Apple Pricing Strategy: Don’t Diminish the Brand

| Hidden Dimensions

"Good marketers don't lead with price."

-- Carl Howe

Apple is a premium brand of computer. Apple doesn't try to compete with PCs directly on price for several reasons that are well known. Cut throat pricing leads to diminished profits and loss of shareholder value. It diminishes the hard won reputation of the Apple brand. Finally, it's too early for Apple to jump on price decreases before it fully understands the the impact of the Jan-Mar quarter sales.

Another reason is that dropping prices for a premium brand has to take into account Apple's experience with the price elasticity of its products. Price elasticity is defined as the response in demand for a product as the price decreases. For example, if Apple were to drop the price of the low end Mac mini from US$599 to, say, $399, would the demand increase so much that the new production rate would lower costs and make more money for Apple? Or would the price reduction simply reduce Apple's earnings? Based on what we've seen from Apple lately, the answer has to be the latter.

I suspect that Apple has some fairly sound computer models that suggest what the impact would be of various price reductions. To put it euphemistically. Tim Cook, Apple's COO, has a sharp pencil and a sharp mind. He knows, to the penny, the bill of materials for each Apple product, what the new cost would be based on an increased order, and how his gross margins would be affected.

Recession Realities

It's a fact of life that people who are concerned about getting laid off tend to avoid premium products. That said, Apple still has to ask itself some hard questions about what the impact of lowering prices would be on the company. Eventually, the U.S. and the rest of the world will climb out of this economic mess. How would customers react in the future to Apple raising prices back to original levels? (I remember the outcry when Apple actually raised memory prices a few years ago. One would think Apple ran over a grandma, on crutches, in the parking lot.)

Does Apple have enough cash assets to weather a 10 percent drop in sales in order to preserve its premium brand for the future? (The answer is yes.) History has shown that Apple appeals to prosperous customers, so will a 9 or 10 percent unemployment rate affect a company that only has 10 percent of the total market share of computers in the U.S.? And 3.5 percent worldwide? Will the current mental state of of American consumers drive sales down dramatically or just a bit.  Apple is watching and evaluating.

When observers of the Apple scene suggest that Apple sell a $500 netbook or lower the prices of their notebooks drastically, it seems more like a knee-jerk reaction and wish fulfillment for a "cheaper" Mac than a considered judgment about all the factors I've mentioned above.

Contrasting Apple to Car Companies

A lot of people like to contrast Apple to the American car companies. They wonder what GM or Chrysler would be like if Steve Jobs were the CEO. The reason we're titillated by that prospect is because we intuitively know that the American car companies have operated like Apple under Messrs. Spindler and, to a lesser extent Amelio.

Before Steve Jobs came back to Apple, it was a needy company. It gave away money and computers. It spent lavishly on the Apple Masters program, essentially a bribe to famous people to encourage them to love their Macs and show it. Apple execs stuffed the reseller channel in the vain (and criminal) hope that lots of Macs shipped would substitute for lots of Macs purchased by customers. Many of its products were mediocre and the selection was confusing. (But not my beloved Power Mac 8500!)

If we look at the Detroit auto makers, we see similar things. Rebates essentially bribe customers into buying mediocre products. Also, there are lots of products being built but few great products that cause people to stand in line at oh-dark-thirty to buy them. While Toyota invested heavily in hybrid technology, because they knew that offering cutting edge and responsible products would some day pay off, GM was patting itself on the back over Hummer sales. No one really gets excited about Buicks, but show me someone who doesn't drool over a BMW. That isn't crass thinking, rather, it's just a common sense recognition of the spectrum of quality in products -- an enduring fact.

Basic Human Psychology

Part of the psychology here, by Apple, is that if something is just a little bit out of the buyer's price range, it's desirable. At some point, a dream will come true (or an income tax refund check arrives) and the dream can be fulfilled.

I've handled a few netbooks at Microcenter in Denver, and, believe me, these computers are nothing to drool over. They're work horses for someone who needs a computer to take on travel for surfing, twitter, chat and e-mail. That's it. They do the job nicely.

But when people use low end stuff for a living, its likely that their only available rationalization is how little they spent. Similarly, ask any IT manager about how proud he is about how little money he spent on the computers he bought for his staff. It's a comfortable conceit. Apple knows all about it. These people are not its customers. Should Apple gamble that they should be?

Basically, Apple, as a business, has to make a considered judgment about its own best interests, both now and in the future. Pleas by customers for Apple to give them gifts aren't typically part of the equation. And yet...

Recession Proof?

