Apple's Pricing Strategy Different Than the Street

On Monday, many analysts were predicting that Apple would price the new MacBooks aggressively, based on a recognition of the current economy. However, Apple has a very different outlook, both for the health of the economy and their Mac sales.

When Apple didnit announced an aluminum MacBook for US$899 on Tuesday, Appleis stock slid about 10 percent, and the slide coincided with the news that the real price would be $1,299 for the base model.

Right away, some observers said that Apple didnit cut prices enough and that the higher than expected prices would would test customer loyalty in the downturn. Exploring how Apple operates and their understanding of their customers goes a long way towards explaining that $400 gulf between expectation and reality in Appleis pricing.

First, any lowering of the MacBook price in a dramatic fashion would have to be based on an expectation of drastically reduced notebook sales. However, for example, Barclay Capitalis Ben Reitzes updated his published projections for Apple desktop and notebook sales for the next year.

Source: Barclays Capital

The chart shows that only the typical seasonal adjustments for Mac sales are in effect and that Apple can expect to sell nearly 2 million notebooks alone in the June 2009 quarter and maintain double digit year over year growth in the process. These are not numbers which would cause a company to panic and suddenly chop prices in a recessionary fervor.

In addition, itis well known that Apple sells to the upper quintile of notebook purchasers. These are customers who have the money to buy the best. There arenit many of them, but there are enough, about a third of notebook purchases (by revenue) who have over a thousand dollars to spend on a notebook, that Apple can expect to continue to appeal to that market.

Carl Howe, Director of Anywhere Research, with the Yankee Group agrees. He told TMO, "These prices are not chosen at random, but itis the result of Apple being a premium brand. In fact, setting a low price is the last refuge of a good marketer. Good marketers just donit go there, and they never lead with price."

"It takes a lot of price discipline," he added. "Analysts look at profitability, not just pricing."

So it is somewhat surprising that some observers and analysts were disappointed by Appleis price announcements on Tuesday when they know well Appleis history, strategy, and customer base.

Piper Jaffrayis Gene Munster told the Wall Street Journal on Wednesday that the announced pricing indicates that Apple feels confident about the economy. In addition, Steve Jobs told the WSJ after the presentation, "We donit build these [notebooks] for the Street."

Apple understands its customer base and income profile well. All of the fuss and angst on Tuesday was based on the idea that the entire cross-section of U.S. income profiles needs to be addressed with fire sale, brand damaging prices. Apple never has addressed the low end, price sensitive market and doesnit appear to be ready to do so in the near future.