Pricing, Pricing, Pricing

(commentary)

While I was away in the Galapagos leading a photo workshop, not a lot was happening in the camera industry. Except for one thing: some modest pricing aggression. This site’s exclusive advertiser, B&H, for example, temporarily upped the rewards discount for future purchases on Canon and Nikon gear to 10% (no longer offered). This was on top of any other instant rebate or discount that might apply. That brought the “total discount” from MSRP for a D810 up to 24%, for example. Even the rarely discounted Df seems to have sprung a few brief sales while I was off photographing birds and reptiles.

Price-wise, this was arguably the best holiday season in the past few years to buy a high-end camera (lower end consumer cameras have had many past generation bargains for several years now).

And yet, Nikon is expected to raise prices in Europe and many other areas in early 2016, as well as cut the length of some European warranties*. Canon’s approach seems slightly different: they are talking about lowering their costs of production of DSLRs and lenses by completely automating production over the next two years, which they believe will cut production costs by 10-20%, and they did a serious year-end dump of inventory by offering free printers and significant discounts on cameras, probably to make their market share numbers for the year look like they haven’t gone down.

What we’re witnessing is classic market-tail economics in action. The simple fact is that camera unit volume is declining. Both Canon and Nikon experienced double-digit percentage unit decline in late 2015 for their ILC offerings. Their response is predictable: for everything already in inventory and sitting on shelves, discount them enough so that they move to customer hands; for things going to appear on shelves soon, try to raise the price. Meanwhile, lower costs. 

The problem is that neither change (price reductions or price increases) actually fixes the underlying problem. The Japanese are using short-term micromanagement to put band aids on symptoms, but simply have no solution for the disease they’re actually experiencing. Nikon is the most vulnerable to the disease. At some point Nikon will no longer be able to cost cut, dump excess into the gray market, or discount built-up inventory enough to balance their volume decline. This is a wasting disease, and at some point you can’t mask the effects by pricing decisions. My prediction is that Nikon is soon to become a smaller company. 

In terms of financial health in the camera market, Sony is the only company that seems to be clearly moving the opposite direction and gaining some modest unit volume worth noting. But before all the Sony fan-boys start celebrating, they started from a poor position and are still a long way from being a dominate player. Becoming a bigger fish in a pond that’s getting smaller isn’t exactly a healthy proposition, either. 

For ILCs it’s a three player game (nearly 90% of the market): Canon, Nikon, and Sony, in that order, with the current year numbers (as of end of October) being something around 43%, 31%, and 14%. But consider this: if Nikon is truly slipping in that second place spot, the likelihood that they’ll resort to pricing to try to regain market share increases, and if Nikon re-prices, so will Canon and Sony have to. Indeed, every one of the three is vulnerable to actions of the other two at this point. 

Which brings me back to what happened this holiday season: right now, while pricing is still what I call moderately aggressive, it seems to be relatively across-the-board moderately aggressive, and as much of that is big dealer aggression as it is manufacturer pricing aggression. There were no panic sales going on that I could see, only highly motivated inventory turn compulsion. But what happens in January?

The camera makers all seem to think this: new products commanding higher prices (or at least reverting back to MSRP). Actually, Sony already went down that route with the Mark II versions of the A7’s. I personally think that the customer is a bit exhausted by upgrades and high prices at the moment, so I don’t see how that trying to push the customer up pattern is going to hold. Indeed, I suspect we’ll see significant discounts even on the Mark II Sonys soon. 

CIPA data suggests that things are still extremely weak in terms of demand, and I doubt a full slate of new products is going to change that. Consider (all year-to-date through October compared to previous year):

  • Compacts: units down 21%, dollars down 10%
  • DSLRs: units down 7%, dollars down 8%
  • Mirrorless: units up less than 1%, dollars up 9%
  • Lenses: units down 5%, dollars up 3%

The notion that fewer units at higher prices is not exactly holding up here (again Sony might be an exception to this, but only a modest one). Overall the total number of dollars taken in by the entire Japanese camera companies pre-SG&A write downs was 96.7% of the previous year. After SG&A expenses eventually get accounted for, it’s likely far, far worse. To expect that to change next year is currently wishful thinking. Indeed, the exact same wishful thinking that kicked off 2015 in Tokyo ;~). 

The numbers say that if I’m Nikon, I have to take something like 10% out of my costs in 2016 in order to just stay at the same profit level. Either that or I need to sell a lot more product. And that’s only if Nikon can hold market share. I don’t think there’s 10% to take out of Nikon’s costs any more, and selling fewer products actually is likely to increase many costs. Until something obvious changes, it’s an easy prediction that Nikon will be under more financial stress in 2016 than it was in 2015. How that shows up in customer impact and pricing is yet to be seen. But price increases? Good luck with that, Nikon.

And no, mirrorless isn’t dominating DSLRs. This year’s slight gain in mirrorless units coupled with DSLRs slight loss still has DSLRs still outselling mirrorless 2:1. Indeed, exactly 2:1. To put that in perspective, Sony would have had to have sold every mirrorless camera made in order to come close to catching Nikon’s market share in ILC. 

Shifts are occurring, but they’re still modest shifts. 


* Technically, Nikon can’t cut European warranties in the EU Zone: the EU requires two year warranty compliance. However, I suspect that Nikon has enough sales within Europe that spill out of the enforcement zone that they’ve decided that they can save money by shortening the “official” warranty. Personally, I was surprised when I heard this rumor (and multiple times from multiple sources). Maybe it’s just a rumor, maybe it’s as I suspect (an attempt to pull a few more dollars out of repair costs in borderline cases), maybe it’s a pipe dream by Nikon, I don’t know.

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