112-Apple Flanks its Phone Market

Apple continues to impress with its moves in the smart phone market.

On the one hand, the company did as we might expect. It introduced a new iPhone with more functions, but priced to compete with the other competitors, at about $200. In a fast-growing market such as the smart phone market, Function innovation (see “Video #31: Function Innovations” on StrategyStreet.com) drives significant changes in market share as long as these innovations are not copied by competitors.

On the other hand, Apple did something that is not characteristic of high-end leaders. The smart phone market is a high-end, Performance Leader, market (see “Video 20: Definition of Performance Leaders” on StrategyStreet.com). The average Performance Leader competitor is loathe to introduce a much-lower priced product to compete with its Performance Leader standard bearer. But, Apple did just that. It reduced the price on its original, highly popular, iPhone to $99. Both the price and the concept are very good.

In a fast growing market, low price, more specifically, a new low price point, can also move a lot of market share. The old iPhone now costs 50% less than the new iPhone. Apple has created a lower-end price point to protect itself from an attack from below. On average, a price point 25% or more below the product standard will attract a lot of current customer attention. A price point 50% below the most popular industry product will do the same and bring new customers into the market. By reducing the price of the old iPhone by 50%, Apple has created a product that will rapidly expand the total market for smart phones, and Apple will have the majority of these new customers.

This new customer volume from the reduction in price on the old iPhone should ramp up Apple’s economies of scale for all of its iPhone products. If Apple’s economies of scale improve, so will its overall margin structure. This superior cost position will enable Apple to gain even more share in the future with similarly aggressive pricing.

This new $99 price point can not go unanswered by the other smart phone competitors (see “Audio Tip #106: How do we Predict Competitor Responses to our Price Moves?” on StrategyStreet.com). There will be too much new market share there for them to ignore this price point.

Posted 6/11/09

Update:

Apple introduces new products at a premium.  It maintains that premium price until a new model is released.  To succeed in this strategy, Apple utilizes a minimum advertised price retail strategy, which prevents retailers from pricing their Apple products below Apple’s specified price.  Still, prices increase year after year.  From its first launch in 2007, iPhone prices had increased 81% by 2021.  To help maintain its price competitiveness, Apple reduces the prices of all its other handsets as the new product is introduced.  Apple’s premium pricing has worked because its major competitor, Samsung, has matched its pricing moves.

Apple has significantly reduced the effective price discounts on its older phones. To get an idea of Apple’s current pricing strategy with the iPhones we use 2022 prices with the iPhone 13 being the base at $699. The iPhone 12 sells for a little over 14% less at $599. The iPhone 11 sells for about 29% less at $499. These discounts are significant but would probably not grow the market anywhere near the rate that its 2009 pricing strategy achieved.

For more thoughts on effective pricing see HERE and HERE for two short videos and HERE for a longer video.

8/22

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