Apple is definitely not recession proof. The collective consciousness of the country, even though about 91 percent of people are still working, is in the dumpers. Each day brings bad news, and Apple sales will be down this quarter. They may be down for a few quarters. Even so,  Apple has the luxury, by virtue of its assets, to avoid a hasty, emotional decision. Peter Oppenheimer, Apple's CFO, has suggested this during the last few earnings reports.

Also, analyst perceptions about how well positioned people are to actually buy Apple products affects their valuation of Apple stock. So despite great products, if fewer people can afford them, then Apple's viability as a company is affected. The question for Apple, however, is deeper. Does lowering prices increase revenues? Does it portend profits that encourage investment? Again, from what we've seen, Apple may not believe that right now.

How far would Apple sales have to drop before Apple needed to take drastic action? What would that action be if Apple sales fell by 50 percent, like the U.S. car companies in February? Macs at 50 percent discounts? Not with gross margins of only 31 percent. On top of that, no business cause and effect is linear, so  an X percent drop in sales doesn't instantly dictate an X percent drop in price.  It's that elasticity issue again. Finally, can a company with US$28 billion in cash and short term investments weather a more probable 10 or even 20 percent slide in sales for a few quarters without damaging its brand? I think the answer is yes, and I think Apple is betting on just that based on the pricing of the latest iMac, Mac mini and Mac Pro updates.

At least for now.

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16 Comments Leave Your Own

aardman

Another thing that should disabuse people of this demand that Apple lower prices is the cost of Apple’s industry-leading customer support.  The Genius bars and phone reps that dispense free support is not free.  Support for the installed base of Macs is paid for by sales of new Macs.  That’s another reason Apple has to play at the premium end of the market—so they can figure in the cost of that premium support without slapping on an outsized impact on product price.

If Mac prices go down, Apple will have to cut down on customer support and this would directly impact Apple’s ability to offer premium after sales support.  Which is one of the main reasons people choose Macs.

Tiger

Face it, there are people who won’t be satisfied until Apple Walmarts itself right into the cellar with Dell. They don’t notice the stock difference at more than 9x. They are about the almighty bottom line price.

Wouldn’t we all like a Ferrari for the price of a Hyundai?

Or in simpler terms, wouldn’t it be nice if Ruth’s Chris Steakhouse cost the same as Sizzler?

Carlito

That’s why Apple has all those Billions of Dollars it is sitting on.

Also, I took advantage of the Genius Bar when my converter board for the screen broke and they took care of it. That was one of my best experience of tech service in any field here in the USA period.

davebarnes

John,
Excellent commentary and analysis.
I do find it sad that you felt the need to explain price elasticity.
,dave

Andyda

I really want Apple to stay in business.  I just replaced my aging iBook with a new MacBook (white) and my aging iMac G5 with a new iMac.  I look at the price I paid as a bargain. 

I have been using Apple products since 1985 and I have purchased 7 new desktop computers and 4 new laptop computers since then.  Recently I even purchased a used Cube just because I always wanted one but never got around to it.

I use Windows where I work, and I really, really don’t want to use Windows at home.

So if Apple needs to charge the prices they do, I will buy the best I can afford.

Just MHO, YMMV

Andy

geoduck

Nice article. I think it’s right on as far as where Apple is positioning itself; as a premium brand. Apple systems may cost more than the bottom end but they have fewer problems and last longer. IMO that’s where Apple needs to focus its advertising; value for the money.

Oh and tundraboy, don’t you just hate that we can’t edit or delete postings any more. I really appreciate the new forums engine they put in a few months back, it works much better, but boy I miss being able to edit and delete. Worse yet it seems inconsistent, some articles I can and some I can’t.

Gene King

I wonder will this recession cause Apple to consider producing a desktop computer [non AIO] between the iMac and the Mac Pro using desktop chips?

MacAgent

Apple has always been a premium brand. It has its own special place in the market, and it has not always appealed to the average consumer. The people who have always bought Apple products will continue to do so, as their quality has never diminished, and their customers are not part of the major demographic other tech companies rely on.

Terrin

I think Jobs summed it up when he said that most people who already buy Apple products will unlikely switch from Apple to another company. In a bad economy people might postpone purchases all together, but jumping ship is unlikely. I agree.

wilf53

Interesting article, but what I often miss in analyses like this, is the international perspective? I think there are a few aspects, also psychological, which is often overlooked.
First of all, is the fact that most of us who follows Apple from abroad, are well aware of American prices. There are many reasons as to why prices in other countries are mostly quite a lot higher. VAT is one but one cannot claim shipping to be another, since they all seem to be shipped from China nowadays:) One excuse often heard, is the claim that there are higher costs for running a business in many other countries, but I would like to have seen exact number in that case.

