Monday, September 10, 2007

Apple’s iPhone Price Cut

So no sooner did I write my post below about how Apple rarely has sales, and they promptly cut the price of the iPhone by $200. I did not mean by “sales” the (anticipated) cutting of price after an initial product launch, but instead the kind of sales like “back to school” or “holiday” or “Labor Day.” Cutting of price after an initial launch can often be wise, and I like to refer to it as “temporal versioning.”

Versioning is generally the idea of offering different versions of the same basic product at different prices. If you offer a deluxe version at a high price and a basic version at a lower price, you can effectively price discriminate, with some folks buying the high-priced version and the more price-sensitive folks going for the cheap version.

Critical to this strategy is separation: the two versions have to be kept distinct enough so that the folks who like the deluxe version won’t see the cheap version as almost as good, and at the lower price, a better deal overall.

With temporal versioning, separation is also temporal -- the time between the high price period and the low price period has to be long enough to keep everyone from seeing the sense in waiting for prices to fall.

Apple seems to have not temporally separated its versions well enough. Nice strategy, but off a bit on the implementation. The consumer outcry is pretty good evidence of the error. Interesting, often when discussing price discrimination students will mention the anger when some consumers discover that others are paying a lower price (economists like to walk down an airplane’s aisle asking people what they paid for their seat). My response to this is often: who cares if the consumers are mad? With Apple, and the importance of repeat purchases, consumer anger could translate quite powerfully into lower sales.

6 comments:

Jackie said...

Bob, by 'temporal versioning' do you mean price skimming strategy? I thought 'temporal versioning' applies to firms releasing different versions (movie vs. home video; hardcover vs. paperback) sequentially to reduce cannibalization. If only price falls but product remains unchanged, it looks more like intertemporal price discrimination to me...

Nice points on the adverse effect of (seemingly unfair) price cuts on customer loyalty. Scott and I are planning to use iPhone as a mini-case in the mkgt core ~

Aaron Burgamy said...

It occurred to me that the primary rationale behind the initial price of the iPhone probably had more to do with controlling demand.

The stakes on this product rollout were very high for Apple, glitches were inevitable, and the supply chain was probably new and relatively untested. By pricing the phone where they did, they could control for risk.

In addition, Apple could ramp up production on its terms and drop the price when they could comfortably meet demand.

Ahmed said...

Apple announces free case for iPhone 4 users: CNET (blog)But I don't think Jobs is losing sleep over his company

www.santa-cruz-3d.com said...

This will not actually have effect, I think so.

4rx said...

iPhone by $200????? Wow, I cannot imagine this price in my country, in my county every one buy a iphone by $200

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