not quite as sexy. For every buck spent, I save 1/1000 of a buck on gasoline? Stop & Shop is giving me 0.1 cents off per gallon? Well, to be fair, the average car fill up might be 10 gallons, so that means my 0.1 cent off per gallon would save me 1 full cent after 10 gallons. That is, our final math:

Spend \$1 on groceries = 1 point = 0.1 cent off per gallon * 10 gallons average = 1 cent saved!

A dollar spent is a penny saved. That’s OK, about in line with every other rewards program out there (see: credit card cash back offers). But a penny is not a huge savings, and it sure isn’t as sexy as the promotions offering 10 cents, 20 cents, or 30 cents off per gallon … or more!

This brilliant promotion is giving Stop & Shop major buzz all for 1% savings. The grocery store likely benefits as well from slippage, the half of customers who won’t care about participating and then the portion of the remainder who likely stop by a participating Shell or Stop & Shop gas station only every other fill-up … meaning its true cost for this promotion could be 0.25% or less of all grocery revenue. Points also expire in 30 days. You get the idea.

So, 1% total potential return on grocery spending, for the fraction of customers who remember. That’s chump change … but I confess, it still feels great. I’ve swung by and “saved” 30 cents off per gallon in a recent fill-up. Tied, obviously, to \$300 in recent grocery spending for my 1/1000 return per gallon price savings, which at 10 gallons saved me 3 bucks, or 1% back from my groceries … er. Logic be damned. Stop & Shop, you made me feel good with your clever math, and odds are I’ll keep driving back.

# The miraculous illusion of Amazon’s free shipping

People are funny about perceiving value. We all want value — we run mental calculators in our minds, trying to predict transactions of love or money in our favor, and yet typically we suck at this. In a world of millions of products, we can’t tell if \$400 for a leather coat or \$20 for a book is a good deal. So most companies resort to pricing games to bend our minds into a state where we feel we’re getting value.

My favorite pricing gambit is Amazon Prime — a daring attempt by Amazon to convince us that every time we drop scores of dollars on an order, the shipping that supports that purchase is “free.”

Yeah.

Amazon is playing a classic pricing game, used by everyone from Apple to Walmart, to make the perceived value of a purchase feel better. It includes a basic reference price — first, set up a higher price, or in this case, “shipping costs X” … and then discount below it, in this case, “shipping costs \$0.” It also uses price obscurity, bundling the real cost of something into an unusual package (sort of like candy sold in unusual package sizes at movie theaters). Amazon Prime costs \$79 annually. If you pay, Amazon says you get “free” shipping for one year plus streaming of some video content, and one free Kindle book to rent monthly. Voila! We feel like we’re getting a deal.

First, obviously, shipping costs something. There are no magic elves delivering books, and the guy in the big brown truck in your driveway makes a salary. Analysts have figured this Prime fee actually costs Amazon \$90 in shipping and streaming services for a typical customer, so Amazon loses money per “Prime” customer … if you only count the cost of shipping and streaming. For every \$79 covering shipping costs that comes in, Amazon spends \$11 more than that to ship stuff out. All told, Amazon in 2011 had shipping revenue of \$1.55 billion but paid out \$3.99 billion in shipping and fulfillment costs, for a net loss on shipping of \$2.4 billion. Yep, Amazon lost billions to get goods to your home.

But what about all the profit from all those books and clothes and shoes you order via Amazon.com?

Well, that is big. In 2011, Amazon made \$48 billion in sales and \$631 million in net income. That works out to a 1.3% profit margin per customer order — thin, because this is a competitive business, but one that Amazon certainly wants to scale. And “free shipping” is helping the company grow. Amazon sales have been accelerating, up 41% overall in 2011 vs. 40% in 2010 and 28% in 2009. Amazon notes in its annual report that “increased unit sales were driven largely by our continued efforts to reduce prices for customers, including from our shipping offers…”

When you add it up, it’s a clever gambit. Amazon loses \$2.4 billion in shipping and fulfillment to gain \$48 billion in sales … while jacking up growth to please investors at a torrid 41% rate per year. In balance, Amazon comes out way ahead. And all of this growth — in a world where Amazon has been the top e-commerce player for years — means on average, you’re likely spending 41% more at Amazon.com each year. Other retailers have noticed, which is why you’ll see “free shipping” on nearly every e-commerce site this holiday season. Morgan Stanley has predicted Amazon may approach \$100 billion in sales by 2015, simply by moving its spending per customer from the current \$275 per year today closer to the \$750 per customer spent at Walmart.