But anyhow, I think that people in the US do forget the fact that the level of income etc., often is much lower in most other countries outside the US. But still, Macs are often more expensive relative to the US. Windows PCs are mostly not. They seem to be more or less the same, all over. Thus, Macs are even more expensive, counted in cash, but they are also relatively more expensive compared to Windows PCs than the difference is in the US.

I think this is much of the reason why global market share is so much behind the one in the US. Macs are even more for the elite in many countries, than it is in the US and a few other countries like the Scandinavian countries, Germany, Switzerland and The Netherlands.

It is a little thoughtless then to dismiss the problem by saying that Apple do not cater to the low price-segment. It is of course an argument that they can probably not keep up the quality if they go down too much in price, but I am sure much would have been won if they were able to harmonise the pricing somewhat is some countries.

But it is certainly not an easy problem for a US company to handle, especially when it is trying to increase its market share globally. But a more affordable tower could be one thing and perhaps a Mac Netbook?

Just my 2 ?re worth, trying to add another perspective:)

John Martellaro

Remember that if Apple lowered the price of Macs in other countries, in proportion to their economy, an instant black market would appear. Profiteers would buy Macs overseas and sell them in the U.S. for less, still making a profit, and undercutting U.S. retail outlets.
J.M.

Chaz

John
I can agree with all of your comments, but note that Apple can maintain the premium brand, but careful examination of where the PC prices are and staying linked to being in the top 20%.  My concern is that they wait too long to change prices and components, and people wait, or worse, get really honked off when buying a product 45 days before and upgrade, where you get 2x’s the Ram, HDD, faster CPU, etc.

Secondly, you haven’t factored in the enormous open door called VISTA!  I expect M$ to close this door relatively soon, and I can’t see most of the public understanding Snow Leopard and what those changes mean.  Developers will not embrace 64bit computing for years, so, there’s a chance to strike while the iron is hot.  And given that component prices will continue to decline, I’m not sure why you think they have to raise prices in the future?

wilf53

Yes, John, I am aware of that fact you mention and it is a valid point. To expect them to lower prices in proportion to each country?s economic level is of course just wishful thinking and if we consider how large those differences are, it would probably require some kind of economic magic not known in this world:)
What I was thinking of, however, was merely smaller adjustments to make the prices more equal to American prices, an average sales tax included, if need be. This would probably mean lower margins, but the question is whether that would not be more than balanced up with increased sales - and they would not be creating a black market since you could still get Macs for the same price or even slightly cheaper in the US. But you would create a psychological effect which would be positive. How positive, is another question.

As it is now, we do have a psychological effect when comparing European prices to US and that is a negative effect.
It would still be products for a certain elite, but professionals might be more enticed to buy than before.

Every eurocent counts, I think. The question is if those are added or subtracted.

geoduck

This is the core of the question we see here in Canada. The base MacBook is $999 in the US. The same unit in the Apple Canada store is $1149, a difference of ~15%. Is this good or bad? Well right now when the Canadian Dollar is running between 75 and 80 cents to the US dollar and it’s not a bad deal. Last year when the Canadian dollar was over parity, at one point it reached $1.10 US, it would have been really bad. Money floats, would we expect Apple to adjust the price daily to reflect exchange rates? I’d like to see them try to keep the price comparable across country lines, but at some point this gets to be a huge undertaking.

Doug

I’ve read numerous analysis about why Apple should continue to be a premium brand, often focusing on the idea of why they shouldn’t get into the netbook market.  And generally I agree, but there are other options open to Apple for less expensive but still ‘premium’ systems.

They could make a very nice mid-tower, something half of a MacPro with that would give people the options for expandability and power, without the huge cost of a workstation class system.  They could even make the system in the style of Shuttle Computers little lunchbox systems that pack plenty of punch and expansion in a small unit so they could justify a premium.  They could at least offer this mid-desktop at a price point between the Mini and Pro.  And it wouldn’t have to be a ‘cheap’ system.

Many people have been clamoring for such a system for a long time.  For many the mini is underpowered & overpriced, and the Pro is overpriced & overpowered / sized.  A midtower could serve very well to provide a perfect balance of power and price.  Sadly it seems we have to resort to Hackintoshes to achieve that.

geoduck

Oh I just LOVE the Shuttle systems. Tiny, quiet, just slightly expandible, yes that would be a perfect model for a mid tower. A couple of slots and space for two drives. Ideal.

But I don’t see Apple doing that.

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