Pricing Strategy of Apple free essay sample

Price The initial price of the iPhone was set at: Model Price 4gb model $499 8gb model $599 Introduced in June 2007 at a top price of $599 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. Just two months later, Apple discontinued the less-expensive $499 model and cut the price of the premium version from $599 to $399. 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. Moreover, the iPhone user base consists mainly of young early adopters: about 75% of whom are previous Apple customers. We will write a custom essay sample on Pricing Strategy of Apple or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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 roduct, 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. Price 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 heir 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 ofa product. 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. 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), Figure depicting the prices and sales of iPod Classic from 2002 to 2006 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. 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. Versioning (Pricing discrimination) Pricing discrimination is a pricing strategy that charges customers difference prices or the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. Most often the seller places customers in groups based on certain attributes and charges each groups a different price. 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. 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. Apples 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. Its important to note that price discrimination can also be structured across eographies, 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 $100 store credit to early iPhone customers. In addition to temporal price discrimination, Apple practices price discrimination via versioning where it proposes many versions of products according to the needs and prices of their customers. The wealthy clients can buy a latest version of iPod lassic, iPod nano or iPod touch while those who are less wealthy can always pay the price of a previous generation iPod (classic or nano) or an iPod Shuffle (49$). This large offer is constantly renewed which allows the company to practice the skimming and reassure the snobbish members of the Apple family. Apples Strategy: United States and Europe Apples 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 fghting for the end. They are used to cramming heir phones with more technology than their competitors as in the case with Nokias N series, Sonys P series, and Motorolas range of smart phones. They have high resolution cameras and video recorders, MP3 players, software and dozens of instance, the number of Symbian-based phones increased 44% to 34. 6 million in the first six months of 2007 from 24 million in IH 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. Its also interesting to see the large Linux share in Japan and China (PRC). In Europe, Britains 02 and Germanys 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).