To what extent the iPhone pricing strategy is similar to the iPod pricing strategy? How do you explain that the iPod price cut did not lead to such a level of customers’ protest? Answer: Both iPhone and iPod have experienced a large amount of price cut in their product lifecycle. In this document, we can find that iPod was launched in October 2001. Tough relatively high priced for an MP3 player, it was hugely demanded and remains popular till date though there was a price slash in 2005.
Similar to the price cut of the iPod, two months after the launch of the iPhone, Apple lowered the price by 200 USD.
However, regarding the price strategy, a big difference between two products is the timing of price cut. iPod adjusted its price after experiencing a 4-year success from its launch in 2001, whereas iPhone drop in price in only 2 month, which is the main explanation of why the iPod price cut did not lead to such a serious level of customers’ protest.
Although both price adjustments were designed for the aim to further expand in the mass market and improve the sales, we can find that the main reason for price cut of iPod is to sell more products in its declining period of product lifecycle.
By contrast, the objective of price cut of iPhone is to rapidly monopoly the smart phone market in its growing period of product lifecycle, which resulted a part of Apple fans’ profits since they bought the product in a high price.
2. “Market analysts pointed out that Apple had created a strong brand and customer loyalty which it capitalized on by adopting a skimming strategy in pricing. They also felt that customers accept its highly priced products with equanimity. To go a step further, they consciously expect it to be so. What does this tell you about the value of iPhone own-price elasticity, cross-price elasticity and income elasticity? Answer: The practice of ‘price skimming’ involves charging a relatively high price for a short time where a new, innovative, or much-improved product is launched onto a market. Obviously, due to the reason that Apple had created a strong brand image by its innovation of technology and creativity of design, and loyalty of customers, particularly those Apple crazy fans, the price skimming strategy was able to work extremely well when iPhone was launched onto the market.
Meanwhile, Apple’s iPhone entered the highly volatile cell phone market combining telephony, MP3, Web surfing and video watching, which completely revolutionized the tech-savvy market and was most awaited by both the technology enthusiasts and mainstream media. Therefore, the success of this strategy was largely dependent on those first adopters’ inelasticity of demand for the product either by the market as a whole. However, in the cell phone industry, where the product lifecycle is relatively short and the market is highly competitive.
Before some other competing products or substitutes emerging on the market, iPhone could enjoy its high price and benefit from its “monopoly profits” in a short term where demand is relatively inelastic. Whereas in the cell phone industry, the demand from mass market is price elastic, which is the main reason that Apple needs to drop its price to increase its sales according to its mass-market strategy. In terms of cross-price elasticity, we can think about this question from two aspects: complements and substitutes.
Firstly, due the reason that the demand of iPhone is price elastic in mass market, price of iPhone decrease, quantity demanded of components increases, which leads Apple to get a lower price of components from its supplier and further guarantee its gross margin of iPhone. In addition, the increase of sales also means the increase number of customer buying and renting apps from Apple’s online store. Secondly, considering substitutes, price of iPhone decrease, and quantity of competing products demanded decrease.
Since the demand is price elastic, the lower production cost and increase revenue from Apple softer ware are able to recuperate the loss from cost cut. We can make the conclusion that regarding to the income elasticity, a decrease of price of iPhone has a positive impact on its total revenue. 3. Based on the information provided in the case would you say that the market for smartphone is closer to monopoly or to monopolistic competition? Justify. Answer: Yes, base on the information provided in the case, I regard the smartphone industry as a monopolistic competition.
Monopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another. Smartphone industry has following characteristics: * There are several producers like Apple, Blackberry, Nokia, Motorola etc. , and many consumers in the market, but no company can total control over the market price. * Consumers perceive that there are non-price differences among the competitors’ products. * There are few barriers to entry and exit. Producers have a degree of control over price. 4. Is the price cut decided by Apple two months after iPhone initial launch consistent with the smartphone market structure described above? Answer: Yes, the performance of iPhone is consistent with the smartphone market structure. Firstly, the MC firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes. Technically, the cross price elasticity of demand between goods in such a market is positive.
In this case, iPhone perform the same basic functions but have differences in qualities such as design, style, reputation and appearance. Secondly, independent decision-making is another characteristic of monopolistic competition. The firm gives no consideration to what effect its decision may have on competitors. In other words each firm feels free to set prices as if it were a monopoly. Lastly, Apple has some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. An MC firm can raise it prices without losing all its customers.
The firm can also lower prices without triggering a potentially ruinous price war with competitors, which is the reason why iPhone was able to largely cut its price in two months. 5. Knowing the price cut affected negatively Apple reputation, do you believe Apple adopted an opportunistic pricing strategy initially selling the iPhone at a high price to take advantage of holiday season high spending habits and then dropping the price to stimulate market growth? Is this consistent with Apple pricing strategy in its other product lines like computers and iPod?
Answer: I don’t entirely believe that iPhone lunched at a high price was due to it attempted to take the advantage of “holiday season high spending habits”. From my point of view, there are two main reasons why iPhone priced high at the beginning: Firstly, the core consumer groups of iPhone are enthusiastic fans of high-tech gadgets; and some of them are loyalty customers of Apple. These parts of people are not sensitive for iPhone’s price. What attract them are its quality, design and innovation. The first adopters’ inelasticity of demand is a good opportunity for using the price skimming strategy.
