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Apple's Pricing Strategy

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Think Different
APPLE’S PRICING STRATEGIES
Think Different
INDEX
NO. CONTENT
1 Executive summary
2 Introduction
3 Apple Inc.
4 Price
5 Target Group
6 Skimming
7 Vers...
Think Different
1. Executive summary
Apple Inc. is a technology company, which designs, produces and sells goods of the Co...
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Apple's Pricing Strategy

  1. 1. Think Different APPLE’S PRICING STRATEGIES
  2. 2. Think Different INDEX NO. CONTENT 1 Executive summary 2 Introduction 3 Apple Inc. 4 Price 5 Target Group 6 Skimming 7 Versioning (Pricing discrimination) 8 Apple’s Strategy: United States and Europe 9 Conclusion Think Different
  3. 3. Think Different 1. Executive summary Apple Inc. is a technology company, which designs, produces and sells goods of the Computer, Music and Mobile-phone Industries. It is differentiated by its brand-perception and identification. Over the last couple of years, Apple has become a cult-brand, thanking it’s iLife, iTunes, QuickTime and iMac lines. Apple Inc.’s short-term goals is currently increasing the sales of the just launched iPad (the most innovative web=browser in market). In the long-run, Apple aims for the top of the market, becoming the number one leader. Apple Inc. has incorporated numerous features that are unique and well known in the market today. We consider that there are several Apple products with several appealing features such as: iMac, iPod, iPhone and iPad. These products represent a revolutionary era for the development of Apple. By placing such products in the market, Apple Inc. has attracted a lot of customers in one way or another. Highly advanced technology, simplicity and design, and the sense of luxury are the main features integrated in these products. Moreover the comfort and convenience that these products provide are very crucial.
  4. 4. Think Different “Think Different” One of the main reasons which inspired me to choose Apple Inc. is its unique, simple and luxurious image that Apple has created in the market over the years. “Think differently” which is an inspiring motto, made us believe that simplicity and creativity combined with luxury can lead to a successful and profitable company, such as Apple. Another component that we found to be challenging for us was to understand Apple’s goals, objectives and their secret of being successful. A very important fact about Apple products today is that these products are globally spread. This has created among us the idea that Apple products are no longer luxuries but real necessities due to the technological developments. Moreover, what has motivated us most to select Apple Inc., is the way we relate ourselves with its products. Each of us being an Apple consumer has build trustworthiness relationship with the products that this company offers. Owning an iPod or iPhone today definitely will make your life easy and simple. As mentioned above, 2010 came with the launching of the iPad, which is a totally differentiated product in the market. It is a web-browser, which also can be used as laptop, and can be useful in every aspect of educational and professional areas. Its price, compared to regular Apple prices, is pretty affordable ($499), which is an incentive for more buyers to purchase. This is the main goal of Apple in the current day.
  5. 5. Think Different 2. Introduction According to (OPPapers, 2012).Apple Inc is an American multinational organization located in 1 infinite loop, Cupertino, California 95014, in the middle of the Silicon Valley. It is focused on designing and developing the personal computers, other related software products, and the electronic products such as MP3 players and iPods. Apple Inc’s main products are iMac, iPod, iPhone, and its latest advanced product is iPad, which is on the verge of creating another revolution after iPhone. Apple Inc was founded in 1976 and since then Apple Inc has been leading the way in innovating new products, however it has encountered numerous ups and downs since then.
  6. 6. Think Different Apple Inc produced the first ever extremely successful personal computer. It has been always on the forefront of innovating new products; however it has often struggled to maintain the hold on the market share in the product line. Lately, Apple Inc has transformed its image from an inventive computer manufacturer to a fully-fledged consumer’s electronic company. Some facts of its success can be calculated from its sales of $13.95 billion in the year 2005. In year 2005, Apple Inc had controlled 4.2% of the US market in PCs. Also, Apple iPods models had controlled 70% of the hard drive MP3 player market. Apple Inc enjoys the leading share in the handset market, generating over 71% of the industry’s profit with 6.5% of the international handset market. Apple unveiled its first iPhone on 9th January, 2007. The most recent iPhone, is iPhone 4S, and it was announced on 4rth October, 2011 and was released 10 days later.
