July 08, 2005
Competing on Price
Posted by Christine Hurt

As the self-appointed archivist of the Hurt-Stancil family, I spend a lot of time (and money) taking pictures and creating scrapbooks.  For three years now, I've been uploading my photos onto Shutterfly.com and having the pictures printed and sent to me.  I have approximately 3500-4000 photos uploaded onto their system in 76 different "albums."  Over the years, the prepaid price per 4 x 6 print has dropped from 29 cents incrementally down to 19 cents, staying in line with its competitors.  As I mentioned before, one of Shutterfly's competitors, Snapfish.com, was recently bought by HP.  About a month ago, after the acquisition, Snapfish announced that prepaid 4 x 6 prints were 10 cents.  (Individual prints are only 12 cents, compared with Shutterfly's individual price of 29 cents.)  I have been waiting for Shutterfly to reciprocate by lowering prices at least a few cents, but so far Shutterfly is standing firm at 19 cents.

Over the weekend, Shutterfly upgraded the service to make it more user-friendly and added some bells and whistles.  I don't want bells and whistles.  I want 10 cent prints.  (I figured out that this year I could have saved $400 at 10 cents a print.)  I'm not sure if Shutterfly is counting on path dependence to keep customers at their site or their new user-friendly features, but I'm wavering.

So why is Shutterfly (a privately-held company with about seven investors, including Texas Instruments) not budging?  Can they not afford to cut their margins on prepaid prints?  Do they think that Snapfish will not be able to stay at 10 cents forever?  Is HP taking a loss on prepaid prints to try to drive Shutterfly out of business or make them lose money?  We've been discussing lately some of the phantom synergies of conglomerates, but one type of financial synergy that conglomerates possess is the ability to use one division to subsidize another division to achieve a particular goal.

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