A template to increase your bottomline sale prices, the Apple Way.
Just yesterday, Apple announced its luxury headphones, the AirPods Max. And Twitter went into a frenzy about its cost. Rightly so; given that most best-bang-for-your-buck smartphones (including the current price of iPhone 11 at $599) have a price range of $600 to $700. Which makes its price of $549, an excruciatingly hard pill to swallow.
Then people defaulted to their same base rationale which is used to explain all of Apple’s pricing strategies:
→ Apple is a premium and luxury brand.
→ Apple is greedy and doesn’t know what it is doing.
→ This is a product to showcase Apple’s audio skills for enthusiasts and not for consumers.
Just like that, most people miss the underlying reason for these ludicrous prices. While this example is specific to Apple, this trend exists across every industry where the primary aim is to generate profit.
As technology progresses, there are 3 things that are bound to happen:
→ The bottom-line costs plummet.
→ Innovations cost a fair bit more and top-of-the-line stuff cost a pretty penny.
→ Market fragments into too many options and then slowly dwindles into fewer options. (See the graph of the smartphone industry to understand better).
Due to these advancements in technology, it has become fairly unnecessary to purchase a product every few years. In fact, the product lifetime has gradually increased to about 6 to 8 years. This results in a drop in revenue for companies from that commodity. In other words, if the price were to remain the same, and the units sold decrease, the profits also decrease creating a problem with investors, shareholders and year-over-year growth, pulling in prophets of doom, shouting of the rooftops to sell of their shares while masquerading as financial experts.
To solve this issue in the short term, companies typically have five different approaches:
→ Drop the prices, bundle offers and other promotions to sell more units and get same or higher net profit.
→ Create a perception of a completely redesigned and revolutionary revision of the product while increasing the price per unit to justify its functions. So, even with less sales, the net profit remains same or increases.
→ Create a problem and then offer a solution to the newly created problem.
→ Diversify product portfolio. Instead of achieving increased profit from one segment, try to get customers to spend more on the company’s offerings in different segments.
→ Sell your business to another interested party for loads of money and shift tracks to a different segment.
Increases in bottom-line seem contradictory to the way technology evolves. However, the ingenuity of human perception allows marketeers and companies to trick the regular Joe into unconsciously raise their bottom-line expectations and spending allowances.
Low-Margin High Volume Strategy:
For those unfamiliar with this type of business model, most of the Chinese smartphone competitors use this in the ultra-low, low, medium price categories. In the range of Rs. 4,000 (~USD 55) to Rs. 36,000 (~USD 500), every Redmi, Relame, Oppo and Vivo phone follows this strategy of mass volumes at low margins, generating enough profit and revenue. (Sales of Xiaomi explains my point).
High-Margin Low-Volume Strategy:
Brands follow this model for Rs. 40,000 (~USD 550) and above. There are increasingly higher margins on higher pricing demographics. They make more revenue and profit of each device, again equating or exceeding their target. Sure, they make it seem worth it with the best-in-class technology, great materials and premium product finishes. But, at the end of the day, they do the same work a $200 smartphone does — answer calls, stay-in-touch, access the internet and post photos online. (Check 2018, the year iPhone X was Apple’s mainstay).
Create a problem and solution strategy:
The trend to remove headphone jack and then upsell an accessory to solve this problem is an upsetting trend in the smartphone industry, started by Apple but clearly adopted by competitors. Today, wireless is the name of the game and the introduction of the truly wireless earphones category was a big push towards the future. The frustrating inefficiency of the truly wireless earphones in both sound quality, latency, connectivity and power efficiency is truly annoying and reflects the nature of a product that was rushed to release prematurelt (true for most companies except AirPods and other brands). Again, the overall market benefited but it was the company who removed a $3 port to receive $170 in return.