  7. 7. Think Different 3. APPLE Inc. According to (Scribd Inc., 2013) Apple has to be one of the greatest success stories of all time. The beginnings of Apple started with Wozniak assembling a simple built computer machine. It was in the summer of 1971 Wozniak 21 and Jobs 16 were introduced to each other by a mutual friend Bill Fernandez. Wozniak had shown Jobs his simple built computer machine and this impressed Jobs to the point Jobs believed he could sell it for a profit. It was here they would form a strong friendship because they not only shared a passion for computers, but because they were both known as outcasts and for the first time they had a great understanding, admiration and respect for each other‘s abilities, personality and intellect. They would begin the Apple project by selling some of their possessions: Wozniak's HP scientific calculator and Jobs' Volkswagen, they raised $1300 and assembled their first prototypes in Jobs bedroom.
  8. 8. Think Different When the project became too big for the bedroom they moved the project into Jobs family's garage, it was on a huge wooden work bench that served as their first manufacturing base. The computers were hand built by Wozniak and first shown to the public at the Home brew Computer club. After selling a number of the machines Apple was established on April 1, 1976 and went public on December 12, 1980. Apple has maintained its great success with its ability to understand what the consumer wants before the consumer even knows what they want; Apple effectively creates wants by their constant creative innovation and unique design which is stylish, user friendly and affordable. They have also been able to create a brand in the high technology world just as Chanel has in the fashion world. People can easily recognize an apple whether it's the I-Pod, the I-Phone, the Mac Air or the I-Pad. It has become a product that defines one's identity in how they desire to be seen by society that is a person who is highly innovative, intelligent, stylish and apart of the in crowd. This is pure marketing genius. This marketing genius of Apple has seen this company outperform beyond the business world's expectations. While so many companies are struggling to break even in the current recession Apple is getting stronger by the day. Apple’s Most Successful Products and Services iPhone 4, iPad&iPad 2, iPhone, iTunes, PowerBook G4, iPod, OS X, iMac, Quick time, Mac, Apple II.
  9. 9. Think Different 4. Price The initial price of the iPhone was set at: iPhone 6 Price iPhone 6 Plus Price 16 GB $199 16 GB $299 64 GB $299 64 GB $399 128 GB $399 128 GB $499 Introduced in September 2014 at a top price of $499 in the United States, the iPhone was one of the most anticipated electronic devices of the decade. Despite its high price, consumers across the country stood in long lines to buy the iPhone on the first day of sales
  10. 10. Think Different 5. Target Group A study conducted by Rubicon (2008) on iPhone users indicates that 50% of the surveyed users are age 30 or younger. Most of the users described themselves as technologically sophisticated. In general, iPhone users were over represented in the occupations that are usually early adopters of technology: professional and scientific users, arts and entertainment, and the information industry.
  11. 11. Think Different Moreover, the iPhone user base consists mainly of young early adopters: about 75% of whom are previous Apple customers. Now, the challenge for Apple is to get their product beyond the youthful technophiles and into the hands of mainstream users in order to maintain sustained growth. While the early adopters are a great group for launching a product, without mainstream use, the early success would not be lasting. This is why Apple has decided to use different pricing strategies such as the skimming and versioning. Below diagram can describe the iPhone audience composition:
  12. 12. Think Different 6. Skimming Skimming is referred to as selling a product at a high price; basically companies sacrificing sales to gain high profits. This is employed by companies in order to reimburse their cost of investment put into the original research of the product. This strategy is often used to target early users of a product/service because they are relatively less price sensitive than others. Early users are targeted either because their need for the product is more than others or they understand the value of the product better than others. In any case, this strategy is employed only for a limited period of time as a way to recover most of the investment of a product. According to Köehler (1996), the skimming price strategy is a high price strategy which provides a healthy margin but risks a depressed sales volume. Since high prices also attract piracy, protection costs against piracy basically eat up margins. In the case of Apple, the buyers are not attracted by pirated versions of products because of the image of the brand linked to the snobbism of the “members of the Apple family”.
  13. 13. Think Different In the graph below, we compared iPod sales with the price of iPod classic from 2002 to 2006. According to the data, the iPod classic model seemed to have either reduced its price or maintained the same price from one year to the next. In 2002, iPod classic price was the highest; as a result, it was also shown as the year with the lowest sales. For example, the Apple iPod classic costs over the years include: 399$ (2002), 299$ (2003), 299$ (2004) and 249$ (2005). Foremost, while issuing new generation model of a classic iPod, the company was still selling the previous version at the reduced price. The skimming pricing strategy is presented at two levels. First, the price of the same model is diminishing with time, especially when Apple is issuing the newest version of the iPod. Second, the price of every next generation model launched on the market is less expensive than its predecessor, which is illustrated by the above graph. Here, we took the prices of the iPod classic but the same results can be seen with the iPod mini (the launching price in 2004 was 249$ while the newest version launched in 2005 cost 199$) and the iPod nano. To gain market share, a seller cannot solemnly rely on skimming strategies but must also use other pricing tactics such as pricing discrimination, which has been the case of Apple.
