The Economics of HP's Brilliant Trick to Get You to Buy a TouchPad

HP will manufacture more of its tablets that nobody wanted

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Hewlett Packard is up to something sneaky. Again. HP has announced that it will make more of those lame TouchPad tablets that it was desperately trying to get rid of last week by selling the unwanted devices for a discounted $99, as we reported. Before, nobody would touch the tablet, but the limited-time-offer set off some sort of carnal need for HP TouchPads. Now they are all sold out and going for $300 on e-Bay; we thought it was a pretty brilliant marketing scheme. Well done, HP: You got rid of your stinkers, made back some of the losses, and did some well-played brand management. Even if you were losing money on the tablets, which cost around $300 to make, the move worked for you guys--at least the first time. But this second go around: What's going on here?

It's a bit of a head scratcher that HP would manufacture more of something that they desperately wanted to get rid of. It's math: If they make more units and sell them at $99 they will lose money. $207 to be exact, explains The Wall Street Journal's Ian Sherr. "The decision to manufacture a second run, however, left analysts scratching their heads. The introductory model of the TouchPad costs $306 to manufacture, according to an estimate from research firm IHS iSuppli, suggesting a loss of roughly two-thirds if it is sold for $99."

But maybe HP is being a little less silly than assumed: they never said anything about price. "H-P didn't say what it would charge for the new batch of TouchPads, but cautioned potential buyers there might not be enough to go around," continues Sherr. If people are willing to purchase the tablet for $300 on eBay, they might fork over that much to HP, in which case the devices would sell at-cost. That would prove lucrative for HP explains, explains TechCrunch's Michael Arrington. "Because selling a device at cost and then bringing in the revenue through the app store is a proven and lucrative business model."

But what if the demand isn't there? HP knows that, in part, people purchased the lesser model because of scarcity, which as Arrington argues, is a powerful motivator.

Perception of scarcity is a fascinating human condition. It’s one of the first things we learn as children--that running towards something is usually a guarantee that you won’t get it. But act like you don’t want something, and it’ll come running to you. The creation of the perception of scarcity is a winning, if shallow, tactic in most human relationships. 

And you can bet HP is playing that game. "We don't know exactly when these units will be available or how many we'll get," H-P spokesman Mark Budgell wrote on a company blog, reports Sherr. "We can't promise we'll have enough for everyone." Hurry! Get your TouchPads! They're going quickly.

But this tactic might not work the second time around. "They did a lot of these moves in haste," Sterne Agee analyst Shaw Wu said to Sherr. "He said the move will likely create confusion among customers and application developers, which H-P is still trying to woo." But even if customers don't take the bait, for the moment HP can enjoy the light, argues Arrington. "This is the best marketing money can buy. HP finally has a hit product and people lining up to buy it. It doesn’t get any better than this." Now they just have to hope someone will buy all those new TouchPads, or else they'll be back at square-one: hoarding a stockpile of tablet lemons.

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