I found this image on the interwebs and so can not verify its accuracy. But if it is correct then Apple 5s customers choosing 32GB over 16GB are paying $120 more for a product that costs ~$8 more to make. Those choosing 64GB over 32GB are paying $130 more for a product that costs ~$22 more to make. (Costs may differ due to access speed, etc., but not much.) Apple can still earn pretty hefty margins.
As long as Apple is insulated from competition, it has the ability to price discriminate. Apple's ability to charge different prices for seemingly the same product is where Apple's true genius in pricing shines through (Cookson, 2010). High income shoppers are generally speaking a lot less sensitive to price; high value customers have low elasticity of demand. Apple uses similar pricing strategies when it introduced the iPad mini. Apple strategically positioned the smaller 7-inch version of the iPad in an attempt to segment the market and identify which consumers are willing to pay high vs lower price points. This is indirect price discrimination in that, obviously, higher valued customers can choose to purchase the lesser iPads. Concerns of cannibalization in both the tablet market as well as other Apple products are clearly a concern.
ReplyDeleteWith the iPhone 5s, it is interesting how Apple has identified a $130 price point between the low to middle and middle to high value customers. By discriminating based on elasticity of demand, Apple is attempting to prevent arbitrage. I would even take the cost model one step further and predict that cost of fixed storage is considerable smaller than the price of a SD card. The most expensive components for both models are those that are associated with the display screen, coming in at a combined cost of about $41 (Thompson, 2013). I would assume the margins are even higher than the model suggests and the costs of production are slightly lower.
References
Cookson, T. (2010, September 15). Apple: Pricing Tricks or Pricing Treats. Retrieved from This Young Economist: http://blog.thisyoungeconomist.com/2010/09/apple-pricing-tricks-or-pricing-treats.html
Thompson, C. (2013, September 24). Here's how much it costs Apple to build new iPhones. Retrieved from Technology Reporter, CNBC.com: http://www.cnbc.com/id/101058725
Another way Apple identifies elastic vs. inelastic customers is by allowing the cell phone providers to sell their products at a greatly discounted rate for customers that sign a contract with the service provider. The customers whose purchase decision is influenced by the difference in price will either sign a new contract, or wait until their contract is up to receive the discounted price. This strategy helps the cell phone companies by gaining contracts, but it also helps Apple by utilizing indirect price discrimination to maximize their revenue. There is a slight risk of cannabilism due to the fact that the price differential is great enough that most people will not choose to buy the product at full price when the discounted product is available. There are circumstances that create inelastic customers, however. If a customer’s iphone breaks and they are not due to upgrade their phone to a newer model through their contract, they may be forced to purchase a phone at the full price. Been there, done that.
ReplyDeleteFroeb, L.M., McCann, B.T., Shor, M., Ward, M.R. (2014) Managerial Economics: A problem solving approach. Third Edition. South-Western Cengage Learning: Mason.