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APPLE’S PRICING STRATEGIES

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INDEX

NO. CONTENT

1 Executive summary

2 Introduction

3 Apple Inc.

4 Price

5 Target Group

6 Skimming

7 Versioning (Pricing discrimination)

8 Apple’s Strategy: United States and Europe

9 Conclusion

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1. Executive summary

Apple Inc. is a technology company, which designs, produces and sells goods of the Computer,

Music and Mobile-phone Industries. It is differentiated by its brand-perception and

identification. Over the last couple of years, Apple has become a cult-brand, thanking it’s iLife,

iTunes, QuickTime and iMac lines. Apple Inc.’s short-term goals is currently increasing the sales

of the just launched iPad (the most innovative web=browser in market). In the long-run, Apple

aims for the top of the market, becoming the number one leader.

Apple Inc. has incorporated numerous features that are unique and well known in the market

today. We consider that there are several Apple products with several appealing features such as:

iMac, iPod, iPhone and iPad. These products represent a revolutionary era for the development

of Apple. By placing such products in the market, Apple Inc. has attracted a lot of customers in

one way or another. Highly advanced technology, simplicity and design, and the sense of luxury

are the main features integrated in these products. Moreover the comfort and convenience that

these products provide are very crucial.

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“Think Different”

One of the main reasons which inspired me to choose Apple Inc. is its unique, simple and

luxurious image that Apple has created in the market over the years. “Think differently” which is

an inspiring motto, made us believe that simplicity and creativity combined with luxury can lead

to a successful and profitable company, such as Apple. Another component that we found to be

challenging for us was to understand Apple’s goals, objectives and their secret of being

successful. A very important fact about Apple products today is that these products are globally

spread. This has created among us the idea that Apple products are no longer luxuries but real

necessities due to the technological developments. Moreover, what has motivated us most to

select Apple Inc., is the way we relate ourselves with its products. Each of us being an Apple

consumer has build trustworthiness relationship with the products that this company offers.

Owning an iPod or iPhone today definitely will make your life easy and simple.

As mentioned above, 2010 came with the launching of the iPad, which is a totally differentiated

product in the market. It is a web-browser, which also can be used as laptop, and can be useful in

every aspect of educational and professional areas. Its price, compared to regular Apple prices, is

pretty affordable ($499), which is an incentive for more buyers to purchase. This is the main goal

of Apple in the current day.

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2. Introduction

According to (OPPapers, 2012).Apple Inc is an American multinational organization located in 1

infinite loop, Cupertino, California 95014, in the middle of the Silicon Valley.

It is focused on designing and developing the personal computers, other related software

products, and the electronic products such as MP3 players and iPods. Apple Inc’s main products

are iMac, iPod, iPhone, and its latest advanced product is iPad, which is on the verge of creating

another revolution after iPhone. Apple Inc was founded in 1976 and since then Apple Inc has

been leading the way in innovating new products, however it has encountered numerous ups and

downs since then.

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Apple Inc produced the first ever extremely successful personal computer. It has been always on

the forefront of innovating new products; however it has often struggled to maintain the hold on

the market share in the product line. Lately, Apple Inc has transformed its image from an

inventive computer manufacturer to a fully-fledged consumer’s electronic company. Some facts

of its success can be calculated from its sales of $13.95 billion in the year 2005. In year 2005,

Apple Inc had controlled 4.2% of the US market in PCs. Also, Apple iPods models had

controlled 70% of the hard drive MP3 player market. Apple Inc enjoys the leading share in the

handset market, generating over 71% of the industry’s profit with 6.5% of the international

handset market. Apple unveiled its first iPhone on 9th January, 2007. The most recent iPhone, is

iPhone 4S, and it was announced on 4rth October, 2011 and was released 10 days later.

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3. APPLE Inc.

According to (Scribd Inc., 2013) Apple has to be one of the greatest success stories of all time.

The beginnings of Apple started with Wozniak assembling a simple built computer machine. It

was in the summer of 1971 Wozniak 21 and Jobs 16 were introduced to each other by a mutual

friend Bill Fernandez. Wozniak had shown Jobs his simple built computer machine and this

impressed Jobs to the point Jobs believed he could sell it for a profit. It was here they would

form a strong friendship because they not only shared a passion for computers, but because they

were both known as outcasts and for the first time they had a great understanding, admiration

and respect for each other‘s abilities, personality and intellect. They would begin the Apple

project by selling some of their possessions: Wozniak's HP scientific calculator and Jobs'

Volkswagen, they raised $1300 and assembled their first prototypes in Jobs bedroom.

