How Apple plays the pricing game — not!

I just came across this Bloomberg article via a Freaknomics article, expecting to read something smart, or at least interesting, about Apple’s pricing strategy. The strategies he discusses in the article are quite common and could potentially make for an entertaining read in my opinion. Unfortunately, the author Ben Kunz seems desperate to write a cynical article about Apple (to boost traffic and controversy?), even if it is a bad fit in some cases. As a result, he makes some very poor analyses, whether intentional or not. Let’s go through the different strategies in the article.

Price Decoys

As a first example, Kunz mentions that Apple will release a 7-inch version of the iPad, and regards this as a decoy, which he defines as “products, services, or price points that a business doesn’t really want you to take, but rather use as a reference to make another product look better.” He doesn’t actually use any pricing figures to explain why he believes this to be the case, so it seems purely a personal judgment. However, if you have been following the tablet market closely, you would know that many competitors (e.g. Samsung and Archos) are releasing 7-inch tablets of their own. Kunz asks why in the world Apple would add yet another potentially cannibalizing product to its lineup of iPods, iPod Touches, iPads, laptops and computers. Well, because it is better to “cannibalize” your own sales, than to lose these sales to your competitors because you do not have a specific offering.

He goes on to compare the prizes of the iPhone 4 and the iPod Touch. He argues that the iPhone 4 costs $199 compared to $229 for the cheapest iPod Touch, even though the iPhone 4 has more features. Thus the iPod Touch is a decoy; they don’t actually want to sell them. Wtf? Did he just conveniently forget that the iPhones are subsidized by taking a mobile subscription? Or is he really this poorly informed?

There is some merit in the different pricing points he mentions for each of the iPod Touch versions. However, I believe the deviousness lies not in decoy pricing, but rather being able to set the different prices at such a level that customers are on the fence which version to buy. Make the incremental price too high or too low, and the decision for the consumer becomes an easy one. I think the Apple pricing specialists have extensively researched the price elasticity instead of consciously pricing any one of the versions “out of the market.”

I do like the example he gave about a realtor trying to sell a house by first showing you a house that needs some work done. I suspect that’s how used car salesmen operate as well.

Establish a high reference price

Ah, a classic! You often see these during so-called special offers, where the original price is heavily overstated, leading you to believe that the special offer is a great deal indeed. And of course, it is a widely used tactic in bazaars and street markets throughout the entire world, for example in Hong Kong or Morocco. You may feel like a hotshot after being able to bargain 50% off of the original asking price, until you meet someone else who had bought the exact same product for half that price again…

Here he mentions that the iPhone first cost $599 when it first hit the streets. Again, he forgets the distinction between subsidized and non-subsidized prices. When you think about it, when was the last time Apple drastically dropped their prices, apart from when they release new versions of their products?

Obscure the reference price

“Apple also obscures references by making its products look like nothing else, from the first iPod with a unique scroll wheel to the current iterations wrapped in gleaming aluminum. Apple seems wondrously unique, until you consider aluminum is the same material you wrap leftover fish in and then it hits you: Apple is disguising itself so you can’t compare prices.

I have trouble in identifying the point he is trying to make here. I think he is making a reference to Apple’s design philosophy. No, the aluminum doesn’t cost much more to make, but they do look nice and shiny, don’t they? To me, this seems as much an accomplishment, if not more, of the design department than the pricing department.

“Is the new $99 Apple TV box a good deal? Who knows? It looks like nothing else on the planet.”

Take this reasoning literally, and every new product which has appeared in the history of mankind is guilty of obscuring the reference price.

Bundle price components to hide what you can

“Buy an Apple product and you’ll spend more downstream. For every iPad or iPhone sold, Apple likely counts on your future song purchases, video rentals, and soon iAd clicks on app advertising.”

I don’t think this counts as “bundling.” Bundling would be if you would buy a iPod touch for $239 instead of $229, but you get 50 songs right off the bat, for example. Future purchases do not count as bundling.

And he mentions the monthly data fees and phone contracts as bundling. Um, yes, that’s true in a sense. But after ignoring the monthly fees for most of his article, he suddenly mentions them now. And he seems to forget that Apple is not the only party here. Yes, Apple tends to force a pricing model on the network operators, but he completely fails to even mention the role of those network operators! If you didn’t know any better, you could come to the conclusion that Apple is actually the one offering the data plans and phone subscriptions. That is just not true.

And this is his conclusion:

“The pricing strategy is brilliant. By staging a series of perceived technology innovations and then adding price decoys, reference prices, obscurity and bundling, Apple makes us willing to pay more to do the same stuff we did 30 years ago: read magazines, type messages, watch shows or make phone calls. The communication breakthroughs are mostly an illusion, but with shiny aluminum in our hands, who cares what it costs?”

Is he even serious? So we haven’t made any technological and communication progress in the last 30 years?? It’s all thanks to pricing??

Sorry for the rant, but all in all, this is a very poor article, which unfortunately is not an exception. There are just so many poorly written articles with misrepresented facts, even in professional magazines. This one is especially annoying because it relates quite closely to my everyday job. At least I’m glad most of the comments both on the Bloomberg and Freakonomics website complain about the article as well.

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