Apple’s iPhone Pricing Strategy: Good, Not Great
With yesterday’s iPhone release, Apple changed things up by going to a “good-better-best” pricing strategy on its new devices. As it always does, the company showcased a new and improved iPhone model — the 5S — which provides faster processing, a better camera, and James Bond-like fingerprint security technology. Prices for the 5S in the U.S. start at $199 for customers who commit to a 24 month contract, and $649 for those who prefer not to be tied to a two-year financial obligation. Apple also released a lower priced iPhone, the 5C (many view the “C” as a moniker for “cheaper”), which in essence is old technology — similar to the current iPhone 5 — in a plastic backed case available with a variety of new colors. 5C prices in the U.S. start at $99 on contract and $549 off-contract.
But in my view the good-better-best pricing strategy (in this case “better-best”) makes sense for Apple for a couple key reasons:
Giving customers more choice will generate growth. I often use the analogy of early-bird, regular, and chef’s table options that are available at many gourmet restaurants. This strategy allows customers to choose the price that works best for them. Newly married couples on a budget, for instance, opt to arrive before 6:30 PM while dining high rollers willingly pay a hefty premium to hob nob with the chef. A similar type of self-selection will occur with these two iPhone options. By serving the price sensitive market, Apple will grow its business with new early-bird customers.
It will preserve the 5S’s margins. In my consulting work with companies, I’ve been in similar situations as Apple now faces. Often times a premium product with large market share encounters a new wave of competition that is winning customers via rock bottom prices. For proof of Apple’s woes in this area one need look no further than the recent Siri-bashing Windows 8 Tablet ads, whose punch-line is $250 cheaper price tag than the...