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Looking at the Lenovo website, I can see that the configuration options for RAM on a M83 Pro SFF are as follows:

4GB PC3-12800 DDR3 1600MHz UDIMM              base price
8GB PC3-12800 DDR3 1600MHz UDIMM (4GBx2)      add $160
8GB PC3-12800 DDR3 1600MHz UDIMM              add $200
12GB PC3-12800 DDR3 1600MHz UDIMM (8GB+4GB)   add $295
...

However, if I look at buying a 4GB stick from Lenovo from the accessories page; the price is $63. How can that be? Is the difference ($160 vs $63) how much it costs to install the stick?

fixer1234
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greener
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    To be perfectly honest, I'd probably get the cheapest possible selection then buy my own ram. The price difference might be laptop ram vs. desktop ram, but even so you'll usually see something like a single 8gb stick go for around $70 bought separately. Not aware of anything that would stop you from going that route – Rogue Jul 17 '14 at 18:23
  • I don't know what that difference is but I'm certain it's not labor costs, it takes seconds to install and they probably have it automated or have workers on an assembly line on top of that. Perhaps just marketing; I.e. they know more people will purchase the preconfigured system? – Jason C Jul 17 '14 at 18:23
  • **Evidently it costs them $97 to install it at the factory.** It's their pricing model, so they charge as they like. These are likely pre-configured and sitting in their warehouse. When you add the option you are paying for someone to get it off the shelf, open it and reconfigure it. If you do it yourself, you only pay for the memory. – CharlieRB Jul 17 '14 at 18:24
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    @charlierb I would imagine that a large well run manufacturer would prestock various configurations in proportions roughly based on popularity to avoid that cost, and certainly would not be in a position where they had to take a $90+ hit (5-10% the systems entire retail price) per unit for a configuration selection.I cannot imagine the workflow at a Lenovo warehouse including pulling individual items off the shelf and reconfiguring per order. – Jason C Jul 17 '14 at 18:26
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    you should consider the memory frequency too and labour hours too – Quijote Shin Jul 17 '14 at 19:08
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    An in depth treatment of this topic can be found in the book *The Strategy and Tactics of Pricing: A Guide to Growing More Profitably* by Nagle, Hogan, and Zale. – Maxx Daymon Jul 17 '14 at 20:41
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    @JasonC You are correct, those days are long gone. All the large manufacturers use predictive inventory management, mass customization (both by robot and <$1/hr labor), and just-in-time assembly. Behind the consumer facing competition is another behind-the-scenes manufacturing efficiency competition. – Maxx Daymon Jul 17 '14 at 20:59

4 Answers4

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Profit Maximization

It is an example of value-based pricing (pricing based on the perceived value to the customer, ignoring the actual cost to build or provide) strategy designed to boost profits while psychologically appearing competitive, particularly in areas where there is strong price competition. With public companies, we can see the bottom line effects of these pricing strategies due to some degree of transparency. This is just one of many pricing strategies used by companies to increase profit margins.

The "labor" Hypothesis (aka: the cost-plus misunderstanding)

No, the price delta isn't labor costs. The "labor" hypothesis is easy to nullify. If it went toward labor costs, the result would simply not show up in the profit margins. When we look at the financials, we see the margins for the different units, we have insight into the near-slave labor conditions many of these devices are built under, we know that labor would increase the price more uniformly regardless of component and, again, would not suddenly appear on the balance sheet as a profit. The highest paid workers assembling devices like this make US $1.18 per hour (The Deadly Labor Behind Our Phones, Laptops and Consumer Gadgets), not anywhere close to explain the delta. Moreover, we know that it costs no more in labor to insert or solder two 8GiB parts than two 2GiB parts, and that companies research desired configurations ahead of time and build inventory to match.

Consumers often expect products to use cost-plus pricing (in which a fixed percentage is added to the cost of the product) and are often surprised and dismayed to learn of other pricing strategies.

Storage Suckers:

Ever since the days of the iPod, Apple has boosted its bottom line through upgrades. The company offers the entry-level versions of its devices at a price that seems reasonable to many people. This entry-level price functions as a marketing come-on—a way to get you in the store.

