Apple recently lowered their estimates of Q1 2019 Sales, citing slower iPhone sales among other factors. Since then I heard from several people that Apple’s pricing strategy was wrong, and they had misjudged price elasticity. My response is to quote Aaron Rodgers, QB of the Green Bay Packers, “Relax.” While Apple clearly overshot with pricing in China and India, they must tweak some prices; but they do not have the wrong iPhone pricing strategy.
Let’s start with the basics. Apple uses a premium pricing strategy for iPhones and they have a good, better, best lineup. In the company’s view, the iPhones are superior to competitor offerings, and customers prefer the Apple phones. For that, customers are willing to pay a premium. Recognizing that some customers are more price-sensitive than others, the company offers a range of iPhone generations, and within each generation a range of models. The current lineup includes models from the iPhone SE and iPhone 6 up through the iPhone X and XS Max.
These strategy components are sound. Customers have demonstrated they are willing to pay more for the Apple design and platform. Those who cannot afford or are unwilling to pay for the highest end models can make trade-offs in features and functionality to get an iPhone in their price range.
The next element to consider is segmentation. The range of models and price points offered is a part of segmentation, but so is geography. iPhone sales missed expectations by the widest margins in China and India. Although China and India are potentially huge markets, they are different segments from the US and Europe. To start, the average incomes in China and India are lower than in more developed markets. In addition, a big part of the value story in developed markets is the customer preference to stay in the Apple ecosystem and use the iOS platform. In China and India, the ecosystems of music, payments, and social media developed on independent platforms and the Apple platform may not be a big draw. These are segments where it certainly seems that Apple misjudged how large a value premium they could command, but it does not mean a premium pricing strategy was wrong.
Misunderstanding the value premium seems most acute in India, where Apple commands only 2% market share. If the entire segment is focused around $300 phones, perhaps due to income levels, it is probably not realistic to anticipate selling many $800 to $1,000 phones. In such a segment, that would really be skimming.
That leads me to the point that strategy primarily answers the questions “Where do we compete?” and “How do we win?” Apple is competing globally in many different segments and believes they win by providing superior design, user features, user experience and platform. Pricing strategy primarily deals with which structure of prices is consistent with how the company wins, captures the value customers place on the products, and provides appropriate incentives for customers to buy more and better products. Pricing strategy is not the specific prices charged. So, while Apple seems to have overshot the optimal price points in developing markets, and US customers may be reaching the limits of what they will pay; the company’s strategy of premium pricing and a good, better, best lineup is still appropriate.
My last point is – no company should be afraid to get something wrong. Years ago I wrote a post, The Racer’s Edge, in which I discussed auto racers finding the limits of the cars. The same principle applies in pricing and in business generally. To perform at your maximum, to find the point of optimal performance, you must be willing to take educated risks. In pricing, that means testing new price points and evaluating customer responses. Apple is learning where the limits of customer price sensitivity are, and what trade-offs customers are willing to make between prices and features. Overestimating the demand at higher price points in developing markets is not a failure of the strategy. It is part of finding the limits.
Apple’s stock price has taken a beating because of lowering sales expectations, but I am not worried about the company. They still have great design, make products most of us like, and have a valuable ecosystem. Although they may tweak their prices, I am confident they still have the right pricing strategy.