Oops. Did you catch that? The typical Amazon customer spends \$275 annually there today. If you sign up for \$79 in Prime free shipping above that, \$79/(\$275 + \$79) or 22% of your annual spending goes to … free shipping.

So go ahead, get that shipping deal. At least, it feels like a deal if you don’t do the math.

Image: Selva

# The future of variable pricing

Yes, you should charge some customers more than others. To understand this concept of “variable pricing,” let’s play a mind game. Imagine you walk into a restaurant, read the menu and discover this new place serves only pork chops. You call the waiter over and ask, “why only pork chops?,” and he responds “our chef has found the average person likes the average meal of pork chops, so we only serve what the average person wants.” You’d walk out, thinking, wow, idiots!

Most companies price goods the same way — setting an average price that an average consumer will find appealing. The old Econ 101 textbooks talk about markets setting prices, with supply shortages or growing demand pushing prices up, and inventory growth and consumer apathy pushing prices down. But the inference is at any one time, there is one perfect price for any one product, because 100 years ago all marketers could do was gauge overall market demand. Adam Smith’s Invisible Hand moved all prices for a given good in one swoop. Companies do this today; when the iPad 3 launches, Apple will likely price it at \$500 for everybody.

But why charge everyone the same price? Shouldn’t the tech-geek salivating over the new iPad 3 be hit with a \$1,000 bill, because he’d willingly pay it, and the mom at home who isn’t too hot on tech be charged only \$300? Their levels of desire are different, so these customers could and should be charged different prices. If Apple could find an even split audience, it would average \$650 per unit for that glorious new tablet with retina display — jacking margins up \$150 while keeping everyone happy.

Yet even Apple with all its smarts hasn’t figured out how to charge you or me differently based on our individual need states. Variable prices are used by some marketers, but usually only in four blunt ways: (a) a hook to lure in new customers (see magazine “30% off for subscription” deals), (b) discounts that self-select cheapskates (see grocery store coupons that give only those who clip them 50 cents off a can of beans), and (c) incentives to stop customer defection (try calling your cable company tonight threatening to quit to DISH and they’ll drop your monthly bill by \$20). These first three ways differentiate customers to either build new acquisitions, solve a problem of a subset hypersensitive to price, or stop churn. What is common is they all threat mass subgroups of customers the same.

The fourth version of price variation is tied to timing — cycling through price hikes or drops. Apple is brilliant at this, rapidly moving all its products through price reductions (say, an iPhone priced at \$500, then \$400, \$300, \$100, of course all with backend data subscription offsets) usually timed to push old product inventory as a newer version launches. But again, it’s treating all segments of customers the same at any given time.

But what if a fifth pricing approach, one-to-one pricing, were possible?

If you and I are different people, we obviously want things at different levels. Desire is not a binary on-off switch; we may both want a new pair of cowboy boots, but you kinda want them now and I’m burning to get a new pair. So I’d be willing to pay \$200 and you only \$100 if marketers could see inside our heads. By setting the price of the boots at \$120, marketers are aiming toward an imperfect average — making me happy, and trying to push you up a little in what you’d pay — but I could give them more margin, and you less, for more overall profit if only prices were tied to our individual desires. I should pay \$200 and you \$100. The average shoots to \$150. We’re happier, and the leather-stitcher is richer.