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When the project became too big for the bedroom they moved the project into Jobs family's

garage, it was on a huge wooden work bench that served as their first manufacturing base. The

computers were hand built by Wozniak and first shown to the public at the Home brew

Computer club. After selling a number of the machines Apple was established on April 1, 1976

and went public on December 12, 1980.

Apple has maintained its great success with its ability to understand what the consumer wants

before the consumer even knows what they want; Apple effectively creates wants by their

constant creative innovation and unique design which is stylish, user friendly and affordable.

They have also been able to create a brand in the high technology world just as Chanel has in the

fashion world. People can easily recognize an apple whether it's the I-Pod, the I-Phone, the Mac

Air or the I-Pad. It has become a product that defines one's identity in how they desire to be seen

by society that is a person who is highly innovative, intelligent, stylish and apart of the in crowd.

This is pure marketing genius. This marketing genius of Apple has seen this company

outperform beyond the business world's expectations. While so many companies are struggling

to break even in the current recession Apple is getting stronger by the day.

Apple’s Most Successful Products and Services

iPhone 4, iPad&iPad 2, iPhone, iTunes, PowerBook G4, iPod, OS X, iMac, Quick time, Mac,

Apple II.

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4. Price

The initial price of the iPhone was set at:

iPhone 6 Price iPhone 6 Plus Price

16 GB $199 16 GB $299

64 GB $299 64 GB $399

128 GB $399 128 GB $499

Introduced in September 2014 at a top price of $499 in the United States, the iPhone was one

of the most anticipated electronic devices of the decade. Despite its high price, consumers

across the country stood in long lines to buy the iPhone on the first day of sales

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5. Target Group

A study conducted by Rubicon (2008) on iPhone users indicates that 50% of the surveyed users

are age 30 or younger. Most of the users described themselves as technologically sophisticated.

In general, iPhone users were over represented in the occupations that are usually early adopters

of technology: professional and scientific users, arts and entertainment, and the information

industry.

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Moreover, the iPhone user base consists mainly of young early adopters: about 75% of whom are

previous Apple customers. Now, the challenge for Apple is to get their product beyond the

youthful technophiles and into the hands of mainstream users in order to maintain sustained

growth. While the early adopters are a great group for launching a product, without mainstream

use, the early success would not be lasting. This is why Apple has decided to use different

pricing strategies such as the skimming and versioning.

Below diagram can describe the iPhone audience composition:

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6. Skimming

Skimming is referred to as selling a product at a high price; basically companies sacrificing sales

to gain high profits. This is employed by companies in order to reimburse their cost of

investment put into the original research of the product. This strategy is often used to target early

users of a product/service because they are relatively less price sensitive than others. Early users

are targeted either because their need for the product is more than others or they understand the

value of the product better than others. In any case, this strategy is employed only for a limited

period of time as a way to recover most of the investment of a product.

According to Köehler (1996), the skimming price strategy is a high price strategy which provides

a healthy margin but risks a depressed sales volume. Since high prices also attract piracy,

protection costs against piracy basically eat up margins. In the case of Apple, the buyers are not

attracted by pirated versions of products because of the image of the brand linked to the

snobbism of the “members of the Apple family”.

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In the graph below, we compared iPod sales with the price of iPod classic from 2002 to 2006.

According to the data, the iPod classic model seemed to have either reduced its price or

maintained the same price from one year to the next. In 2002, iPod classic price was the highest;

as a result, it was also shown as the year with the lowest sales. For example, the Apple iPod

classic costs over the years include: 399$ (2002), 299$ (2003), 299$ (2004) and 249$ (2005).

Foremost, while issuing new generation model of a classic iPod, the company was still selling

the previous version at the reduced price.

The skimming pricing strategy is presented at two levels. First, the price of the same model is

diminishing with time, especially when Apple is issuing the newest version of the iPod. Second,

the price of every next generation model launched on the market is less expensive than its

predecessor, which is illustrated by the above graph.

Here, we took the prices of the iPod classic but the same results can be seen with the iPod mini

(the launching price in 2004 was 249$ while the newest version launched in 2005 cost 199$) and

the iPod nano. To gain market share, a seller cannot solemnly rely on skimming strategies but

must also use other pricing tactics such as pricing discrimination, which has been the case of

Apple.

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7. Versioning (Pricing discrimination)

The purpose of price discrimination is generally to capture the market's consumer surplus. This

surplus arises because, in a market with a single clearing price, some customers (the very low

price elasticity segment) would have been prepared to pay more than the single market price.

