The News
Apple recently launched the iPhone 15, at a starting price of $799 going up to $1599 for its most premium model. These prices were expected as Apple has gone all the way in extending its ‘premium’ pricing.
Yet, despite the high prices and a global economic slowdown, Apple is expected to generate record-shattering sales. What can other companies learn from Apple and its pricing strategy?
The Insight
The first iPhone was launched at a much-publicized event in January 2007. Steve Jobs called it a revolutionary device that comes along occasionally and changes everything. It was indeed revolutionary. Never before have people wait in queues to buy a phone and never did a phone brand talk about its sales numbers. And ever since the iPhone launch has been one of the most awaited events by tech enthusiasts.
Beyond the phone, there are actual numbers that reveal a more significant story.
The first iPhone had two variants on launch - a 4GB variant that retailed for $499 and an 8GB variant that retailed for $599, the price of which was reduced to $499 around two months after launch. At the time of launch, it was one of the costliest phones in the market. Yet it beat all market expectations and sold one million phones within 75 days, and ended up selling more than six million phones in total. So much for the prediction made by Steve Balmer, the erstwhile CEO of Microsoft who said that Apple was going to sell zero iPhones.
However, $500 was a considerable sum at the time and the price continues to increase every year. In fact, while $500 was just above 10% of the average per capita income in the U.S. in 2007, the current iPhone prices are nearly 20% of the average per capita income. Evidently, a growing number of consumers are purchasing iPhones, despite their elevated prices. This is something that most organizations would love to emulate and implement - the ability to charge very high (read exorbitant) prices, yet not be bothered by declining sales figures.
But What Is the Secret Sauce?
The biggest learning that organizations can take away from Apple is their ability to communicate the high value of iPhones in the most appropriate way. You see, value often outweighs price in consumer decisions. People tend to buy products based on the value they offer. And because of its high perceived value, Apple has no problems asking for a higher price. You see, as long as the perceived value is greater than the price, customers will pay willingly.
But this high perceived value would not have been possible if not for the great set of features that these phones carry. For example, professionals use iPhones for their photography. In fact, a lot of photographers swear by the utility of an iPhone over a big camera for taking photos in crowded and random places. Further, look at an iPhone launch event, and there are always many firsts. For instance, the iPhone 15 boasts a suite of features that are likely to influence upcoming features in other smartphones over the next few years. There is a reason why people swear by iPhones and its features, and the product differentiation is a strong reason for the same. And let us not forget the premium materials that they use to make their devices. You really can’t complain about the quality of an iPhone.
But you just can’t rely on a superior set of features to do the trick, can you? No one would buy a new phone if it did not offer them an ecosystem of services. Back when the concept of operating systems and platforms was new, Apple pushed forward its strategy of the Apple iOS app store. With an iPhone purchase, the customer gains access to a whole suite of products ranging from Apple TV to Apple Wallet. Apple has built a comprehensive ecosystem of products and services that work seamlessly together. This lock-in effect makes it harder for customers to switch to competitors. It is all about not just making it difficult for the customer to leave your product but making it worthwhile enough for them to stay back.
We also need to remember that the iPhone was not just built for the U.S. market. And its success across the globe offers an insight into how Apple evolved its pricing strategy to stay relevant in different markets. iPhones have always been expensive, and this remains true today. However, in certain markets, their prices are further inflated due to taxes and tariffs. India is a great example. For many years most of us got our friends from the U.S., Canada, UK, or Dubai to bring us iPhones because it was far cheaper there. Even though the cost difference still exists, it is not that much today. Why? Because Apple understood the importance of having different pricing strategies for different markets and acted accordingly. First, they launched the ‘S’ versions in India, a lower-priced alternative to their premium phones in order to reduce the gap between price and the ability to pay. Over the years, Apple has also taken steps to move manufacturing to India to reduce taxes and tariffs and gain more customers. It is all about staying relevant to the market and thinking from a local point of view.
But none of these strategies would have worked if the iPhone was ‘really’ pricey. Yes, a price tag of $599 was high, but Apple used an innovative pricing strategy to offset this high price. They were able to adopt a strategy known as “Subsidy Pricing” or “Carrier Pricing” where the upfront cost of the iPhone is lower than its actual retail price because the carrier pays a portion of the cost, and the customer repays the remainder through their monthly service fees over the duration of a contract. It is like a SaaS pricing model where you reduce the pain of paying a very high price upfront but may end up paying a higher price in the long run. With this, Apple was able to attract more customers than their competitors would have thought of. And as they say, the rest is history. It is also something that investors like Warren Buffet like. Who would not love monthly recurring revenues?
Yes, Apple was, and still is a great brand. But before the iPhone, Apple was a niche organization with a cult following - their MacBooks were not used by the masses. But the iPhone changed their story. And probably the way Apple priced is one of the reasons for this success. After all, who wouldn’t love a chance to price high, yet not be bothered about falling sales.
