Apple’s Pricing Model 🍎 Podcast Ep. 69
Apple is one of the biggest companies in the world. In this episode of Pricing college – we discuss what we really like about the Apple pricing model.
We cover value-based pricing, the ecosystem and customer loyalty and also barriers to competition.
TIME-STAMPED SHOW NOTES
[00:40] Apple is one of the first who price well, in fact, they connect pricing and value.
[01:58] Apple thinks about value and pricing in their entire offer. They linked everything together
[02:56] What is the Apple pricing model?
[04:21] A value-based business, the Apple pricing model is far moved from cost-plus pricing
[05:02] How does the closed ecosystem affect the Apple pricing model?
[06:58] Aidan discusses the beauty of the universe created by Apple
[08:54] With competition coming in and going through business model challenges, will it also change Apple pricing model?
[11:24] Will the apple pricing model be the same in 10 years as it is today?
What is the Apple pricing model?
In today’s episode, we want to talk about aspects of the pricing strategy utilised by Apple that we like or think are noteworthy.
Apple’s a great case example for pricing and product innovation.
Customers love it. It’s very successful. But yes, it has had its fair share of challenges both in product lifecycle and even now in terms of business competition. But in terms of pricing, it was one of the first to do pricing really well.
It was one of the first to think about pricing and connect pricing and value.
- To capture market share.
- To capture people’s imaginations.
- And, to keep them coming back to and to drive profitability.
So, I guess we’re going to talk about, how they really do that?
To start on that I think that’s let’s look at the product. They’ve really just honed in on a very small number of products. Very niche looked and making these products beautiful, shiny, user-friendly, different.
But in terms of range, just narrow in on the range. So they can control the cost element of manufacturing. Also in terms of customer demand, control that and price accordingly.
The first thing I really like about Apple is that it’s almost the epitome of a company that thinks about value and pricing in their entire offer.
Everything is linked together…
- It’s the customer experience.
- It’s the offer.
- And, it’s the value.
- Or, how people view their product versus other products.
Whether a Samsung leading other player or other clearly cheaper versions that can do very similar things. They know exactly what people like about the product through focus groups and different methods. They advertise aspects that lifestyle elements of the software or machines.
Their telephone is catered to certain demographics and even like their computers. I don’t know what the correct word is. I don’t think they’re called PC’s because they’re Apple Mac’s I think. But those are aimed at the people who are whether in the RT community need certain software or just like that software.
So they know they’re demographic. They know their target audience. And they seem to know it better than I think any other company I know.
Apple Pricing Model: Premium Pricing
So relating to that…
- They know their audience.
- They’ve got a small product range.
- They know what people want.
So what’s their pricing strategy? Well, it’s premium pricing.
They pitch their pricing higher than everyone else. Because they know they’ve got a great thing that people want to buy. As I was saying before because they’ve got a smaller product range.
They know that sort of the number of customers and their huge amount of spending. They’re willing to pay for what they’ve got. They’re able to control supply and demand for their products.
So, just in terms of customer spending in that industry. I think last year it was something like half a trillion dollars spent. So it’s huge, and they’ve captured a large share of that market.
But in terms of their strategy, because they’re going premium, they’re getting value-based. What is their business strategy? Let’s think about that. It’s not necessarily market share they’re really going for profit here. But in so doing, they’re capturing more market share.
Because they are honing in on what customers want to buy the perceived value. I suppose that has a knock-on effect on the share price. So yeah, customer value leads to shareholder value.
Another thing I like about them is they are an unashamedly value-based business.
It’s always in the papers everyone knows that their products are manufactured generally in China. I think they’re still made by Foxconn or one of those companies. And they are manufactured and created at let’s be honest a much cheaper cost than the cost of the phone and the device are sold at.
But there’s no pressure in the business to lower their costs. There’s no pressure when they bring out a new model to bring it out at lower costs. And it’s almost as if cost-plus pricing isn’t even on their radar.
They’re so far removed from cost-plus pricing and what most companies do. It’s not even a discussion point.
Apple pricing model and the ecosystem they created
I suppose on that because they know they’ve got control and visibility on supply and demand, costs and production. And they’ve made their process so efficient. They have been able to streamline costs.
But just because they have that doesn’t mean they’ve reduced prices. Because they’ve got that premium anchor strategy keeping prices up.
So they can continue to drive profitability, sustainable profitable growth. I suppose other than that what I like about Apple is the signature of note Apple is their ability to create closed ecosystems. That sort of capture either IP in terms of their development IP software.
And in terms of customers, they’ve got focus groups forums. Apple apps store to really capture the customers becomes a sticky model. So it’s very hard to get out of it that’s what that close sort of whether it’s IP driven or customer-driven.
They do want to capture and keep everything they acquire and that’s a sort of interesting model.
I think a lot of Apple customers are very willing and they love that kind of model. Because they get so much value out of it.
And that’s a sort of debate that’s ongoing at the moment. Because I think developers are currently being charged something like 30% for being a part of the Apple App Store system.
And starting to think…
- Am I getting the value out of it?
