Apple, as we all know, has been incredibly successful with its iPad products. They have sold millions upon millions of the products. The low end of the iPad 1 was set at $499, and so was the low end of the iPad 2, and $829 for the highest end version. In fact, so successful was Apple that this generated a “reference price”. They had educated the market that this is THE price for an iPad.

With the 3rd generation iPad (Apple just calls it “the new iPad”), Apple found themselves in a conundrum. On one hand the reference price they themselves had set was strong in consumers mind, and on the other hand, the product cost of iPad 3, with its much higher resolution display, faster processor and more memory, is substantially higher than the prior generation.

The company iSupply reports the cost of the new iPad (low end) is $316.05 giving a gross margin to list price of 36.7% – still spectacular by commodity computer standards, but compared with iPad 2, with a gross margin of 50% (before the iPad 3 was introduced and price of the iPad 2 dropped), pretty poor. The highest end version shows a similar drop in gross margin from 67% to 51%.

I guess the decision Apple’s executives made here was, despite focusing their company on profits, that the reference price set by the iPad 1 and 2 was so strong they did not have any choice but to price the iPad 3 at the same price. And with looming increased competition in the tablet space, a higher price, to protect margins, would have generated a backlash in value perceptions and in market share. In fact, with the iPad product and pricing strategy Apple had painted itself into a corner. Could they have done something different? Well, maybe:

They could have, somewhere halfway through the life of the iPad 2, introduced a “premium” version at $599 for the low end version and $899 for the high end version. Such a high end version could have been, and I’m speculating here, equipped with a higher resolution camera, and maybe the cover could have been tossed in for free as could a year of free iCloud service. Such a premium iPad 2 would have mitigated the issue with the reference price Apple set for themselves. They could then have introduced the new iPad at the price of the “premium” iPad 2. That would have resulted in gross margins for the new iPad of 53% and 55% for the low and top end.

This would have generated a great improvement in margin, but there are some negatives too – more product choices generate some level of customer confusion and managing multiple product lines also adds cost and complexity in manufacturing, logistics and inventory management.

Apple’s management team is incredibly savvy, so I’m sure they considered these options. And they decided to eat the margin erosion in return for simplicity.

But what would you do? Do you have products, or services, that have a price so firmly set in the minds of your customers and prospects that you don’t think you can increase it – especially as you offer new enhanced or extended versions? Think again – maybe you can!

With fruity regards,

Per Sjofors

 

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AuthorPer Sjofors