The only thing stopping marketers from reaching a perfect, one-to-one variable pricing strategy has been the inefficient exchange of information. People’s needs and desires change hourly; demand is constantly in flux, rising and falling like a Twitter meme; no computer systems have been able to track this opportunity to the moment, so marketers take broad cuts at the problem, charging first-class airline passengers more for the illusion of cushier seats, or dropping utility bills for new customer sign-ups. The only organizations good at this are B2B groups such as management consultants, who can take the time to carefully scope the hunger of a potential client and price services accordingly. (The technical term for this price approach is FMA, or “from my ass.”)

This will change soon. All that is needed is technology to identify consumers’ “need state” — how much they crave a product now — and output technology to change the price offer.

What are the input technologies? Mobile phones are soon adding NFC wireless technology to become mobile wallets; apps such as Square and others may leapfrog the technology with customer identification tech tied to your bank or credit accounts. LBS pinpoints your location on maps, and the technology is getting so good Google Maps recently began showing the store locations inside malls as you walk around, differentiating whether you are on the first or second floor. Social media connectivity means your personal ID can be had if you walk into a geo-fenced location. Soon, if you walk into a wine store, they will know who you are, what aisle you’re in, what you like, your customer lifetime value (estimated stream of future profits), and your social network.

What are the output technologies? Digital screens, of course, are getting cheap. E Ink and the like could make labels and price tags variable, morphing instantly based on the customer approaching them.

The future is rather obvious. You and I walk into the clothing store, and the leather jacket tag flashes \$500 for you if you really, really want it, but only \$300 for me if I sorta, kinda want it. Rather than timing mass pricing to mass market demand, variable pricing would dynamically change to maximize the match of consumer desire with marketer profit.

Does this seem unfair? Of course, but treating people differently is part of life. If you have two children, you send them to two different grades based on their age. You give you wife and mother two different gifts for Valentine’s Day. If you coach track, you push the high school athletes at different levels based on their starting endurance and speed.

Changing pricing to an individual, one-to-one level is simply marketing efficiency taken to the ultimate conclusion. Technology will soon make it happen, just as certain as the coupon in Sunday’s newspaper will let you buy coffee at the supermarket for 35% off while I pay full fare.

One-to-one pricing will happen. I probably shouldn’t have confessed I really want those cowboy boots.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Jef Safi

# Tim Hortons’ brilliantly disguised price increase

How do you raise your prices while convincing customers to buy more while making customers think they’re getting a better deal?

Tim Hortons, the Canadian donut chain, just did all this brilliantly. Hortons simply shifted the size of all of its cups up a notch: a “small” is now a “medium,” a “medium” now a “large,” etc. Hortons notes in its fine print that this “isn’t a change in the price or actual amount of beverage” — which means customers will pay the same per ounce of coffee. At first, this seems a fair deal, but now consider the likely scenario.

A regular customer walks in and orders her “medium” coffee in the morning … and is handed a larger cup. With more ounces. At a greater overall cost.

Our customer, bleary-eyed and thirsty for her Morning Joe, has a choice — return the coffee for what now has a “smaller” size name, or keep the larger size. If she sticks with the new cup size, she’ll be ordering more coffee every day, and pay more for it. Yet she walks out carrying a larger cup, feeling like she’s getting more at Tim Hortons after all.

This form of pricing is called “price obscurity,” a clever ploy to gain more revenue per sale by making it difficult to judge what you’re really getting. You’ve seen this before at movie theaters that give you a strange, extra-large size box of candy that costs \$4 or \$5. Is that a good deal? Of course you can’t tell, because the packaging obscures the value of the candy inside. If you’re still confused, play Hortons’ strategy to the extreme, and imagine if ordering a “small” coffee returned you a gallon that cost \$30. Is that still a good deal?

Tim Hortons may not be charging more per ounce, but it is charging more per “size,” and sizes are what coffee customers order. Well played, Hortons. We bet your profit on this new pricing will be extra large.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

# Netflix kills Qwikster — yet still buries DVDs

Netflix announced today it will go back to business as usual, give up renaming its DVD-by-mail service Qwikster, and allow consumers to order movies for both streaming and mail from one web site. With the stock price down 61%, Reed Hastings beat a hasty retreat from his vision of making Netflix purely a streaming firm. NYT reports Hastings joked on Facebook that his investors might poison him.

