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The Devil's Advocate
by John Kheit

Apple's Up-Sell Equals Switcher No Sale
September 10th, 2003

Apple has been practicing the art of up-selling for a while. Go to any Apple store, and beyond being greeted by patronizing and obnoxiously condescending employees, you'll be faced with the up-sell. You can experience this even on Apple's Web site just by perusing their prices on the G5.

The premise of the up-sell works something like this. Sell a piece of crap at a low price. Then for a marginally greater sum, offer an increase in value with a perceived utility being an order of magnitude greater than the price increase. Using the G5 as an example, for US$1,999 you get a 800 MHz bus, 1.6 GHz CPU, 80 GB hard drive, and 256 MB of RAM; however, with the entry model you are limited to only 4 GB of RAM instead of 8 GB and PCI slots instead of PCI-X. For US$2,499 you get a 900 MHz bus, 1.8 GHz CPU, 160 GB hard drive, and 512 MB of RAM. For US$2,999 you get a 1 GHz bus, two 2 GHz CPUs, 120GB hard drive, and 512 MB of RAM. So for 25% more money, you get roughly 50% more capacity with the 1.8 GHz machine (by capacity, I'm talking of a rough amalgamation of storage space, storage capacity, bus and CPU speed). For 50% more, you get roughly 100% more capacity from the dual 2 GHz machine. So a savvy non-Mac person will quickly glean that lower-priced machines are performance rip-offs; but realistically, for most people the dual 2 GHz machine is ridiculously overpriced because walking out with one will end up costing over US$4,500 on average.

Why that much? Well if you get that nice looking G5 tower, most people want to match it with an Apple monitor -- especially since Apple uses proprietary monitor connectors -- and when spending a premium on a G5 dual 2 GHz tower, who wants to have to scrimp and mismatch it with that measly old Apple 17" monitor for US$699? Most will want at least the 20", and that's another US$1,299. Then don't forget the Bluetooth adapter, US$50, and Airport Extreme, US$99, that Apple will nickel and dime you with. And if you're already spending such an obscene amount on a computer, you don't want to scrimp and deny yourself the iSight for only US$150. Hell, you've invested so much at that point, wouldn't it be a crime not to upgrade the video card from the ATI 9600 Pro to the 9800 Pro? Well then add another US$300.

The grand total for all this "reasonableness?" US$4,965.95.

These are the economics of the up-sell that the average potential Switcher is faced with; and guess what? They balk. If settling will cost the average would-be Switcher a minimum of $2,700 to walk out of an Apple store with a tower system and a measly 17" monitor (1.6 GHz G5, $1,999, and 17" Apple LCD display, $699—not mentioning the huge cost in re-acquiring software), then, hell, why not just really settle and get a Windows box for half the price and probably greater CPU throughput to boot? After all, the 2 GHz G5 is roughly equivalent to a 3 GHz P4 in throughput. So a 1.6 GHz G5 is the rough equivalent of a 2.4 GHz P4, which is a mediocre performance level for Wintel systems these days. Sure, the PC at half the price may not be an exact match to a G5 system, but the perceived value is what counts to most potential Switchers.

Considering the average Mac owner holds onto their system far longer than a PC owner, for them the economics of the up-sell don't work either. If you've been holding onto your Mac for 4-5 years, the leap in performance by going to a 1.6 GHz G5 will be so great, likely over 10 times an increase in speed, that for Mac users, the low-end G5s can appeal to them from the perspective of their relative gain in performance over their old systems.

Still, if they can swing it, the up-sell is the far better deal, and this may be one of the factors that keeps Mac users on the sidelines and out of the stores for so long. If Mac users are savvy enough not to settle for Windows, then perhaps a great deal of them don't want to settle for an Apple machine until it's offered at a reasonable and attainable price/performance point; one at which they don't feel they are settling or making too many huge concessions.

The end result is that there is a good chance that the up-sell Apple pathology may result in more lost sales than increased revenue. For example, I know more than a few folks that ended up going with E-machine's excellent PowerBook-like machine instead of a comparable PowerBook, which costs roughly 100% more. Due to its popularity, E-machines has been selling out that model since its debut.

Apple may be a premium brand, and people should reasonably expect to pay more for its superb products, however, maintaining a perceived price premium of 100% over comparable products is sure to keep its market share stagnant at best. Perhaps that's what Apple wants. Regardless, with up-sells to such ridiculously high prices, that's exactly what it's going to continue to get.

John Kheit and TMO Editor-in-Chief Bryan Chaffin currently have a Bet. The Bet concerns Apple's market share of the next four quarters, starting with the current (September) quarter. John says that Apple's market share will not rise, while Bryan says that it will. For every quarter, there's US$25 at stake, and the loser of the 4th quarter has to publicly own up to a band that they are embarrassed to enjoy. For more details on The Bet, read "The Bet: Apple, Faster, Better & Still a Loser," by John Kheit.

is an attorney. Please don't hold that against him. This work does not necessarily reflect the views and/or opinions of The Mac Observer, any third parties, or even John for that matter. No assertions of fact are being made, but rather the reader is simply asked to consider the possibilities.

You can send your comments directly to me, or you can also post your comments below.

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