“We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost.”
These were Tim Cook’s ending lines during a business interview back in 2011 when he was freshly appointed CEO.
His thoughts reflected the same as his predecessor, Steve Jobs. The company’s beliefs lie majorly on offering a unique value proposition and creating an aspirational brand image. To achieve this, Apple has constantly updated their pricing strategy. My ongoing business classes kept coming back to this company as a case study in marketing and pricing strategy. From an ardent naysayer to a self-confessed fanboy (?), I decided to reflect on what made me switch. And how Apple continues to dominate the market when my peers are still complaining about the premium price of its products.
A Unique Value Proposition
Apple never competes on price. Any entrepreneur knows that a price war will eventually lead to a race to the bottom, and hurts the market as a whole. Apple, the most valuable company in the world, still follows this and has never wavered on its pricing strategy.
Instead, Apple focuses on its UVP (Unique Value Proposition), which are beautiful designs and simplicity. Apple is not competing on price. Customers will pay more for an Apple product than for something similar from a competitor. However, Apple does not even consider others as competition. Apple focuses on its complete value chain and delivers on the entire product. This helps Apple command higher prices. Apple is like the Rolls-Royce of technology products. Their customers know they are getting their money’s worth and are willing to pay for it. This extra is known as the Apple Tax. This creates a halo effect and it becomes an aspirational brand for many.
Price skimming is a strategy followed by premium brands where the products are priced very high with higher profits so that fewer sales are needed to break even for the manufacturer. It focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers
Before each generation of new products come out, they stir up the consumers’ psychology with curiosity and expectations. When the new product starts sales in the market, its high price makes a lot of consumers stay away. When the Apple X was launched, it broke a glass ceiling in smartphone prices (INR 1,00,000 in India and $1000 in the US). However, despite its relatively high price, its sales remain unaffected. Instead, this builds the high-end image of Apple in the minds of consumers and brings a lot of loyal customers.
Just when its sales are still running well and the market has not saturated, Apple starts to develop the next generation of products and begins to reduce the price of old products. As a result, before the latest product is available, the current product has become hot products and market coverage has reached a considerable height. This opens up a broader market for the new products. When the latest product comes out, their price is even higher than the previous generation, but its sales are still good. That’s why Apple’s skimming pricing strategy can obtain a good result.
Unbundle to increase price and revenue
Unbundling your products or services offers more choices for your audience by splitting them into multiple offerings tailored to meet the needs of your audience. This helps a business reach different consumers by offering just what they want.
One of the latest strategies that Apple has executed to increase their revenue is unbundling its products. Apple has stopped including the phone charger and earphones with the phone. That had caused a lot of internet memes and backlash. But if you think about it, it’s a brilliant strategy, Apple knows it can’t possibly raise its price on new models any further without losing (some) market share. So, it unbundled the product so that customers have the option to choose which accessories they want. It gives them more flexibility to customize their experiences and needs. For example, I may want a larger power brick or AirPods instead of wired earphones. Another instance was the $1000 monitor stand. The Apple XDR display was priced similar to standard studio monitors. However, in order to generate more revenue, it simply unbundled the stand and sold it as a separate accessory. Unbundling provides more flexibility and customization options to the user. It enables Apple to provide only the most valuable part of the product. It certainly doesn’t hurt them that customers now pay slightly more for the same product.
Why does it work?
First of all, there is a very strong brand to support the premium prices. Second, there are a number of customers with strong purchasing power who are not sensitive to price. Third, the amazing speed with which Apple can replace its product line with the newer generation.
Apple could, of course, “buy” more market share simply by lowering its prices, but this has two major disadvantages. First, the market share that they would be buying is worth far less than the market share that they already own. Second, a lower price would lead to lower profits as well. That could be counter-productive and could also damage that halo effect of the brand.
There’s nothing wrong with market share and I’m quite certain that Apple would be more than happy to expand their market share — but not at any price.
This article is a work in progress and will be updated as I realize them during my MBA studies.