Which is sad, because Hastings was absolutely right. Netflix pissed off consumers with its price hike this summer, pushing fees for combined mail rentals and streaming from \$10 to \$16 per month, causing screams. But that was a bargain compared to the \$75 per month average U.S. cable bill. Before that price hike, streaming cost \$8 a month and DVDs were a \$2 surcharge — yet it costs Netflix a full \$1 to ship every DVD to home by mail. The economics make no sense, and the consumer outrage is a perfect example of the illogical way people respond to prices based not on value, but on a perceived reference point. The same animal instinct that makes us feel good when we buy a leather jacket for \$300 “marked down 50% from \$600,” a fake reference price that never really existed, triggers fury when we suddenly have to pay \$6 more for a fantastic service previously priced at an insanely low \$10.

What The New York Times and other media miss today is Netflix, while superficially apologetic, remains completely focused on streaming and killing DVDs — as they should. The Netflix home page mentions DVDs by mail nowhere; click on the main offer, and the second “unlimited TV episodes & movies” landing page focuses almost entirely on the streaming service, with only one tiny text link at the bottom left posing “Can I get DVDs by mail from Netflix?” If I did not want anyone to sign up for the mail service, but had to offer it, this is exactly how I’d bury it.

Netflix tried to fire its DVD customers, but couldn’t. So now, it’s simply going to migrate quietly away from them.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Originally posted on G+.

# The Daily’s clever price decoy

Quick, which of the “subscribe now” offers above is a good deal?

Neither. It’s all a game of price decoys from The Daily, Rupert Murdoch’s flashy news magazine designed specifically for the iPad. Decoys are a form of price framing, in which consumers are given a somewhat bad-feeling deal that is meant to steer them to the second-best thing.

Decoys work because most of us want to feel smart, and yet all of us are inherently bad at judging value. Is a leather jacket worth \$400? You don’t know … until someone tells you it’s marked down from \$650, then it feels great! And if you haggle the price down more to \$350, you walk out of the store a self-proclaimed hero. But you just shelled out \$350 for a piece of stitched animal skin … perhaps truly worth only \$70. When consumers are offered a “better deal than X,” or “20% off Y,” they can more easily satisfy the childish Id’s need to negotiate at every possible turn whether or not that process achieves true value.

Let’s watch how The Daily does it. If you download The Daily’s iPad app, you’ll get to read the magazine for about a week, and then a window pops up warning you, oops, you’re going to have to subscribe in seven days. Two green boxes give two choices:

Option 1: Only 99 cents per week to subscribe! That sounds low, so people bad at math might leap at that. (Bonus revenue for The Daily, cleverly raising rates on the portion of their audience self-selected for low IQs.) Like an ugly house a Realtor shows you before taking you to the house she really wants to sell you, this subscription offer is the price decoy.

Option 2: Only \$39.99 a year! This is actually \$12 less a year than Option 1, so people good at math will take this as the better offer. A-ha, you think, I’ve outsmarted The Daily, and I will go for Option 2, a better deal!

Of course, the pricing for either option is absolutely arbitrary. The Daily has already gotten you to download the app, and it has no incremental cost to distribute one more copy daily to your iPad, since you are paying for the Wi-Fi or 3G signal that delivers it. But by giving you a choice, The Daily has slowed you down enough to check out each offer, and to try to determine which is the better value. Since one price must be better than the other, you’ll feel good no matter which you pick. Right?

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

# Modeling how NYT’s paywall will survive, in 6 steps

As newspapers face plummeting circulations and an audience reluctant to pay for any online content, erecting a paywall is risky business. The New York Times announced just such a wall this week — a careful gambit in which it will continue to give readers 20 free articles a month (or more if you land from Google search), but for the 21st article on you must subscribe at \$15 per month for web and phone access, \$20 for tablets, or \$35 for all combined gizmos.