What's Behind Apple's Epic Memory Markup:

At an Apple store, a charger that IHS estimates costs $1.40 to make sells for $40. The company’s gross margin stood at 37 percent last quarter, compared with archrival Samsung’s 30 percent, Hewlett-Packard’s (HPQ) 23 percent, and Dell’s (DELL) 18.5 percent, data compiled by Bloomberg show. Marshall estimates that the mobile memory markup accounted for about one-fourth of Apple’s profit last quarter; Gene Munster of Piper Jaffray puts it at around two-fifths.

In cases of soldered memory (as in tablets and ultrabooks) "starting at" prices and decoy pricing (sometimes misunderstood as illegal bait-and-switch tactics) are used to maintain an appearance of competitiveness.

The tablet memory mark-up scandal:

Yet despite these paltry market costs, Apple charges its customers £80 more for its 32GB iPad than for its 16GB model. That’s a profitable mark-up of at least 1,267%, based on the market price of £5.85.

Maxx Daymon
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  • I find the high configuration page vs. accessory page pricing to be *particularly* evil / brilliant (depending on your POV) because even if a customer were to look at the accessories page, they may conclude that the price difference means the bare accessory choice is inferior in some way, thus reinforcing them to choose the configuration price *even* after becoming aware of the accessory price. I'm sure there is a name for the "more expensive = I have more confidence in it" effect, I just don't know what it is. It's important to ask the type of question the OP is asking. – Jason C Jul 17 '14 at 21:22
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    Some great sources there. Best answer I've seen to a question that probably doesn't belong here. :) – Jason Jul 18 '14 at 15:04
  • @Jason I debated whether I should answer. I looked at other StackExchange sites and thought this might make more sense on Personal Finance and Money site. I don't have enough rep to suggest a migration though, and I decided sharing the knowledge was more important. – Maxx Daymon Jul 18 '14 at 21:46
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    @JasonC That would be called [*Premium pricing*](http://en.wikipedia.org/wiki/Premium_pricing) (also *image pricing* or *prestige pricing*) Monster cable is an example of this, and the recently available .rich TLD (US$2599/year to have a .rich domain) – Maxx Daymon Jul 18 '14 at 21:51
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There's no technical reason, it's purely marketing. Most people aren't comfortable with installing internal hardware and will pay for it.

It's not unique to Lenovo or even the computer industry. In the sales world, it's common to sell the base product with little to no margins, and the add-on products with high margins.

Jason
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The short answer is, yes, you are paying extra for labor. The company will charge for the time it takes their employees to install it, and to install it to their standards, with the equipment and specifications that their quality control requires. It is similar to taking a car to the manufacturer's dealership for repairs.

However, you may want to check warranty information. Some companies may void warranties if end users install their own modifications. -------update

While the price increase may not explicitly be labor cost, it is the cost many people are willing to pay to NOT have to do the labor themselves. Companies spend a lot of time trying to figure out how much they can charge for this and still be competitive.

Edward
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  • In the USA at least, Magnuson-Moss Warranty Act severely restricts voiding of warranties in such cases. Well worth understanding. – Ben Voigt Jul 17 '14 at 19:10
  • @BenVoigt The RAM stick page says "Lenovo memory installed in a new Lenovo system automatically assumes system warranty" which I read both ways: **new** Lenovo system = at the factory? – greener Jul 17 '14 at 19:16
  • @greener: Well, there are two different issues. One is how much warranty the RAM comes with. Another is whether the system warranty changes with the installation of RAM. – Ben Voigt Jul 17 '14 at 20:30
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    Labor would not be an issue here. You are paying for your perception that the factory will do a "better" job installing the component than you will; and you are also paying, perhaps unintentionally, for the ease of selecting the component from a drop-down over hunting through the accessories page. It is pure marketing. If you are driven to make a profit and you know that customers typically order through the configuration page, you may tend to increase price there, while keeping accessory page prices low to remain competitive with third-party accessories. – Jason C Jul 17 '14 at 21:15
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Also, I don't know if things are still this way, but certain RAM and certain computer models haven't always mixed well. Part of the "labor" charge may be running the new sticks through a MEMTEST of some sort to validate that all RAM is working and accounted for properly in the OS.

WEFX
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  • I would imagine all manufactured RAM is run through automated testing on the assembly line on the way out, and that this process would apply equally to *all* RAM -- regardless of whether it was a default option on a system, a non-default option, or a bare accessory -- and thus not create any difference in cost between them. – Jason C Jul 17 '14 at 21:10