Secondly, high price strategy is an effective method to build a high-end brand image. It’s much easier that a high brand image product cuts its price for promotion than a low brand image one raises it. For the tech-savvy market, the product lifecycle is short. We can often find on the market that a product of Apple or other brands cuts its price when it has been launched for a period of time. But iPhone dropped its price only 2 months after it had been introduced onto the market. This strategy is quite different from other products of Apple.
For instance, iPod depreciated 2 years after it came into the market. Seeing the price of iPhone must be in line with iPod Touch, this strategy is “special” for Apple, comparing with other products. 6. “According to Apple executives the move had been planned long ago and felt that the pricing strategy was conceived in part to keep the iPhone’s pricing in line with its new iPod touch. ” Explain to what extent a high-priced iPhone could be an obstacle to the success of the new iPod Touch. Based on what you know about Apple late development do you find that explanation convincing?
Answer: In terms of the features of these two types of products, iPod Touch is like a simplified version of iPhone, without the function of a “phone”. This determines that the prices of these two types of products must be “in a line”, which means, for a reasonable consideration, the price of iPod Touch must be lower than iPhone but not too far away. If iPhone had not cut its price, iPod Touch must have had been priced at a higher level than the realistic one. We assume that, if iPhone 4 GB continued being sold at 499USD, iPod Touch may be sold at 400 or 450USD. As an mp3 player, it would be much more expensive than its competing brands.
On the contrary, if iPhone had kept a high price level but iPod Touch had been set at a low one, the customers would have had been confused for “why a simplified version of iPhone is so much ‘cheaper’ than iPhone? ” That would have had a negative impacts on the sales of both iPhone and iPod Touch, even would have had impaired Apple’s brand image. Combining with what I know about the late development of these two types of products, I found although the price cutting had a temporary harm on customer’s trust, iPhone and iPod Touch both performed well on the market.
It proved the importance of keeping the price of iPhone and iPod Touch in a line. 7. “But the sharp price cut suggested that even Apple, which has long lived in a pricing bubble insulated from other personal computer makers, is not immune from the brutal pressures of the cellular phone business. ” Does this statement mean that the personal computers market is different from the cellular phone business in other words, the cellular phone market is more competitive than the personal computer market? Why? Do you share this view? Justify.
Answer: From this statement, I can’t make the conclusion that the cell phone market is more competitive than the personal computer market. Apple is one of the earliest personal computer manufacturers in the world. Its personal computer products are behalf of the most advanced PC technology of the world. Especially its graphics processing technology and operating system have high reputation. Thus, Apple’s PC products long lived in a pricing bubble insulated from other personal computer makers. That means Apple has definitely strong market power on PC market. Its high price doesn’t mean there is less competition.
Furthermore, the technical innovation, appearance design, and function combination of cell phone products are updating so fast. So the lifecycle of a handset product is shorter than a computer. The price cutting often occurs when a mobile phone has come onto market for a period of time. The objective usually is for making price room for a new generation of product, which isn’t caused by competing activities. In conclusion, I don’t share this view. 8. “Keeping in mind Apple’s range of high priced products which gives it an “aura” of exclusivity, was Jobs decision to reduce the price a right one?… With a 50% gross margin, Apple is setting itself up for aggressive price declines going forward”. Do you believe that Apple move is a sign that it is ready to enter a price war? Would this mean that Apple is leaving the niche market position it held for decades to go after mass market? What would be the pros and cons of that strategy? Do you believe it? Answer: The characteristics of Apple’s products are novel design, fashionable appearance and the combination of music, game, music, web surfing and other functions.
It determines the positioning of iPhone must be high, and the main target consumer group is high income, music ; digital amateurs. This segment of consumer has low sensitive for price. Pure price war will not yield more market shares for iPhone. So, the price cutting strategy doesn’t mean Apple is ready for the price war. The product’s features determine Apple’s niche market strategy. But a cell phone product innovates relatively faster than other cargos. When a product successfully attracted some first adopters, how to sell them to more followers should be the core problem.
Cutting the price and going in to the mass market is a universal method. Apple also adopted this strategy on iPhone. Pros of going to mass market: * iPhone can attract more followers. Some of them are sensitive to the price, their demands are elastic. Before the price cutting and entry of the mass market, some of the non-owners didn’t buy it just because of the high price. * iPhone can expand its market share quicker, and establish the competitive barriers. Its market power will be stronger. * The expanded customers would have had bought more online products, which would have had a big growth of income. By this strategy, iPhone can consolidate their customer-friendly brand image, and increase the loyalty of the customers. * The cooperation with AT;T can get a synergy between these two brands, and can receive a sum of bonus revenue from the carrier. Cons of going to mass market: * It made the brand image be lower than before. * Decreased the gross margin of iPhone. * Hurt some die-hards’ loyalty. * Increased the degree of monopoly, made the competition imperfect, and harmed the balance of the benign competition with its rivals.
But a cellular phone product such as iPhone goes into the mass market is usually a temporary strategy when the product comes into the mature or declining period in its lifecycle, or when the company wants to make some price room for a new product. Apple cut iPhone’s price was just for keeping the iPhone’s price being in a line with iPod Touch’s. It didn’t mean Apple changed its main branding strategy to go into the mass market. For that time, I assume that it was a reasonable strategy for Apple to cut iPhone’s price.