Here’s How Much Consumers Will Pay for a Tablet

Updated: When the Motorola Xoom (s mmi) tablet arrived to market at $799, a collective grumble was heard, with many saying the price was simply too high. That makes sense when compared to Apple’s iPad (s aapl), which starts out at $499. Apple also enjoys a competitive pricing advantage due to multi-billion deals that pre-pay for device components. But the closest comparison of a Xoom to an iPad is really the $729 model, which includes a 3G radio and 32 GB of memory just like Motorola’s Xoom. Clearly, a $499 option gives Apple customers a foot in the tablet door, but what’s the price that consumers are really looking to pay for a tablet?

Based on a survey by the Institute for Mobile Markets Research, that figure ranges between $351 and $524. The former figure represents the mean amount representing such a good value that a consumer would definitely purchase one. The latter price of $524 is the mean response from survey participants who say they’d never pay that much or more for a tablet. The survey reflects a total of 814 participants, 38 percent of which were already “very or extremely interested” in a tablet device, which makes sense. Folks who aren’t even interested are likely to skew the prices even lower. There’s even a price point that’s “too low” as survey respondents feel that a mean tablet price of $202 is likely a device of “questionable quality.”

Obviously, only one of the current iPad models — there are six — fall into the desirable price range, and yet the company has sold more than 15 million of its first iPad and is expected to move up to 40 million more this year as iPad 2 arrives later this week. How then, are the sales quickly rising if the models cost more?

I suspect many mainstream customers consider the base model with 16 GB and Wi-Fi only as a starting point. And for some, that particular unit is more than good enough to experience the “post-PC” era. It works at home with no monthly data plan and still has plenty of room for hundreds of apps. After that, these consumers essentially consider a self-upsell for additional storage, since you can’t add capacity later, or justify the 3G radio with the lack of a contract. There’s no such current choice with the Xoom: It’s either $799 for a month-to-month 3G deal or $599 with a 2-year data commitment, and that’s an obstacle for tight budgets.

How much negative impact does a data-plan contract have? The IMMR survey will be updated with this data in the coming days, but I got an early peek at results showing that only 25 percent of would-be tablet consumers are interested by a hardware subsidy in return for a data plan commitment. Just like our own poll last week, the majority of survey participants would rather purchase a lower-cost, Wi-Fi only tablet. Surprisingly, however, of those who preferred a 3G device in the IMMR survey, more consumers said they’d go with a contract data plan than on a month-to-month basis. Clearly, our hardware subsidy addiction is still in full force.

I should also note that the survey question assumed a 3G tablet would add $100 to the price of a Wi-Fi model. That seems low to me, as the 3G option for iPad adds $130 and a Xoom with Wi-Fi only is expected to show a $200 cost difference. If the question were phrased to reflect these cost increments, I think more would prefer a Wi-Fi model as indicated by the 75 percent result in our poll last week.

I expect these results to change over time to further favor Wi-Fi tablets over 3G units as more consumers purchase handsets that can double as mobile broadband hotspots. Once they better understand that this feature is a monthly service, and not a separate data plan that requires a 24-month commitment, the appeal of a 3G tablet diminishes. Some will always want a dedicated connection for their tablet, but by the end of this year, I wouldn’t be surprised to see far more Wi-Fi tablets sold as compared to those with a 3G radio.

So what does this mean for Motorola and the other Android tablet makers lined up behind them, ready to launch new tablets? Tablets consumers want a range of choices, want them to be cheap, and don’t find the prospect of carrier commitment appealing. It may actually make more sense for LG, HTC, Samsung and others who haven’t yet launched a Honeycomb tablet to start first with a lower-cost Wi-Fi model. Adding a more expensive 3G version can always come later, once the buzz builds around a less-expensive Wi-Fi unit.

But that sheds light on Apple’s other advantage, because few of its peers in the tablet space have a distribution channel outside of the carrier stores. You might find a Samsung tablet in the local Best Buy, for example, but there’s no Samsung store to compete with Apple’s retail chain. That adds an entirely new layer of complexity and cost risk for non-Apple tablets. These companies have to negotiate with retail stores and possibly give up a cut of profits to get shelf space if they want to forgo the carriers as the primary distribution channel.

Update: Not all of the 814 survey participants were “very or extremely” interested in purchasing a tablet, so the post now reflects that 38 percent fit this category.

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