Placing bets on the iPhone 7 price tag

Alok Sane – 216177624

There are rumours that the new iPhone 7 is to be released this week.  I think we can all safely say the price tag will not be cheap. When the iPhone 5s came out in September of 2013, the recommended retail price (RRP) for the 16GB model was A$869. Fast forward to September of 2016 and I can buy it for A$448 at Officeworks. Now, we could just say it’s been 3 years and technology is evolving so it’s not worth as much as it was 3 years go. But the iPhone 5s as a product is still exactly the same – yet it’s worth nearly half the price it was 3 years ago and it depreciated on average A$2.70 a week?  Let us look at some of the marketing and pricing techniques Apple uses and what drives the price of a product to fall so drastically.

Price Skimming

This technique involves setting the price high for a short time when the product is new, innovative or when an improved product is launched. As demand for a product is high at product launch, the aim of this technique is to charge customers more for having the product sooner. Prices are lowered later when demand of the early adopters falls (Huimin and Hernandez, 2010).

Sound similar to Apple?

Skimming not only helps recoup their research and development costs and allows them to continue innovative; it maintains the high quality image of their products and allows them to reduce their price in response to competition (Huimin and Hernandez, 2010).

Price Discrimination

Price Skimming also assists in market segmentation and price discrimination. Price discrimination involves charging different market segments different prices for the same product or service (Investopedia, 2007).

In 2013 consumer watchdog Choice condemned Apple for forcing Australian customers to pay 14% more than US customers for an identical iPhone 5s (NewsComAu, 2016).Marginal Cost Revenue curve

To enable Apple to make a maximum profit from each market segment, they must meet the demand in each segment. In order to do this, they may lower the price in lower socio economic markets in order to generate more revenue, and increase the price in markets where customers are willing to pay more (Huimin and Hernandez, 2010).

Profit maximisation occurs when Price (P) > Marginal Revenue (MR) = Marginal Cost (MC) and P is also > than Average Total Cost (ATC) (See Figure 1). When price discriminating, Apple is able to charge anywhere above point B and below point C on figure 1 before demand begins to decline.

Price Fluctuation

This is a picture of what the outside of an Apple Store in Berlin looked like the day the Phone 6 was released.

Packed apple store

And… this is what is looks like on any other day.

empty apple store

What does this tell us?

When a product like the iPhone is first launched, the demand for the product is very high. Particularly amongst the tech enthusiasts who are willing to pay more fhigh equilor the product, just to have it earlier.

So when the iPhone is first launched the demand/supply curve would look something like Figure 2. Essentially, demand for the product is relatively inelastic, though not completely. Meaning, Apple can meet the supply and demand equilibrium at a much higher price

The price of the iPhone will change are various stages of the product life cycle. For example, when Samsung announces a much improved Galaxy S7  the demand for the iphone will likely decrease (unless ofcourse all of Apple’s customer base all die- hard iOS fans). Yes, brand loyality will have an impact here, but it is unlikely the entire customer base is loyal. A competitor would eventually release a product with similar or better features which would be competilow equiltively priced and a very good substitute to the iPhone. In actual fact Samsung became the world’s largest iPhone maker in 2012, overtaking Apple (Investmentwatchblog.com, 2016).

Similarly, when the next generation of the iPhone is announced, demand for the current generation falls drastically which results in Apple adjusting their price in order to maintain the equilibrum between supply and demand. (See figure 3)

Note – these graphs do not include the impact of any other external factors such as taxation, tariffs etc.

Perceived Value & Quality

An iPhone can be several times more expensive than a flagship Android phone, but this premium pricing technique is part of Apple’s marketing strategy.  The high price point has helped promote and maintain a favourable perception amongst loyal buyers and has created a luxury psychological association with its products (Version Daily, 2016).

Apple is a luxury products brand due to their high price tag, and generally consumers of luxury goods are willing to pay more to maintain their status symbol.

 

References

Huimin, M. and Hernandez, J. (2010). Price Skimming on a Successful Marketing Strategy: Study of Ipad Launching as Apple’s Innovative Product. School of Management, Wuhan University of Technology, Wuhan, P.R.China, 430070.

Investmentwatchblog.com. (2016). SAMSUNG eats APPLE, now world’s top mobile phone maker « InvestmentWatch. [online] Available at: http://investmentwatchblog.com/samsung-eats-apple-now-worlds-top-mobile-phone-maker/ [Accessed 3 Sep. 2016].

Investopedia. (2007). Price Discrimination. [online] Available at: http://www.investopedia.com/terms/p/price_discrimination.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186 [Accessed 3 Sep. 2016].

NewsComAu. (2016). Australian customers will pay up to $114 more than Americans for the new iPhone. [online] Available at: http://www.news.com.au/technology/iphone/australian-customers-will-pay-up-to-114-more-than-americans-for-the-new-iphone/story-fn5sd1vk-1226717584450 [Accessed 3 Sep. 2016].

Version Daily. (2016). The marketing strategy of Apple: A concise analysis | Version Daily. [online] Available at: http://www.versiondaily.com/the-marketing-strategy-of-apple-a-concise-analysis/ [Accessed 3 Sep. 2016].

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