Friday, September 10, 2010

How Apple Uses Pricing

Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: "Nope. What Steve Jobs sells is pricing."

Pricing? You bet.

Jobs is a master of using pricing decoys, reference prices, bundling and obscurity to make you think his shiny aluminum toys are a good deal. Apple's Sept. 1 announcement of new products was a classic example.

The popular iPod Touch media player has been revamped at three price points - $229, $299, and $399 - all costing more than the iPhone, which does everything the Touch can plus make phone calls.

What gives? Watch Apple, and you can learn pricing tricks for your own business.
Thus begins a fascinating article at Bloomberg Business Week. Pricing strategies like these are especially important for information goods and in a world of well-informed consumers. In fact, if anything, the article overemphasized the psychology of pricing and underestimates how these strategies can be very effective even when consumers are entirely rational.


  1. Erik, To receive the discounted iPhone price doesn't Apple require the buyer to simultaneously activate phone through a contract (with ATT), and thereby receive a kickback? Perhaps not an "apples to apples" comparison, from either the consumer's, or Apple's perspective.

  2. Here is an interesting and much more expanded explanation of why Apple's marketing strategy may enable it to earn such large profits in such a competitive industry, and why pricing is just one part of a much larger picture:

    "Apple's strategy has all the characteristics of a luxury strategy applied to a classic market: let us review them:

    - A strong vision at the beginning, a creative Utopia.
    - A historic, creative founder, nurturing and personifying this Utopia, who, have been supplanted, returns to save the now-declining company.
    - A temporal dimension that now solidifies over time: Apple is a saga, that of a messianic creator, ousted from his company and replaced by traditional marketing [referring here to John Skulley], then recalled to give the same company a new creative lease on life.
    - A status component: when you use an Apple, you show it off proudly. Moreover, the famous Apple logo has been inverted on laptops so that everyone around can identify it in a meeting, when it is open. We all know users who stick an 'apple' on their computer cover in order to cover the brand of the (non-Apple) product they are using.
    - A collective cultural dimension (as anyone who has attended Steve Jobs's annual jamboree can testify), and a personal one (any Apple fan can spend hours explaining to you to what extent their computer is different from, and nicer than, that of any other brand), the exceedance of pure functionality through an aesthetic dimension and sensual materials (glass and aluminum for the iMac).
    - A relationship to art, since the brand is worshiped by design professionals, its most faithful clients and believers.
    - Personalization taken to the extreme (the thousands of different possible covers for the iPod, even crocodile or python skin), and the 'iPod-ization' of your car.
    - The systematic creation of virtual rarity, hence the queues of clients waiting an entire night for the opportunity to buy an iPhone as soon as it comes out.
    - Increasingly controlled distribution: exclusive boutiques (the Cube) [referring to the New York store] and dedicated Apple stands are multiplying, which enables them to remain in direct contact with their clients, and never in direct comparison with other PC brands. Apple distribution took a further step with the launch of the iPhone, which is granted to a single telephone operator per country, at a high price (30 per cent of turnover) or a considerable royalty rate, which speaks volumes about the gross margin. We can understand the rush of sharp minds and hackers around the world to unlock this device and render it compatible with all operators. For Apple this is the equivalent of counterfeiting or grey market typical of the luxury market.
    - The prices clearly higher than competitors and never reduced.
    - Clients set at a distance: Apple was revolutionary in its day through its open invitation to 'techies' on all sides, to the 'nerds' to freely create with and for Apple. With iPhone and iTunes, we are moving into another logic, closed and aiming to manage demand.

    The fact that Apple's strategy is clearly a strategy copied from what we call 'luxury' is likewise confirmed by the failure of John Skulley to return the 'Apple collective' to the straight and narrow of classic marketing, a failure that demonstrated the specificity of the brand, or better yet, the fact that Apple is not only a brand, but above all a universe, that of the original dream of 'human, user-friendly computing' of 1970s California."

    by Jean-Noel Kapferef and Vincent Bastien, excepted from "Luxury Strategy" (2009)

  3. I've seen some interesting analysis suggesting that Apple's marketing strategy is really a 'luxury'-like strategy, which goes a long way toward explaining not only their pricing, but also why they manage their brand, distribution, etc so differently from other companies in their space. In fact, they probably need to charge slightly higher prices to maintain consistency with the rest of their marketing strategy. There is an interesting open question about how much volume they can actually achieve without undermining their image and that this may actually be a bigger risk for them than margins, an interesting reversal compared to other companies (consider, for example, the much greater importance of iPhone/iPad scarcity than iPhone/iPad prices in determining the demand for the product).

    The best analysis of Apple as a luxury company that I have seen is in "Luxury Strategy" by Jean-Noel Kapferef and Vincent Bastien (2009). I can't post it all here, but you can check it out online at Page 284 is a good place to get an overview of the argument.

  4. Here is interesting information to know about pricing of i-phone4.

    -Price of SIM-lock-free i-phone4|51|Apple

    Recently, in Japan, i-phone4 is only provided by Softbank Inc. which is a third mobile operator in Japan. But as written in the following news, Japan Communications Inc., an MVNO company, started to provide micro-SIM for i-phone4. Today, Japan Communications Inc. announced that they will also sell a SIM-lock-free i-phone4 which is imported from above supplier. Surprisingly, the price of the i-phone they sell is as same as the above price! Usually when operators sell terminals, they will reduce the price by their 1 year profits they gain and there is a 2 year lock-in restriction associated.

    I suppose Japan Communications Inc. is using an "versioning price scheme." First, they sell it in retail price and later, they will sell it in lower price (as same as in AT&T) with some restrictions.