- Am I getting ripped off by Apple?
I think the beauty of the App Store and the universe let’s call it the uniform. The universe that they have once you’re in it, once you invest in the product.
You’ve made the choice that you’re an apple buyer.
You’ve bought the Apple Mac or your telephone. You really are locked into their system whether it’s iTunes or whether it is AppStore for apps.
We saw that even recently with an app or a game as popular globally as Fortnite. Whereby those legal issues etc over the split of revenues and monies from that sale.
So, the beauty of the product is they have such a leading product.
But also that anybody who invents a new product that wants to be sold through that target audience. Has to basically let Apple clip a ticket on it and make their money also. So it’s just an incredible revenue maker.
That also applies to iTunes whereby it will do that and also to the movies. Apple movies etc are through their services also. So it lets them latch on to so many other aspects that don’t involve the creation of it.
But they’re the gatekeepers.
They own the means of delivery. The mechanism of delivery because they are in theory own the software which is not using the usual system.
So, yeah, it is a perfect model. You can see overlaps in methods such as the Nespresso pods. Whereby you’re having certain pods to use that system.
Even an older system, such as Xerox machines and printers where you have that upfront investment. Then basically you’re tied in as long as the machine lasts.
I suppose if you buy an Apple phone you’d expect it to last two years or whatever it is. But then there’s also the other aspect whereby people’s lives are on their phones now. Which admittedly is quite sad.
But they’re tied into the phone based on photographs, messaging to friends and family history. If you’ve got a new Apple phone, you can transfer it across to the new one.
So you’re sort of locked in even if you’re had that phone for two years. You’re sort of locked in for much longer than that.
Bottomline: How will business model challenges and future competition affect Apple pricing model?
I suppose now people are tied into other Apple platforms, such as the Apple Watch, TV, iOS, their iPad, lots of different things. They said they’ve got multiple platforms that are feeding through this one closed IT system, coding system.
They’re driving huge amounts of traffic to these sites based on both in terms of the developers that want to get onto that to sell their apps. And customers that want to be a part of it. Just have that huge range and access to their IP, the whole ecosystem.
On that, they’ve got like payment processing they host. And they don’t have any hosting fees for the developers. Just that the marketing spent to advertise apps for developers is huge. They just wouldn’t get that visibility to their customer base without Apple Store.
But saying that great idea, Is it going to be disrupted? Yes, it is.
Developers aren’t fully happy with it. I think Apple has said that if developers are doing good business through them and their customers stay for more than a year or so.
Then they reduce the commission for developers to 15% as opposed to 30%. I suppose that’s better than nothing. But it’s still pretty high.
I think there’s going to be no competition in this market. Because people want the IP and I think it’s a battle now. Even Netflix is suffering the same. It has everything going through that currently but now Disney is going to go direct. They’re going to take all their IP with them.
Equally, this could happen in the app space too, and it is already. So there are things for them that they’ve done really well. They’ve overcome many challenges in terms of competition with product development, Android phone, Samsung, etc.
Now they’re going through business model challenges.
They obviously always have been quite agile in their business strategy and willing to adapt and pivot. That is really one of the greatest achievements and features of Apple. I’m just excited to see what happens next.
I think fundamentally we’ve all heard enough about Steve Jobs to last a lifetime and what a marketing and creative genius he was.
Fair enough a lot of the products and services and the beginning building blocks of this ecosystem was always in place. Before he left the business and left this mortal coil as well.
So those are in place I supposed the question is, as Joanna mentioned there with Disney and these sort of companies going more direct the actual.
Because at the moment, I suppose you could argue it’s like the old cinema chains. Whereby Hollywood, the movie producers made the movies. But it was the people owning cinemas and access presented to the people.
I suppose with the eyeballs is the same method now. The content creation people, whoever they are. They will be under moving more people like Netflix also so that’s changing.
But the content creation and then the mechanism of getting in front of your eyeballs, and who owns those eyeballs? who controls it?
The gatekeeper that is changing and when a change, will the apple model be the same in 10 years as it is today?
I would have to say it’s unlikely. But at the end of the day, Apple has at the moment. An absolute golden goose. It is given probably what’s called supernormal profits that you hear about in economics.
To be honest, unless you come up with something better to replace it. You’ve got to keep up with that golden goose lays the eggs. And don’t kill the golden goose until you absolutely have to.
One thing for sure, I suppose is in that space IP online Internet things move very, very quickly.
Now at the moment, they’re giant platforms leading the way. Taking most of the traffic but they too disrupted the brick and mortar real world.
I think pretty soon they’re going to be disrupted by new competition, new ideas. And as I say, it’s an exciting space. I think I’m prepared.
I can’t wait to see a different set of brands in front of me, not just the usual for always out there. Even in terms of the Amazons, Netflix, Apple they are the best they’ve done exciting work. But it’s time for a change.
I’m gonna go around and shop this idea for lots of private equity and venture capital companies. I’m gonna come up with a new groundbreaking technology business to beat Apple and make Megamillions.
Does anyone want to invest? Yeah, give me a call.
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