Price Targeting, Storage and the SD card slot

Here's a little theory I'd like to get some thoughts on. It's about smartphone pricing. Bear with me.

Pricing is a dilemma for companies. Decrease the price of a product and you make less profit on each unit. But increase it and you might sell fewer units. How to work out the perfect balance?

In a corporation's dream world, they would be able to find out exactly how much you're prepared to pay for something and charge you not one penny less than that. They can't do this in reality because (a) why would you reveal your price ceiling? and (b) you can easily find out what other customers have paid. Sometimes this model does work pretty well though. Car salespeople probably have a good stab at guessing how much they can get from a customer and offer them a price to match. If the customer doesn't bite, then they can try "I can offer you a discount. Still not OK? Right this new deal is the best I can do... No? OK, let me just check with my manager if I can go any lower", until the customer is happy. As long as the salesman is still making a profit, and he knows he couldn't have made any more profit from that customer, then he is happy too.

Many industries can't do this. But that doesn't mean they can't do anything to get more money out of certain people. Price-targetting is a trick companies pull to try to get people who are less careful with their money to hand over extra cash, without losing sales from people who are not prepared to cough up any more. Think about how much you pay for marshmallows and cream in Starbucks. The marshmallows can't cost Starbucks more than a few pennies and the mark-up on them has to be several hundred percent. Think about supermarkets that offer cheap prices to people who spend the time collecting coupons. What those people are telling the supermarkets is "I care about getting the best deals" - so the supermarkets offer them the best deals. What people who don't collect coupons are telling them is "I don't have time to check I'm getting the absolute best deal on everything I buy". We pay more.

Price targeting is a blunter instrument than the car salesman's personalised approach, but the beauty of it is that companies don't have to guess how much each individual will pay. People reveal themselves as prepared to donate more to the company's bottom line by opting for the product with the bigger profit margin, and as an added plus they get a product or service just improved enough to justify the extra expense to themselves.

I think these days storage capacity seems to be used for price-targeting in smartphones.

Take a look at the iPhone 4S pricing: 16GB £499, 32GB £599, 64GB £699 (UK prices, but it's probably a similar story elsewhere). Does 16GB of extra storage really cost 100 pounds? Does 32GB on top of that cost another 100? Of course not, nowhere near. The profit margins on the higher storage versions are much larger than on the 16GB version, and it's several hundred percent of the actual value of the memory. Apple are selectively milking the people who want the best money can buy and are prepared to pay for it (even if what they get in return is not objectively worth it, taking the market price for memory as a guide). 

It's a shame to see the Nexus line going down this route with the Galaxy Nexus. And to make the strategy work they have to remove a feature - the SD card slot. If they left it in then people would be able to get a 32GB Galaxy Nexus by - shock horror - paying the market rate for memory. And the problem is there are lots of people who would appreciate extra storage space, but not at a rip-off price. They might be put off the Galaxy Nexus, or they might buy the 16GB version and have to mess around more than they'd like moving things off and onto the device.

What do people think? Is this what's going on? Is it a problem? Is the lack of an SD card slot an issue for you? Will you be buying the 32GB version or the 16 GB version?