The question on everyone’s mind is: Will NYT get creamed by fleeing readers? Curious, we modeled scenarios for how the Times might actually profit without killing itself. These are guesses of course, but let’s play the game through.

Step 1: Take 10,000 NYT online readers and divide into 10 equal deciles.

Here’s what a sample portion of the Times’ audience looks like, with 10,000 readers apportioned to 10 equal groups of 1,000 (deciles). For each step in the following analysis, we’ll track the movement of readers and revenue from the starting point of these first 10 deciles.

Step 2: Estimate how many articles each group reads.

The Times keeps its online readers’ behavior a trade secret, of course, but we know that within the 10 customer deciles, some are light readers and others are ravenous for news. Let’s assume that the bottom half (deciles 1-5) read fewer than 20 articles a month, and the top half (deciles 6-10) read more, with each tier having heavier usage. We’ve estimated the most ardent readers of the Times read 180 articles a month, or about 6 pieces per day. So far, so good.

Step 3: Estimate the current online ad revenue.

Whoa! Only \$5.93 per reader per month? You can see why the Times is interested in making money from online subscription fees. Next, let’s forecast what happens to this merry reading crew once the paywall goes up.

Step 4: Estimate the audience shift after paywall.

WHAT? YOU WANT US TO PAY?! Now, no one knows how the audience will respond, but the Times has been clever. Half the readers won’t feel any pain at all. Everyone gets 20 articles a month for free, and the paywall only looms for the most fervent fans of NYT’s coverage, most likely to be forgiving. So let’s assume true losses — customers ticked off enough to leave the Times forever — are minimal at about 5% of the readers in the top half of usage deciles. So the Times overall would lose only 2.5% of all readers for good. Let’s then assume that about 25% of the high-reader groups, or 12.5% of all online readers, subscribe, and the remainder “shift” to tier 5, the group that caps out at 20 articles a month unwilling to pay for more. The resulting readership composition looks like the bars above.

Step 5: Estimate revenue after paywall

The subscription fees will hit only deciles 6-10, readers above 20 articles. If we guess the average fee is \$16 per month, we can add subscription fee totals to the remaining ad revenue. Yep. The Times makes less money, with average revenue per reader falling in our estimate from \$5.93 per month to \$5.34 — a 9.9% decline.

Step 6: Model how the Times gets to break-even or beyond

The New York Times isn’t stupid, of course, and has had McKinsey-level MBAs crunching numbers to see how it can make more money from its readers while not damaging the ad revenue. Readers who sign up for paid subscriptions have huge value — they’re more loyal, less likely to leave, provide more information about their demographics, and most important give the Times opportunities to charge advertisers more for access.

And that’s the key. If we assume the Times pushes its pricing a bit for this new subscriber base — say, upping CPMs on online ads, or charging more for tablet and mobile advertising that has heaviest usage among the top readers — it could surpass the pre-paywall revenue levels. The table above shows this scenario, with a 50% push on ad rates only among subscribers resulting in average revenue per all readers rising from \$5.93 pre-paywall to \$6.25 post-wall — a 5.4% gain. In addition, the new subscriber model may lower future reader loss rates, since it’s hard to leave once you pay.

It is possible for the Times to come out ahead with more money from fewer readers. Like an airline, NYT is charging only its best customers higher rates, and the love from that audience may ameliorate the bitter pill. And the beauty of the Time’s partial-payment model is it should scare customers into defection slowly. If readers begin fleeing in droves, the Times can always tear that paywall down.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

# The NY Times’ \$240 differential price

Here’s a curious approach to guarding margins. The New York Times is offering readers of its web site a special new way to view the newspaper on computers. “Times Reader” provides an iPad-type layout, with better graphics, intuitive swooping between pages, even an interactive crossword puzzle.

Catch is this costs \$240 a year.