Diversification strategy:
This is an inevitable step in the life of every successful startup to mature into a company. A company cannot remain in business or even grow in its size, reach higher financial targets every year unless they expand into new markets and diversify their portfolio. Uber for instance started out as cab-hailing company in the US. Then it expanded to different markets globally. In India, Uber now operates along with its cab-hailing services, an auto-rickshaw service, a motorcycle service, while also attempting food-delivery through its UberEats platform. This has led to different products catering to different consumer needs. (See images below for Apple’s portfolio of hardware and software products)
Cut-your-losses strategy:
Over the years, cut-your-losses strategy has become fairly predominant among car manufacturers. It is quite common to find headlines where a company has changed ownership with astonishing frequency that has become the norm. In 2009, TATA Motors bought Land Rover and Jaguar. Before that it was Audi who bought Lamborghini. Then Volkswagen bought Porsche. For a list of which car company owns which brand check out — johnhughes.com.
In the past five years, we have seen companies implement each one of the above individually or in some combinations to effectively achieve their goals. But these are all short term plans as beyond this one or two years, they will loose their impact in the rapidly evolving world of technology. To achieve a more stable way of keeping their income source stable or increasing, the company needs to increase its bottom-line costs or/and diversify their product portfolio with successful in-demand products.
The Apple way:
With iPhones maturing into a stable market, the number of units of iPhone sold, plateaued. Apple’s yoy growth also dipped and it had to come up with another business strategy to make money. So, they adopted an innovative long-term strategy, “Raise the base-price and make it feel like a steal”.
When iPhone X was introduced, it had a completely new design, it had the premium luxury feeling and it was a market-disruptor unlike any before it save for the original iPhone. And it made sure that its value was known as well — $1,000 a piece. Unsurprisingly, people balked at the starting price. Yet they bought it in droves, making it one among the best-selling smartphones of all time and also a successful example of the 2nd business strategy.
The real magic happened the next year. Apple’s pricing had been on a steady increase since the iPhone 6s, likely anticipating this target. Inching forward towards $1,000 every year as you can see in this image.
In 2018, alongside the introduction of iPhone Xs and Xs Max priced at $999 and $1,099 , Apple introduced the iPhone Xr at $749. The brilliance behind this strategy was first lost on people. There was some negative coverage about it being too expensive to be “budget” but in a general consumer’s mind, it felt like a steal, even though they were paying $100 more than iPhone 6 (the most popular iPhone of all time) for essentially the same features. While you may argue that its components are costlier than iPhone 6’s components, you must remember that iPhone 6 launched in 2014. So the components in it then were of similar cost.
As mentioned above, technology improves over time and reduces costs. And the iPhone Xr was the most popular smartphone in 2018-2019. They increased their sales and revenue by tricking the consumer into believing that they were getting a steal of a device, which is simply not the case. The only improvements of iPhone Xr over the iPhone 8 (the previous phone at this segment) was the size of display (because of the new design), camera, processor and water-resistance. That is basically what happens with every iteration of an android phone.
Following on the same lines, Apple dropped $50 of its price tag and suddenly the iPhone 11 took the top-spot outselling Xr and even X. In other words, Apple’s increased its baseline cost and still made it seem like that cost was a necessary requirement when in all honesty the competition has been offering better phones at lower costs. The end result is them getting more revenue even though they sell lesser phones than before.
(Note : When Apple increased the maximum price, Android OEMs too made the same jump without significant benefits making non-Apple consumers pay more as well. Apple sets an annoying trend for the smartphone industry. It is time Droids truly built their uniqueness into themselves as not much of a distinction exists between an iPhone and Android.)
This is not including how they have used the other strategies like diversified into other segments — Apple Watch, Airpods, Apple Services; created a problem with the headphone jack and sold a $170 replacement; introduced a dropped price strategy on the iPhone SE series and many more examples (Essentially an iPhone 8 with a processor change. And a $50 price tag drop).
At the end of the day, Apple or any other company is out to make money. It is not greed but their sole objective as a company and their responsibility towards their shareholders. So, they do introduce products targeting luxury segments. Superficially, it may be only to showcase their premium, luxury status. But there is always an ulterior motive rooted in the base directive of “The responsibility of the CEO is to make more money the company’s shareholders” and in turn more money overall. As consumers, we are faced with the choice to be fooled by this and accept the change or recognize this for what it is and reject this trend. Of course, the third option being, recognize the trend but still opt to pay the premium which makes us the patsies where we get the short end of the stick and still pay for it to be fixed.
Disclaimer: This article is formulated by observing and scrutinizing every decision a company makes and trying to interpret their hidden motives. None of this has been derived from an intense study or rigorous academic effort.
