Pricing Strategy of Apple

Topics: IPod, Apple Inc., ITunes Pages: 8 (2928 words) Published: September 24, 2010
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. 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 product, 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 their 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 of a 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), 299$ (2004) and 249$ (2005).

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 for 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...
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