This is a classic example of differential pricing — the concept of charging different customers differently. It’s not unfair, rather a clever strategy to maximize revenue and margins. You see the inverse at grocery stores, where check-out clerks hand you coupons as you walk out the door. Some people, pinching pennies, will come back in with the coupon a week later and buy a can of soup for 50 cents off. You, likely in a hurry, won’t bother and will pay 50 cents more for the same chicken noodle broth. Because the “value” of the product varies for two people, the soup company has succeeded in charging two different people two different prices for the same good — maximizing its money while making you both happy. It’s a question germane to most businesses: How can we charge the customers who value us the most more for our service, while keeping everyone happy? By adding some minor differentiation (a la Times Reader) and letting customers self-select into the more costly service, you’ve built a path to higher profits.

There are readers out there who love the Times who might enjoy the slick layout, and if they haven’t sprung \$500 for an iPad yet, this is the only way they’ll get it. Of course, at \$20 a month, save your money and you can buy an iPad in about two years.

# The pricing genius of the \$0.01 iPhone case

Ah, mimicry. DefaultCase.com is making hay off of Apple’s iPhone 4 reception troubles by running contextual ads online next to articles about iPhones. The banners are designed to look like official Apple ads (same fonts, layout style), and clicking through to the site offers a killer promise — get an iPhone case that solves your antenna issue for only 1 penny!

The math is impossible, you say? Why, yes. Check out and the company adds \$3.99 for shipping and handling. USPS tells us the cost to ship a 3 oz. package is \$1.22, leaving DefaultCase with a nice estimated \$2.78 for each small piece of plastic. Great case study in how to manipulate prices to convey value, while also riding a major company’s bad press.

P.S. The site also suggests the cases are a \$35 value. A touch of reference pricing to sweeten the deal. Yum.

# Apple’s 7-inch iPad decoy. Just in time for Christmas.

This is how Apple will defend the price of its \$500 iPad.

We start with a Taiwanese newspaper report that Apple is building a new, smaller 7-inch iPad due in stores this Christmas. If you wonder why Apple would place yet another product between its iPods, iPod Touches, iPhones, iPads and actual computers, consider it the basic business strategy of a decoy.

A decoy is a product, service or simple price point that is offered not because a marketer wants you to take it, but because it creates a reference point to make another product look better. A BMW salesperson might show you the 7-Series that costs \$90,000, knowing it’s too rich for your blood, but by comparison a fully loaded 5-Series sedan for \$59,000 suddenly looks like a bargain. Or conversely, a Realtor might guide you through a colonial that needs a lot of work for \$390,000 — knowing by comparison the pristine colonial she shows you next for \$410,000 seems like a better value for less headache. Dan Ariely in his book Predictably Irrational suggests that for any product “A,” if you introduce a slightly worse or more expensive version “-A,” you are more likely to get consumers to leap ahead:

“In essence, introducing (-A), the decoy, creates a simple relative comparison with (A), and hence makes (A) look better, not just relative to (-A), but overall as well. As a consequence, the inclusion of (-A) in the set, even if no one ever selects it, makes people more likely to make (A) their final choice.”

Do you really want the small one?

Which brings us back to Apple. By introducing a slightly smaller, worse version of the iPad tablet, Apple kills two birds with one stone. It can sell the tiny gee-whiz gizmo to consumers who don’t have cash for a \$500 toy; and thanks to a lower-end decoy, it makes the upscale tablet look better — and defends the high price. It is no secret that other manufacturers are rushing to produce tablets at lower costs, or that Apple in the past has been forced to rapidly reduce its prices to extend its toys into the mass markets. But if the decoy can help Apple defend the iPad’s high price point (we bet \$400 by Christmas, with the small 7-inch logging in at \$300, take that tablet market share!) for even six additional months, Apple will make millions more.

So go ahead. Enjoy the new, tiny 7-inch tablet when it emerges. But if you walk into an Apple store to look at it, and then find yourself lured by the bigger, more expensive iPad, congratulations: Apple’s decoy has worked.