Price discrimination transfers some of this surplus from the consumer to the producer/marketer.

Strictly, a consumer surplus need not exist, for example where some below-cost selling is

beneficial due to fixed costs or economies of scale. An example is a high-speed internet

connection shared by two consumers in a single building; if one is willing to pay less than half

the cost, and the other willing to make up the rest but not to pay the entire cost, then price

discrimination is necessary for the purchase to take place.

It can be proved mathematically that a firm facing a

downward sloping demand curve that is convex to

the origin will always obtain higher revenues under

price discrimination than under a single price

strategy. This can also be shown diagrammatically.

In the top diagram, a single price (P) is available to all customers. The amount of revenue is

represented by area P, A, Q, O. The consumer surplus is the area above line segment P, A but

below the demand curve (D).

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With price discrimination, (the bottom diagram), the demand curve is divided into two segments

(D1 and D2). A higher price (P1) is charged to the low elasticity segment, and a lower price (P2)

is charged to the high elasticity segment. The total revenue from the first segment is equal to the

area P1,B, Q1,O. The total revenue from the second segment is equal to the area E, C,Q2,Q1.

The sum of these areas will always be greater than the area without discrimination assuming the

demand curve resembles a rectangular hyperbola with unitary elasticity. The more prices that are

introduced, the greater the sum of the revenue areas, and the more of the consumer surplus is

captured by the producer.

Note that the above requires both first and second degree price discrimination: the right segment

corresponds partly to different people than the left segment, partly to the same people, willing to

buy more if the product is cheaper.

It is very useful for the price discriminator to determine the optimum prices in each market

segment. This is done in the next diagram where each segment is considered as a separate market

with its own demand curve. As usual, the profit maximizing output (Qt) is determined by the

intersection of the marginal cost curve (MC) with the marginal revenue curve for the total market

(MRt).

The firm decides what amount of the total output to sell in each market by looking at the

intersection of marginal cost with marginal revenue (profit maximization). This output is then

divided between the two markets, at the equilibrium marginal revenue level. Therefore, the

optimum outputs are Qa and Qb. From the demand curve in each market we can determine the

profit maximizing prices of Pa and Pb.

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It is also important to note that the marginal revenue in both markets at the optimal output levels

must be equal, otherwise the firm could profit from transferring output over to whichever market

is offering higher marginal revenue.

Given that Market 1 has a price elasticity of demand of E1 and Market of E2, the optimal pricing

ration in Market 1 versus Market 2 is P1/P2 = [1+1/E2]/[1+1/E1].

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Apparently, price discrimination is only feasible under certain conditions: 1) companies have

short run market power; 2) consumers can be segmented either directly or indirectly, 3) arbitrage

across differently priced goods is infeasible (Stole, 2003). Given the fact that these conditions are

fulfilled, companies typically have an incentive to practice price discrimination. However, the

form of the price discrimination may also depend on the nature of the market power.

Jagmohagn Raju (2007) highlights that Apple’s price cut is an example of a strategy known as

“temporal price discrimination” where it charges people different prices depending on the their

desire or ability to pay. Companies such as Apple may practice this strategy for two reasons.

First, they gain wide profit margins from those willing to pay a premium price. Second, they

benefit from high volume by building a wider customer base for the product later. It’s important

to note that price discrimination can also be structured across geographies, seasons and by

adding or eliminating features.

As for the “temporal price discrimination,” Apple reduced $200 from the original price of the

iPhone just two months after its release. After a flood of complaints by its customers, Apple

attempt to rectify complaints by offering $100 store credit to early iPhone customers. In addition

to temporal price discrimination, Apple practices price discrimination via versioning where it

proposes many versions of products according to the needs and prices of their customers’. The

“wealthy” clients can buy a latest version of iPod classic, iPod nano or iPod touch while those

who are less “wealthy” can always pay the price of a previous generation iPod (classic or nano)

or an iPod Shuffle (49$).

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The current iPod line consists of (from left to right): the iPod shuffle, iPod nano, iPod classic and

iPod touch.

