The iPhone 6 was released September 19th, and as expected, there was significant buzz and demand for the phone. Similar to the releases of earlier versions of the iPhone, there were some pricing moves that are worth studying. From my perspective, there are both positive and negative pricing lessons we can learn. The first (positive) lesson is identify the differentiating features of your product or service and set prices which capture the value of that differentiation. The opposite lesson is aggressive pricing moves that are easily copied lead to price wars.
Apple released the IPhone 6 at a price of $649 with no wireless contract, but $199 with a contract from one of the carriers. The iPhone 6 Plus could be purchased for an incremental $100. According to Apple and independent reviews, the benefits of the iPhone 6 include a slightly larger screen, with a crisper image, improved Wi-Fi speeds, a better camera and the potential future use of Apple Pay. For those benefits, customers, many of whom have existing contracts that have not been completed, once again lined up down the street from Apple stores on the day of release to upgrade their phones. At a breakfast meeting last week, only one of the 5 participating executives had upgraded to the iPhone 6. When he was asked what was better about the new phone, he said simply, “It’s newer.” He is a classic early adopter. For many of us, the differences in phones would not be worth waiting in line or paying a fee to upgrade a contract early, but for early adopters, they are. Apple understands this and their high initial prices capture premiums from those early adopters.
The other lesson from Apple is to set prices according to the values of the features you offer, not according to your costs. In a Businessweek.com article, The $84.50 Reason Apple Wants You to Buy That Big iPhone, the writer pointed out it only costs Apple $15.50 to make the larger iPhone 6 Plus, but they sell it for an extra $100. The amount it costs Apple to make the larger phone is irrelevant. What matters is whether customers value the extra features, and how much they are willing to pay to get those features. By recognizing that, Apple makes a much better margin on the larger phones.
The opposite pricing lesson comes from the wireless phone companies. Before the release of the new phone, Verizon announced they would offer a free 16 gb iPhone 6 to any customers who traded in an older iPhone and signed a new 2-year contract. Sprint said it would let customers trade in up to three phones per line, give consumers up to $300 per device and match any rival’s trade in offer. T-Mobile said it would beat any rival’s trade-in offer and throw in an extra $50. Sprint then followed up by offering unlimited talk, text, and data for $50 per month to iPhone 6 customers. In effect, the carriers are trying to turn more people into early adopters, and subsidizing the behavior in an effort to lock in subscribers.
If you are wondering what is wrong with the wireless companies competing for the early adopters, it is this – those practices lead to price wars. Apple’s differentiation is their phone, and Apple is correctly capturing the premium the phone can generate. There are some phones that offer competing features, but the early adopters want iPhones and are willing to pay premiums to own them quickly. That is not true with the carriers. Wireless providers have found that although customers may not want to switch phones, they are willing to switch service providers for lower prices. None of the competing carriers is willing to simply let the business go away, so when of them starts competing on price, the others quickly follow. The result is the profitability of all the carriers decreases. Once the price war starts, all the carriers need to participate; however they would all be better served if none of them started the price war at all.
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