  14. 14. Think Different 7. Versioning (Pricing discrimination) The purpose of price discrimination is generally to capture the market's consumer surplus. This surplus arises because, in a market with a single clearing price, some customers (the very low price elasticity segment) would have been prepared to pay more than the single market price. Price discrimination transfers some of this surplus from the consumer to the producer/marketer. Strictly, a consumer surplus need not exist, for example where some below-cost selling is beneficial due to fixed costs or economies of scale. An example is a high-speed internet connection shared by two consumers in a single building; if one is willing to pay less than half the cost, and the other willing to make up the rest but not to pay the entire cost, then price discrimination is necessary for the purchase to take place. It can be proved mathematically that a firm facing a downward sloping demand curve that is convex to the origin will always obtain higher revenues under price discrimination than under a single price strategy. This can also be shown diagrammatically. In the top diagram, a single price (P) is available to all customers. The amount of revenue is represented by area P, A, Q, O. The consumer surplus is the area above line segment P, A but below the demand curve (D).
  15. 15. Think Different With price discrimination, (the bottom diagram), the demand curve is divided into two segments (D1 and D2). A higher price (P1) is charged to the low elasticity segment, and a lower price (P2) is charged to the high elasticity segment. The total revenue from the first segment is equal to the area P1,B, Q1,O. The total revenue from the second segment is equal to the area E, C,Q2,Q1. The sum of these areas will always be greater than the area without discrimination assuming the demand curve resembles a rectangular hyperbola with unitary elasticity. The more prices that are introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is captured by the producer. Note that the above requires both first and second degree price discrimination: the right segment corresponds partly to different people than the left segment, partly to the same people, willing to buy more if the product is cheaper. It is very useful for the price discriminator to determine the optimum prices in each market segment. This is done in the next diagram where each segment is considered as a separate market with its own demand curve. As usual, the profit maximizing output (Qt) is determined by the intersection of the marginal cost curve (MC) with the marginal revenue curve for the total market (MRt). The firm decides what amount of the total output to sell in each market by looking at the intersection of marginal cost with marginal revenue (profit maximization). This output is then divided between the two markets, at the equilibrium marginal revenue level. Therefore, the optimum outputs are Qa and Qb. From the demand curve in each market we can determine the profit maximizing prices of Pa and Pb.
  16. 16. Think Different It is also important to note that the marginal revenue in both markets at the optimal output levels must be equal, otherwise the firm could profit from transferring output over to whichever market is offering higher marginal revenue. Given that Market 1 has a price elasticity of demand of E1 and Market of E2, the optimal pricing ration in Market 1 versus Market 2 is P1/P2 = [1+1/E2]/[1+1/E1].
  17. 17. Think Different Apparently, price discrimination is only feasible under certain conditions: 1) companies have short run market power; 2) consumers can be segmented either directly or indirectly, 3) arbitrage across differently priced goods is infeasible (Stole, 2003). Given the fact that these conditions are fulfilled, companies typically have an incentive to practice price discrimination. However, the form of the price discrimination may also depend on the nature of the market power. Jagmohagn Raju (2007) highlights that Apple’s price cut is an example of a strategy known as “temporal price discrimination” where it charges people different prices depending on the their desire or ability to pay. Companies such as Apple may practice this strategy for two reasons. First, they gain wide profit margins from those willing to pay a premium price. Second, they benefit from high volume by building a wider customer base for the product later. It’s important to note that price discrimination can also be structured across geographies, seasons and by adding or eliminating features. As for the “temporal price discrimination,” Apple reduced $200 from the original price of the iPhone just two months after its release. After a flood of complaints by its customers, Apple attempt to rectify complaints by offering $100 store credit to early iPhone customers. In addition to temporal price discrimination, Apple practices price discrimination via versioning where it proposes many versions of products according to the needs and prices of their customers’. The “wealthy” clients can buy a latest version of iPod classic, iPod nano or iPod touch while those who are less “wealthy” can always pay the price of a previous generation iPod (classic or nano) or an iPod Shuffle (49$).
  18. 18. Think Different The current iPod line consists of (from left to right): the iPod shuffle, iPod nano, iPod classic and iPod touch.
