Slicing the Apple: An analysis of Apple’s pricing strategy

By Ishika Agarwal

Apple CEO Tim Cook told Bloomberg Businessweek in a 2013 interview, “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.”

Apple is known for its luxurious and classic products. The company exclusively markets premium products and offers its customers products at the top of the mass market – often seen as a status symbol. Apple products are mass-produced, mass-distributed, and price-sensitive – the very definition of a mass product.

Before diving into Apple’s price strategy, it is essential to highlight the key points used while pricing a product in general. Firstly, evaluate the cost of manufacturing the product, and then miscellaneous costs are added, including sales tax, import and export costs, marketing expenses, to name a few. Lastly comes determining the profit margin which the manufacturer decides to make from the commodity. After calculating the costs mentioned above, the final retail price of the product is strategized.

The best business model involves solid sales and high-profit margins. Price skimming is a strategy followed by premium brands like Apple, where the products are priced very high with higher profits so that fewer sales are needed to break even for the manufacturer. Apple uses this strategy to distinguish itself from the other manufacturers in the business. Focusing its central manufacturing units in China, Apple has made a robust supply chain for itself, complementing its profits.

Executives at Apple have carefully formulated the companies price strategy, and it focuses a lot on consumer behaviour. In 2019, Apple launched the iPhone 11, priced at $649, while the iPhone 11 Pro was sold at $999 and the iPhone 11 Pro Max at $1099. Here, the iPhone 11 Pro acted as the decoy since there is not much difference in the 11 Pro and 11 Pro Max prices. So, a consumer would get tricked into comparing the iPhones and eventually buying the most expensive option thinking that they would get more value for the money.

Most technology companies manufacture the hardware (Dell, Toshiba, Samsung), install someone else’s software (Windows and Android), and third-party services (Google), and sell the products through different party’s stores. However, Apple has it all working in harmony. This vertical integration of its own software, hardware, and other services combined creates a unique user experience promising it a loyal consumer base. This virtual ecosystem of technology is unique to Apple.

Apple has always been a forward thinker when it comes to its competitors. It sells products and offers its users a unique tech ecosystem where all Apple products can be synced with one another for its best use. Offering consumers a network of applications and add-ons, including Apple Music, iTunes, iCloud, Apple Pay, Apple Care, and the App Store, allows Apple to independently price its products since these additions are exclusive to Apple users.

Apple’s pricing strategy relies on product differentiation, which distinguishes a product or service from competitors. Apple has been victorious at differentiation, thus creating demand for its products and devising a unique customer base. Their success at differentiation, combined with their brand loyalty, allows the company to have power over their pricing. By establishing a loyal customer base and keeping their prices high, Apple has set up an artificial barrier to entry for their competitors. It is not just about comparing the features of its products with its rivals but the quality to which Apple caters. Its products always possess a minimalist and classic appearance, a branding style synonymous with luxurious brands.

Apple spends a great deal of time, energy, and money improving its iPhones’ processors every year. To date, processors designed have been one or two years ahead of the processors made by its competitors, with the latest M1 chip being revolutionary in the technology industry. Keeping itself on the toes with such technological advancements accompanied by the uncompromising nature of the company when it comes to Apple’s designs and quality is something that sets it aside from the others in the business. The groundbreaking technology in Apple products is the prime reason for the high price tags.

Apple utilizes a minimum advertised price, or MAP, retail strategy. This strategy prevents retailers from pricing their Apple products below the MAP. By ensuring the price for Apple products never drop below a specific price, Apple can maintain their product popularity. The minimum advertised price enables Apple to keep its distribution channels clear while ensuring their profits do not see a decrease. All this lends a hand to keeping Steve Job’s original strategy in place, creating premier products that sell for premium prices. After launching its products, Apple is known to discontinue its previous catalogue. This strategy ensures that customers do not switch to its old devices due to a price drop. Maintaining the price spectrum it offers to its customers is a core strategy of the company, and doing so also ensures the sale of its new product line.

An essential part of Apple’s success can also be accredited to its launch events. Marking products at high prices is not enough for any company, and it does not guarantee sales of its products. What ensures a high volume of sales is hidden in Apple’s launch events. Apple’s product launch events have become the stuff of legend, commanding the attention of a global audience and defining an entire industry. The innovative way of showcasing its products and its features to the customers makes them worth the high price that Apple demands. These events are not only descriptive but also a feast for one’s senses. Every aspect is carefully designed and presented to its customers, from setting the music right to the audio and visuals. When it comes to product designing, innovation, price strategy, and most importantly, the art of selling its products, Apple knows it all. Hence, Apple can be called an organization, lifestyle, brand, business, or all in one.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Image: Unsplash

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