This post was originally featured on the Pristine Blog.
Google won't say anything about how they're going to price Glass for the general public upon launch, so I'll fuel the rumor mill for them. To understand how Google will price Glass, let's first look at Glass's components. Then we can think about Google's pricing strategy.
Glass is just another computer, just like smartphones and tablets. Almost every Glass component is an off-the-shelf smartphone component that's already being produced on the order of hundreds of millions of units / year. Top of the line smartphones, such as the iPhone 5, typically have a bill of materials (BOM) between $170 and $200 when they're first released. The BOM decreases over the lifecycle of the product, typically dropping 50-75% before the product is discontinued 2-3 years after launch.
Glass actually uses fewer components than most modern smartphones. Glass doesn't have cellular or GPS chips; a large, multitouch capitative Glass screen; or a large battery (Glass's battery is tiny). On the other hand, Glass has a titanium frame, and the screen technology is being produced at 1/1000th the scale of most other display technologies. Even still, Glass's BOM is less than $200. That's remarkably cheap for an entirely new class of device.
This begs the question, why is Google charging a whopping $1500 for developers to get their hands on Glass? Google isn't charging that price to recoup development costs. If they cared about recouping costs, they'd be releasing more than 10,000 units into the wild at a $1500 price point. Instead, Google is pricing Glass at $1500 for developers and beta testers so that only the committed will buy it. Google is hoping that the folks who spend $1500 will invest and develop for the platform to justify the cost of purchasing the device. That logic has mostly failed. After perusing through the Glass forums and meeting with at least 3 dozen Glass explorers over the past month, I can safely say that at least 75% of Glass explorers aren't doing anything of significance with the device. Additionally, most developers are inherently consumer oriented developers. You don't need Instagram on your face.
So how will Google price Glass for the general public? There are two ways Google could price Glass:
1) Recoup the cost of development by selling Glass with a fat 50% margin. Given how little it costs to build Glass, they could price Glass at $400-500 and capture 50% gross margins.
2) Sell the device at or near break even. In this scenario, the retail cost of Glass would be no more than $300.
For those who don't follow Google, strategy #2 seems nonsensical. Why would Google simply leave those margins on the table? The early adopters are obviously willing to pay, so why not let them pay? Well, let's look at the hardware products that Google sells today:
1) Nexus 4 - $299
2) Nexus 7 - $199
3) Nexus 10 - $399
4) Chromebook Pixel - $1299
The Nexus 4 is sold at modest margins, probably 10-15%. The Nexus 7 is sold at break even. And the Nexus 10 is probably garnering 25% margins as a premium tablet. As a high-end reference device, the Chromebook Pixel is sold with decent margins, probably about 25%.
What we can learn from Google's existing hardware strategy is that Google doesn't care about making money in hardware. For Google, hardware is a means to an end. Google only wants to monetize the app layer, and will give everything else away for free, or charge as little as possible to get users living in the Google-verse at the end of the value chain. The image below illustrates a simplified version of the value chain required to access any computing services or apps.
Google's philosophy in selling hardware without making money is simple: people don't buy computers for the sake of buying computers. They don't pay for Internet for the sake of having Internet (see Google Fiber). They pay for all of these things because they are a means to an end: apps.
Moreover, we know that Google can afford to, and is investing on 10 and 20 year timelines. Most major initiatives at Google - Android, Chrome, Fiber, Gmail, Maps, and YouTube, to name a few - were released without a direct line of sight to profitability. Many of these businesses still generate little if any direct, measurable, attributable profits. Google entered all of these businesses because it saw long term strategic value in owning these spaces. Google knew that if it owned these spaces, it would figure out monetization later.
Lastly, Google wants the concept of mass market eyeware computing to exist. Glass will present unparalleled advertising opportunities. Like the other businesses listed above, Google knows that if eyeware computing takes off, they can monetize it for years if not decades to come. The costs of getting there are immaterial for a company of Google's scale. Conversely, if Google releases Glass at a prohibitive price point and Glass fails to take off as a consumer device, Google knows that eyeware computing won't take off until they commercialize contact lens computing. Contact lenses reduce the cost of wearing Glass computing device to effectively nothing.
In summary, Google has a long background of investing billions of dollars unprofitably in visions that it believes in. Glass is one of those visions. Google has the financial backbone and grit to do whatever it takes to ensure that success. Glass will be cheaper than everyone expects.