Apple’s premium pricing strategy and product differentiation

Market Realist

Must-know: An investor's essential guide to Apple (Part 1 of 7)

Apple’s strategy

On low-end devices, Apple CEO Tim Cook told Bloomberg Businessweek in an interview last year, “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.”

Cook’s thoughts echoed those of his predecessor, Steve Jobs, whose strategy for Apple had four pillars:

  1.     Offer a small number of products.
  2.     Focus on the high end
  3.     Give priority to profits over market share
  4.     Create a halo effect that makes people starve for new Apple products

Differentiation

Apple attempts to increase market demand for its products through differentiation, which entails making its products unique and attractive to consumers. The company’s products have always been designed to be ahead of the curve compared to its peers. Despite high competition, Apple has succeeded in creating demand for its products, giving the company power over prices through product differentiation, innovative advertising, ensured brand loyalty, and hype around the launch of new products. By focusing on customers willing to pay more and maintaining a premium price at the cost of unit volume, Apple also set up an artificial entry barrier to competitors.

Apple sells its products and resells third-party products in most of its major markets directly to consumers and SMBs through its retail and online stores and its direct sales force. The company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Apple uses a retail strategy called “minimum advertised price” (or MAP). Minimum advertised pricing policies prohibit resellers or dealers from advertising a manufacturer’s products below a certain minimum price. MAP is usually enforced through marketing subsidies offered by a manufacturer to its resellers.

According to a piece in Macworld, Apple maintains the popularity of its high-priced products by only offering retailers such as Wal-Mart or Best Buy a marginal wholesale discount. This small percentage in savings isn’t enough of a profit margin for retailers to offer big discounts on Apple’s products, which means customers end up paying a price close to the manufacturer suggested retail price (or MSRP). However, a retailer could give up this small profit margin and offer products at a discount to attract more customers. Apple prevents this scenario by offering monetary incentives to retailers to sell goods at the MAPs fixed by the company.

This price strategy is effective insofar as it prevents retailers from competing directly with Apple’s own stores, and it also ensures that no one reseller has an advantage over another. So Apple is able to keep its distribution channels clean as well as make more money on its direct sales. The Macworld article further noted that iPhones weren’t under a strict pricing model, as they sold at a lower price with wireless contract deals, as retailers gain a commission from carriers.

Premium prices

Jobs’ vision for Apple was always to create a premier product and charge a premium price. Apple’s cheapest products are usually priced in the mid range, but they ensure a high-quality user experience with their features. The hardware and user interface are designed to provide a lot of value for the price, which keeps profits high. However, a company can charge a premium price as long as it has a competitive advantage, and analysts believe the brand is on the way to losing its “aspirational” status. With increasing competition from Android and low-cost smartphones, as well as saturation in the developed markets, analysts feel that the company could risk becoming a high-end niche name.

According to IDC’s mobile phone forecast in 3Q 2013, a number of trends co-exist in the global smartphone market—but none have more of an effect on driving market growth than the steady decline in average selling prices (or ASPs). Android has enabled a number of new manufacturers to enter the smartphone market, supported by a variety of turnkey processing solutions. Many of these handset vendors have focused on low-cost devices as a way to build brand awareness. In 2013, IDC expects smartphone ASPs to hit $337, down 12.8% from the $387 recorded in 2012. This trend will continue in the years to come, and IDC expects smartphone ASPs to gradually drop to $265 by 2017.

Continue to Part 2

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