The Price of the Month. Success or Failure?

02/2010: Apple iPad starting at $499

Posted in Pricing by Jouko Riihimäki on 25.2.2010

Apple launched its iPad device with a great hype. I start writing my blog by considering the forthcoming success of the product regarding its pricing.

Apple has collected wide and committed interest groups all the way from consumer to developers around its own products and services. Now Apple is trying to create a new product group between portable music and entertainment devices and laptops. Creating a new category is challenging and product pricing is difficult when there are no peers.

First I’m telling about the expectations of the iPad prices. The price of the new device was expected generally to be around 800-1000 dollars. The price expectations were evaluated through the earlier product pricing strategies by Apple, and the prices of Apple products have been mainly on a higher level than the general price level of the market. Among loyal consumers Apple is considered as an innovative and high quality brand and consumers are ready to pay more for Apple products than for comparable brands (Brand Value).

Regarding pricing, one option would have been skimming, which is commonly used in the price launching. However, Apple did not use this logic in the pricing of iPad. Using too high a price could prevent the birth of a new category in the minds of the consumers before the novelty enters the market. Another option would have been to take over the market with the cheap price strategy. This strategy can however stamp the new product category with a low added value which would not provide sufficient media attention which is typical for Apple. Also, knowing the great expectations regarding the Apple’s stock price, making the category profitability successful with this pricing model would take too long.

Regardless of various pricing opportunities, Apple “surprised” by launching the iPad price levels around 499-825 dollars depending on the technical features. Here the chosen pricing model indicates an excellent ability to understand the dynamics of the market, and at the same time reach profitable business quickly. This means that first you have to create great expectations, understand the consumer needs and then set the launching price a little below the expected price. This provides the launch of the product excellent starting points regarding pricing.

As Apple is also a well-known pioneering of service concepts connected to its products, I think that the product price is below the level which the consumer is willing to pay for the product (Willingness to Pay). Even as it was written in newspapers that the product costs are approximately 300 dollars, it would not had been sensible in any case from the Apple’s point of view to implement Cost Based Pricing, because in this case the entity is more than the sum of its parts. However, one thing remains as a question mark in iPad pricing. This is the pricing of services that have been bundled together with iPad, for example 3G connection. It seems like the pricing principles of services vary strongly in different countries and the transparency of prices are weak. Due to the assumed service pricing logic, the total cost of ownership is difficult to estimate which may cause the dissatisfaction among the users in the long run.

Pricing stars (1-5):

Jouko Riihimäki, M.Sc, CPP Certified Pricing Professional

Articles:

iPad Prices

http://www.apple.com/ipad/pricing/

Price Expectations

http://www.internetnews.com/hardware/article.php/3852306/Latest+Reports+Say+Apple+iTablet+Is+a+Go.htm

Willigness to Pay

http://static.vouchercodes.co.uk/files/pressreleases/Apple-iTablet-Survey-Findings.pdf

Cost Estimates

http://www.yourtechstuff.com/techwire/2010/02/the-ipad-cost-breakdown-100-profit-for-apple.html

Pricing Strategies

http://en.wikipedia.org/wiki/Pricing_strategies

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