  19. 19. Think Different 8. Apple’s Strategy: United States and Europe Apple’s high-tech inventions may be in direct conflict with the high end products made by Nokia, Motorola, Sony Ericsson and Samsung. However, these companies will not give up that category without fighting for the end. They are used to cramming their phones with more technology than their competitors as in the case with Nokia's N series, Sony's P series, and Motorola's range of smart phones. They have high resolution cameras and video recorders, MP3 players, software and dozens of gameslso; not to mention the fact that they already have large market shares. For instance, the number of Symbian-based phones increased 44% to 34.6 million in the first six months of 2007 from 24 million in 1H 2006, with a quarter of those sales coming from Japan. The success of Nokia N95 and E-Series phones has also helped Symbian boost its revenues to about $172 million (Malik, 2007) The North-American market is very different from the rest of the world, with strong segments for Microsoft, Palm (Access), and RIM. In Europe (EMEA) the market is dominated by Symbian (Nokia), with a small Microsoft pocket and an even smaller RIM market share. It's also interesting to see the large Linux share in Japan and China (PRC). In Europe, Britain's O2 and Germany's T-Mobile have signed exclusive deals with Apple to offer the iPhone to their domestic customers. In Britain, subscribers will have to pay between $74 and $115 per month for an 18-month contract, while in Germany, customers must fork over $72 to $130 per month for a two-year contract (Scott, 2007). It appears that Apple is going against the grain of the European mobile business by charging £269 ($538) for the phone in Britain, and locking customers into 18-month contracts at monthly rates of £35 to £55 ($70 to $110). Typically, carriers discount even high-end cell phones in Europe. Such figures are in addition to the cost of the iPhone handset—which is itself a radical departure for the European market, where most phones are heavily subsidized by operators. British and German customers had to pay $565 and $439, respectively, for the iPhone, compared with $399 for U.S. consumers. In France, Apple has chosen Orange as an exclusive carrier for its iPhone, which is sold in Orange’s online and direct retail stores. The iPhone is available in an 8GB model for €399 ($592.78) and customers need to sign up for one of the special "Orange for iPhone" plans, which range in prices from €49 to €119 per month depending on the usage. Customers can also buy the iPhone for €549 if they wish to use one of Orange's other rate plans. If not, they have the option to buy an iPhone for €649 ($964.20) without a plan. The European market is pretty much dominated by
  20. 20. Think Different “pay-as-you-go customers” who have no contractual obligations to phone carriers and they make up 60% of the phone users (O’Brian, 2007). As a result, the iPhone may be insufficient to induce people to sign up for one or two year service contracts. Currently, the iPhone is available (March, 2008) at 99€ in Germany and in United Kingdom whereas it cost more than 400€ in November 2007. On the one hand, the price cut can be explained by the arrival of a new iPhone in June 2008 compatible with 3G networks. On the other hand, it may be due to the disappointing sales in Europe: 100 000 iPhones sold in France, 70 000 in Germany and 200 000 in the UK while Apple’s objective was to sell 10 000 000 globally by the end of 2008.
  21. 21. Think Different 9. Conclusion The challenge for Apple is to keep coming up with proprietary products that fuel its business model, which is based on innovation and R&D for both hardware and software. Apple’s pricing strategies include setting the price high at the start of launching a new product. After gaining some profits from its early customers who are often fascinated with new technology, Apple seems to reduce its prices in order to make it affordable and popular among other competitive products. Not to mention the fact that Apple’s iPhone and iPod prices change according to its customers as well as geographical locations. Basically, the company adapts prices according to the customers’ ability to pay in different countries. In addition to applying versioning and skimming pricing strategies, Apple also practices vertical bundling, linking the use of an iPod to the use of its iTunes stores. The company argues that protecting iTunes codes is in fact encouraging innovation. However, it also allows the company to control a large part of: portable digital media player market, online music market and online video market. At the same time, it maintains sufficient economic power in these markets in order to control consumer pricing, which ends up having its consumers pay higher prices. With its iPhone, Apple has tried to bind users to AT&T in the US, Orange in France, T-Mobile in Germany and O2 in the UK. However, low sales rates in European countries have shown that iPhone prices were in fact too in comparison to similar smart phones issued by its competitors on the phone market. In order to respond to this challenge, Apple has used its best arm - innovation and will soon issue a new version of the iPhone, which is expected to relaunch iPhone sales.
  22. 22. Think Different 10. Bibliography Info Tech (2007). “Welcome to Planet Apple.” BusinessWeek, July 9, 2007. http://www.businessweek.com Köehler H. D. (1996). “Pricing Considerations for Electronic Products in a Network and Requirements for a Billing System.” VCH Publishing Group; Weinheim/Germany. www.google.com http://en.wikipedia.org/wiki/Timeline_of_Apple_Inc._products

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