Unless you’ve spent the past week living in a cave you’ve no doubt heard about the 3G iPhone announcement from Apple’s Worldwide Developer Conference (WWDC) last week. I’m not going to get into all of the new features introduced to the next version of the iPhone because they’re insignificant compared to the new iPhone pricing structure.
Apple’s Time-Tested Market Skimming Strategy
Market skimming is a pretty basic pricing strategy:
- Release a new, exciting product at a high premium and skim the greatest possible margin from the customers with the greatest demand;
- Once the sales volume begins to decrease at the original price, incrementally lower the price to increase sales again;
- Repeat this exercise until a stable price with an acceptable margin is determined.
Apple has done this for all of their products historically; most notably was the original $599 iPhone. Remember all of the whining that occurred when Steve Jobs lowered the price to $299? Job’s mistake with the original price drop was doing it too soon – after all, his customers were willing to pay $599 just to be one of the cool kids with a shiny new iPhone a few months prior to the price drop.
I think Bill Maher’s explanation of iPhone market skimming is probably one of the better ones:
However, the announcement of the new 3G iPhone brings with it an entirely different strategy than the original iPhone announcement.
Apple’s New Groove: Market Penetration
Market penetration is yet another basic pricing strategy:
- Set an initial lower price on a new product release in order to achieve large market share acquisition;
- This strategy is only effective in markets that are price-elastic (price-sensitive;)
- This strategy is used best when the producer is a new market entrant or has relatively small market share.
Currently Apple does not have much in the way of Smart Phone market share compared to product lines offered by RIM (BlackBerry) and Palm (Treo.) The results of recent ChangeWave surveys indicate this:
The new 3G iPhone, which includes important business features such as access to Microsoft Exchange, is going to roll out on July 11, 2008 with a price tag of $199. This means that the iPhone’s price will be roughly equal to that of any new Treo or BlackBerry unit; in some instances the iPhone is actually cheaper than the alternatives.
The new, low price and the addition of key enterprise features means two major things for Apple:
- The 3G iPhone’s first target is the business user; there are a lot of technical and infrastructural issues that might prevent businesses from adopting the iPhone en-masse immediately, but the iPhone’s features and price all fall within the same range as competing products offered by Palm and RIM. Apple is gunning for the business user.
- The 3G iPhone’s price will drop from $199 to $99 at some point in the future, this much I can guarantee. When the iPhone’s price does drop the phone will be adopted en-masse by the general consumer market. Every ratty 12 year old with a $5/week allowance will be running around with an iPhone.
This time Apple is setting its price low and its volume high, gunning for the common man instead of the zombie fan.
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Comments 3
I don’t know that I agree on the consumer point. The problem is, and I know how weird this sounds but bear with me, Apple is a complete novice at Marketing. I know how antithetical that sounds but think about it. There are many different components to marketing and the only ones Apple has shown proficiency for are branding and advertising.
They’ve never bothered with things like market research because they have a cult that will snap up almost anything they throw out there. The Apple Cube is the perfect example of this. I know for a fact Apple put no market research into the cube because it’s practically identical to the NeXT PC (http://www.sieler.com/vcf4/ex-next.jpg) that Jobs’ was trying to sell years earlier.
I really think it’s the great lie of Apple. Everyone assumes they’re products are perfect and that it’s just the price the keeps them from being mass market hits. But the truth is the price difference is usually only a couple hundred dollars at the most and most people buy computers on credit meaning a couple hundred isn’t going to matter. The reason people don’t buy Apple is because they don’t like them (as you found on this very blog)
The iPhone seems like the same thing to me. Sure it seems like it’s destined to greatness from the tech industry perspective (and I certainly love mine) but that doesn’t necessarily mean anything. I polled about 100 teenagers (remember my agency has a school attached to it) and they all said the same thing: Video and MMS (or the ability to message pictures as they put it) are deal breakers.
For that matter, text messaging is more important than calling for them which raises questions about the soft keyboard as well.
Apple very well may take over the consumer market but I don’t think it’s as cut and dried as people think and I again think it goes back to Apple’s inability to actually poll the market and find out what’s important to customers rather than just dictating what’s important to a cult that will take anything they offer.
Posted 11 Jun 2008 at 8:56 pm ¶Hey Tom,
Apple’s “inexperience with marketing” is something that we discussed in my last semester of college actually. When Steve Jobs released the video iPod he was asked “why will people use this?” His response? “I have no idea, but we figured we’d throw it out there.”
The MacBook AIR? Same example. Do people really want a laptop with a battery that is embedded into the motherboard just to save some space? Jobs had no idea but figured they’d throw it out there anyways.
I think Jobs has a clue when it comes to the iPhone, however – the addition of enterprise features, which Apple has had to license from Microsoft, are the result of customers demanding that this phone support more of the necessary services required to make it a feasible alternative to BlackBerrys and Treos.
As far as the youth market is concerned, if Apple is serious about targeting phone consumers in general and not just people who buy high-end smart phones then Apple will add those features as separate applications or minor add-ons.
I’m making the assumption that adding MMS will be trivial – if it turns out that the iPhone doesn’t have the cellular hardware (should have bought Qualcomm chips) to support it then you’re right – it might be a deal breaker for the youth market.
Posted 12 Jun 2008 at 10:20 am ¶On the MMS I was with you a year ago but now that an entire year has passed I have to assume that its either (a) way harder than I think it is or (b) Apple is specifically not implementing it.
Which comes back to the problem of Apple. Its like the famous story of Jobs refusing to sign the students Mac keyboard unless he could pull off the function keys (which he apparently hates because they were borrowed from the PC). When Jobs doesn’t like something for whatever reason he’ll simply snub it and expect the world to deal.
(though ironically I guess he’s stuck with the function keys at this point)
Posted 12 Jun 2008 at 11:26 pm ¶Trackbacks & Pingbacks 2
Apple to Focus on Market Penetration instead of Market Skimming with 3G iPhone | Marketing Ninja
Apple’s announcement of a $199 iPhone that supports critical enterprise features like Microsoft Exchange indicates a windshift away from Apple’s traditional market skimming price strategy towards a market penetration price strategy.
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