Apple’s Premium Pricing Strategy, Product Differentiation

On low-end devices, Apple CEO Tim Cook told Bloomberg Businessweek in a 2013 interview, “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience, and we figured out a way to do it at a lower cost.”

Cook’s thoughts echoed those of his predecessor, Steve Jobs, whose strategy for Apple had four pillars:

1. Offer a small number of products.
2. Focus on the high end.
3. Give priority to profits over market share.
4. Create a halo effect that makes people eager for new Apple products.

Apple attempts to increase market demand for its products through differentiation, which entails making its products unique and attractive to consumers. The company’s products have always been designed to be ahead of peers. Despite high competition, Apple has succeeded in creating demand for its products. 

As a result, the company has power over prices through product differentiation, innovative advertising, ensured brand loyalty, and hype around new product launches. By focusing on customers willing to pay more and maintaining a premium price at the cost of unit volume, Apple also set up an artificial entry barrier to competitors. 

Apple sells its products and resells third-party products in most of its major markets. It sells directly to consumers and small-to-midsized businesses through its retail and online stores. The company also employs a variety of indirect distribution channels, such as third-party cellular network carriers, wholesalers, retailers, and value-added resellers.

Apple uses a MAP (minimum advertised price) retail strategy. MAP policies prohibit resellers or dealers from advertising a manufacturer’s products below a certain minimum price. MAPs are usually enforced through marketing subsidies offered by a manufacturer to its resellers.

According to Macworld, Apple maintains its high-priced products’ popularity by only offering retailers such as Walmart or Best Buy a marginal wholesale discount. This small percentage in savings isn’t enough of a profit margin for retailers to offer big discounts on Apple’s products. Therefore, customers end up paying a price close to the manufacturer’s suggested retail price. However, a retailer could give up this small profit margin and offer products at a discount to attract more customers. Apple prevents this scenario by offering monetary incentives to retailers to sell goods at the MAPs fixed by the company.

This pricing strategy is effective, as it prevents retailers from competing directly with Apple’s own stores. It also ensures that one reseller doesn’t have an advantage over another. Apple is thereby able to keep its distribution channels clean while making more money on its direct sales. Macworld also noted that iPhones weren’t under a strict pricing model. They are sold at a lower price with wireless contract deals, as retailers gain a commission from carriers.

Jobs’s vision for Apple was always to create a premier product and charge a premium price. Apple’s cheapest product prices are usually midrange, but the products’ features ensure a high-quality user experience. The hardware and user interface are designed to provide a lot of value for the price, keeping profits high. However, a company can only charge a premium price as long as it has a competitive advantage, and analysts believe Apple is on the way to losing its “aspirational” status. With increasing competition from Android and low-cost smartphones, as well as saturation in developed markets, the company could risk becoming a high-end niche name.

Smartphone prices falling significantly has boosted their sales over the last several years. With advanced technology, smartphone companies have managed to reduce handset costs. Global smartphone manufacturers, especially Chinese companies, have significantly brought down smartphone prices, making them more accessible to mass markets. 

Android has enabled a number of new manufacturers to enter the smartphone market, supported by a variety of turnkey processing solutions. Many of these handset vendors have focused on low-cost devices as a way to build brand awareness. 

In comparison, Apple’s iPhone sales have recently fallen. In fiscal 2019’s first nine months, Apple’s iPhone sales fell 15% year-over-year. With phones’ good quality and longer life, consumers need not replace them frequently. Additionally, the newer versions aren’t offering enough incremental features to justify an upgrade.

However, Apple’s iPhone 11 and iPhone 11 Pro are getting a good response, according to the company. While concerns over how Apple will grow in an increasingly competitive smartphone market have hovered for more than five years, the company has always managed to grow its bottom line.  

To learn about the global smartphone industry, read Global Smartphone Companies: An Overview. For the latest updates on technology stocks, refer to Market Realist’s Tech & Comm Services page.