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8. Apple’s Strategy: United States and Europe

Apple’s high-tech inventions may be in direct conflict with the high end products made by

Nokia, Motorola, Sony Ericsson and Samsung. However, these companies will not give up that

category without fighting for the end. They are used to cramming their phones with more

technology than their competitors as in the case with Nokia's N series, Sony's P series, and

Motorola's range of smart phones. They have high resolution cameras and video recorders, MP3

players, software and dozens of gameslso; not to mention the fact that they already have large

market shares. For instance, the number of Symbian-based phones increased 44% to 34.6 million

in the first six months of 2007 from 24 million in 1H 2006, with a quarter of those sales coming

from Japan. The success of Nokia N95 and E-Series phones has also helped Symbian boost its

revenues to about $172 million (Malik, 2007)

The North-American market is very different from the rest of the world, with strong segments for

Microsoft, Palm (Access), and RIM. In Europe (EMEA) the market is dominated by Symbian

(Nokia), with a small Microsoft pocket and an even smaller RIM market share. It's also

interesting to see the large Linux share in Japan and China (PRC).

In Europe, Britain's O2 and Germany's T-Mobile have signed exclusive deals with Apple to offer

the iPhone to their domestic customers. In Britain, subscribers will have to pay between $74 and

$115 per month for an 18-month contract, while in Germany, customers must fork over $72 to

$130 per month for a two-year contract (Scott, 2007). It appears that Apple is going against the

grain of the European mobile business by charging £269 ($538) for the phone in Britain, and

locking customers into 18-month contracts at monthly rates of £35 to £55 ($70 to $110).

Typically, carriers discount even high-end cell phones in Europe. Such figures are in addition to

the cost of the iPhone handset—which is itself a radical departure for the European market,

where most phones are heavily subsidized by operators. British and German customers had to

pay $565 and $439, respectively, for the iPhone, compared with $399 for U.S. consumers. In

France, Apple has chosen Orange as an exclusive carrier for its iPhone, which is sold in Orange’s

online and direct retail stores. The iPhone is available in an 8GB model for €399 ($592.78) and

customers need to sign up for one of the special "Orange for iPhone" plans, which range in prices

from €49 to €119 per month depending on the usage. Customers can also buy the iPhone for

€549 if they wish to use one of Orange's other rate plans. If not, they have the option to buy an

iPhone for €649 ($964.20) without a plan. The European market is pretty much dominated by

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“pay-as-you-go customers” who have no contractual obligations to phone carriers and they make

up 60% of the phone users (O’Brian, 2007). As a result, the iPhone may be insufficient to induce

people to sign up for one or two year service contracts. Currently, the iPhone is available

(March, 2008) at 99€ in Germany and in United Kingdom whereas it cost more than 400€ in

November 2007. On the one hand, the price cut can be explained by the arrival of a new iPhone

in June 2008 compatible with 3G networks. On the other hand, it may be due to the

disappointing sales in Europe: 100 000 iPhones sold in France, 70 000 in Germany and 200 000

in the UK while Apple’s objective was to sell 10 000 000 globally by the end of 2008.

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9. Conclusion

The challenge for Apple is to keep coming up with proprietary products that fuel its business

model, which is based on innovation and R&D for both hardware and software. Apple’s pricing

strategies include setting the price high at the start of launching a new product. After gaining

some profits from its early customers who are often fascinated with new technology, Apple

seems to reduce its prices in order to make it affordable and popular among other competitive

products. Not to mention the fact that Apple’s iPhone and iPod prices change according to its

customers as well as geographical locations. Basically, the company adapts prices according to

the customers’ ability to pay in different countries.

In addition to applying versioning and skimming pricing strategies, Apple also practices vertical

bundling, linking the use of an iPod to the use of its iTunes stores. The company argues that

protecting iTunes codes is in fact encouraging innovation. However, it also allows the company

to control a large part of: portable digital media player market, online music market and online

video market. At the same time, it maintains sufficient economic power in these markets in order

to control consumer pricing, which ends up having its consumers pay higher prices.

With its iPhone, Apple has tried to bind users to AT&T in the US, Orange in France, T-Mobile

in Germany and O2 in the UK. However, low sales rates in European countries have shown that

iPhone prices were in fact too in comparison to similar smart phones issued by its competitors on

the phone market. In order to respond to this challenge, Apple has used its best arm - innovation

and will soon issue a new version of the iPhone, which is expected to relaunch iPhone sales.

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10. Bibliography

Info Tech (2007). “Welcome to Planet Apple.” BusinessWeek, July 9, 2007.

http://www.businessweek.com

Köehler H. D. (1996). “Pricing Considerations for Electronic Products in a Network and

Requirements for a Billing System.” VCH Publishing Group; Weinheim/Germany.

www.google.com

http://en.wikipedia.org/wiki/Timeline_of_Apple_Inc._products