Apple Price Cut Case
1. To what extent the iPhone pricing strategy is similar to the iPod pricing strategy? How do you explain that the iPod price cut did not lead to such a level of customers’ protest?
Answer: Both iPhone and iPod have experienced a large amount of price cut in their product lifecycle. In this document, we can find that iPod was launched in October 2001. Tough relatively high priced for an MP3 player, it was hugely demanded and remains popular till date though there was a price slash in 2005. Similar to the price cut of the iPod, two months after the launch of the iPhone, Apple lowered the price by 200 USD.
However, regarding the price strategy, a big difference between two products is the timing of price cut. iPod adjusted its price after experiencing a 4-year success from its launch in 2001, whereas iPhone drop in price in only 2 month, which is the main explanation of why the iPod price cut did not lead to such a serious level of customers’ protest. Although both price adjustments were designed for the aim to further expand in the mass market and improve the sales, we can find that the main reason for price cut of iPod is to sell more products in its declining period of product lifecycle. By contrast, the objective of price cut of iPhone is to rapidly monopoly the smart phone market in its growing period of product lifecycle, which resulted a part of Apple fans’ profits since they bought the product in a high price.
2. “Market analysts pointed out that Apple had created a strong brand and customer loyalty which it capitalized on by adopting a skimming strategy in pricing. They also felt that customers accept its highly priced products with equanimity. To go a step further, they consciously expect it to be so.” What does this tell you about the value of iPhone own-price elasticity, cross-price elasticity and income elasticity?
Answer: The practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market. Obviously, due to the reason that Apple had created a strong brand image by its innovation of technology and creativity of design, and loyalty of customers, particularly those Apple crazy fans, the price skimming strategy was able to work extremely well when iPhone was launched onto the market. Meanwhile, Apple’s iPhone entered the highly volatile cell phone market combining telephony, MP3, Web surfing and video watching, which completely revolutionized the tech-savvy market and was most awaited by both the technology enthusiasts and mainstream media. Therefore, the success of this strategy was largely dependent on those first adopters’ inelasticity of demand for the product either by the market as a whole.
However, in the cell phone industry, where the product lifecycle is relatively short and the market is highly competitive. Before some other competing products or substitutes emerging on the market, iPhone could enjoy its high price and benefit from its “monopoly profits” in a short term where demand is relatively inelastic. Whereas in the cell phone industry, the demand from mass market is price elastic, which is the main reason that Apple needs to drop its price to increase its sales according to its mass-market strategy.
In terms of cross-price elasticity, we can think about this question from two aspects: complements and substitutes. Firstly, due the reason that the demand of iPhone is price elastic in mass market, price of iPhone decrease, quantity demanded of components increases, which leads Apple to get a lower price of components from its supplier and further guarantee its gross margin of iPhone. In addition, the increase of sales also means the increase number of customer buying and renting apps from Apple’s online store. Secondly, considering substitutes, price of iPhone decrease, and quantity of competing products demanded decrease.
Since the demand is price...
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