Apple’s Expensive Devices Bring Big Profits, But Come At A Price – Forbes
Does the Amazon effect mean it’s time for Apple to “think different?”
For years, Apple has been able to charge near-luxury prices for what amount to mass-market products. It’s iPhone has had a base price of $649 for the past half decade and fancier configurations cost even more. This year’s soon-to-arrive iPhone X will debut at $999. This strategy has generated endless criticism, including some in this space. Of course, at its core the argument is silly: The company is wildly successful, is the most valuable corporation on earth, and sells literally hundreds of millions of devices every year.
But the long simmering question is: When does Apple’s pricing strategy require rethinking? And when does a bigger slice of the market matter at least as much as profit margin? Apple’s answer to these questions varies a great deal from segment to segment. And it might especially come back to the haunt the company in the battle for the living room, where premium pricing with difficult-to-experience differentiation won’t necessarily work.
To understand Apple pricing is to grok the idea that most of its products sell to a specific price and margin target. It’s no coincidence that in most categories, Apple’s average revenue per unit sold is nearly a straight line when viewed on a graph tracking it over time. This fantastic analysis at Asymco illustrates the point quite clearly. iPhone pricing barely varies from the middle $600s and while things like the Plus models cause it to trend higher, the less-expensive SE has pulled it back toward historical norms. And though Mac bounces around in a small band, it doesn’t much escape the $1200-$1300 range on average.
This kind of ruler-like precision is not an accident. Apple executives spec components to the price targets and select product mix — the different models that that make up the line — with a rather specific intent to make these prices stick. When needed, the amounts of extra storage available as upsells or the precise configurations offered are tweaked and, voila, pricing is back where Apple wants it.
Still the company has learned some lessons that it can’t always completely control its own fate. At the iPad introduction, Apple took the breath away from media and analysts by pricing the product much lower than expected. At $499, it was about half what people guessed Apple would charge. The company even made comments suggesting the price could go lower in time. What Apple didn’t fully anticipate was how much lower and how quickly. It made efforts to compete in lower-price segments with the smaller, cheaper iPad Mini (a product that still exists but is no longer inexpensive at $399).
But eventually Apple concluded that it owned all the valuable segments in the tablet market. Growth would come from selling devices that mostly will replace PCs, not from inexpensive video players. Amazon, by contrast, has pricing of $50, $80, and $150 on its Kindle Fire line, depending on screen size. For just watching movies or TV, they all work great. They also sell for prices where Apple can’t realistically operate its business model.