We all know more than a few people who bought Apple iPhones the first day they were available, June 29th. Some people feverishly called around their city to find stores that had them. Others stood in line at AT&T stores. But all of those people paid premium prices for the phones, which have a cool, user-friendly interface. Those people, our friends and colleagues, are early adopters. Anyone who has taken a marketing course knows – early adopters frequently pay a premium price compared to others who buy a product after it has been around awhile. The question in this case is whether that premium, which now appears to be $200, was too much.
Each individual purchaser can decide that answer on his or her own, but from my perspective Apple was smart to charge such a high initial price. Here’s why.
Each prospective purchaser of a phone forms an opinion of the value of the phone to him or her. That value depends on many things including, the specific functions available in the phone and how easy it is to use them, the frequency with which specific features would be used, the quality of the phone signal, and the data transmission speeds versus the need for fast transmission. The value perception of each person also depends on the prices of alternatives in the market, the personal value of having a new toy to play with, and the value of being perceived as hip. With all those variables, each person is likely to come up with a unique perception of value. If we could learn all of those individual value perceptions, we could actually draw a value curve.
Apple’s shareholders would want the management to capture as much of that value curve as possible. That is something the airlines have been doing for quite some time, using statistical models to predict where those different value points are, then setting prices targeted at the individuals who fit various points on the curve. Unfortunately the retail environment cannot easily tailor each price to each buyer. The value curve is really a demand curve, and sellers select price points on the demand curve and offer their products to all buyers at a single price (at least for a while) . One way sellers maximize their take from the demand curve is by setting higher prices initially to capture the demand at the higher prices, then lowering prices over time to capture incremental demand. That is exactly what Apple has done.
We see this behavior all the time in consumer electronic products. It is generally written that the reason prices on electronics drop over time, is the manufacturers are spreading their fixed costs over higher volumes, additional capacity is coming into the market, and new products are available with more features. All of those statements may be true, but they don’t fully explain why manufacturers don’t try to capture more volume earlier by setting lower prices that will attract more buyers earlier. Well, the reason they don’t do that is because there are plenty of early adopters out there who are willing to pay more to get the newest product. If Apple and other manufacturers don’t price their products high initially, they leave all that money on the table.
I suppose the danger in this type of situation is that of angering the early adopters with too high a price premium. In this case, it appears that Apple has run the risk of that by dropping the iPhone price by 33% after only 6 weeks. That strikes me as pretty aggressive, and I have seen a few customer quotes venting their anger. I would bet any anger will all blow over, though . Apple has been very good at understanding their customer base and has consistently offered premium-priced products. My guess is they understand them well this time too, and the $100 credit they are offering will mollify the vast majority of the early adopters. It will also entice them to spend some more money on other Apple products and services. Use your iPhone, and send a response if you don’t agree.
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