How to Sell an Apple: A Classic Case of High-tech Marketing
With a pricing strategy fully in compliance with high-tech marketing theories, iPod proves to be a classic case!
[+] iPod, the product for the "Mac fundamentalists"
On October 23, 2001, Apple launched its first iPod. Thanks to the Microdrive technology, the product was able to offer a memory as large as 5GB, 20 times larger than that of MP3 players based on the flash memory available at that time. Despite its much larger physical size, iPod got popular among the consumers with its brilliant industrial design.
Back at the time, iPod could be used on Mac computers only. Most of its early adopters were addicts of Apple computers. Despite its high MSRP (Manufacturer's Suggested Retail Price) - as high as USD 399 - iPod became a must-have gadget for the Apple fans.
It was a stage when high-tech products had the highest "brand premiums", i.e., the largest difference between the market price and the production cost, as loyal supports tend to be willing to pay additional money for the brand they love. In addition, this group, called "early adopters" in marketing theories, is less price-sensitive.
Of course, the Microdrive technology could lead to higher costs at that time. In addition, with the small manufacturing scale in the initial stage, manufacturing costs tend to be high, so are the retail prices. However, companies with strong brands could find a consumer group willing to pay that much, or even more.
If you are the product manager of iPod, after the market success of the first iPod, would you introduce new models with fewer functions and smaller memories (hence lower prices), or continue to introduce products with extended functions and higher prices?
[+] Continue to focus on early adopters
On March 20 of 2002, less than half a year after the introduction of the first iPod, the second one was introduced, with a memory as large as 10GB (capable of storing about 2,000 songs) and ad hoc features such as phonebook, which allowed the user to input phonebook data through software.
The launch of this USD 499 new model did not drive down the price of the earlier one, which stuck tight at USD 399. In other words, Apple was not introducing the new model to replace the earlier one, but to drive up its gross margin and increase its revenue with "function premiums".
Who would care about a phonebook in a music player? Few people would. Nevertheless, such people are willing to pay more. With the differentiation of its products, Apple continued to take money from those who were willing to pay more among its early adopters.
On June 17, 2002, the 20GB model was introduced at a price of USD 499. This time, the prices of the two earlier models were reduced: the 10GB one down to USD 399 and the 5GB one to USD 299. Besides, this was the result of the drop in manufacturing costs. On the other hand, it also implied the company's intention to expand sales through price cuts.
With a new user interface, the new 20GB model could be used in Windows environment. In other words, having satisfied the demands of the Mac fundamentalist market, Apple was trying to expand its influence to the PC market, starting from the early adopters, too.
Now that the product was already compatible with Windows, the company made a big change in its marketing channel strategy too. iPods, which so far had been available only at an Apple Store, began to be sold in chain stores such as Circuit City. Indeed, expanding the channel had become the most important task for the company's goal toward higher sales.
[+] Continue to cater for the early adopters while trying to infiltrate into the early mass market
From April 28 to September 8 2003, two other models with even larger memories were introduced and prices of earlier products were adjusted accordingly (and the 5GB model was stopped manufacturing). However, the price range was
nailed down between USD 499 and USD 299 firmly for about one year. See the following table for changes in memories and prices.
Increase in memory was now no longer an effective tool to draw more money out of the pockets of the early adopter.
More efforts should be made on peripheral products. With the support of a number of manufacturers, the company developed its sports armbands, large speakers, FM radios, pen recorders and digital cameras. In addition, Apple also cooperated with BMW to develop a number of applications.
The strategy during this stage was to support the price with added values. The profit margin of peripheral products could often be well above that of the core products. Despite their high prices, the peripheral products were hot pursued by the early adopters. With this strategy, Apple continued to drive up its sales and maintain the retail prices of its iPod products.
Yet, it was time to access the mass market. On January 6, 2004, iPod mini was launched. With a memory of 4GB, the product sold at USD 249 (the first iPod sold for less than USD 299), and offered 5 color outer cases. It could be imagined that highly price-sensitive mass consumers were attracted immediately.
On June 19, 2004, the 40GB model fell into the USD 399 line for the first time, an interim setback in the early adopter market. Yet on October 26, iPod Photo was launched, driving the prices back to USD 499, and even USD 599 (for the 60GB model).
Through that means, Apple kept digging deeper into the early adopter market with additional applications. While continuously introducing high-end products (iPod Photo allows photo storage and display) to hold the gross margin and price line, Apple was also beginning to march into the mass market with products with fewer features and lower prices.
[+] Break through! The horn for the march into the mass market: iPod shuffle
When it was launched 3 years ago, iPod sold at USD 399, aiming at the early adopters in the following chart, who could afford it, were willing to pay and, with their brand loyalty, would buy more follow-on products. At that time, most MP3 players are sold at about USD 99 with 128MB flash memories to store only about 50 songs.
Back in 2001, when the 128MB MP3 player was the mainstream product in the market, those people were willing to pay more for an iPod with a memory 40 times larger. Nevertheless, Apple was clear that it was time to enter the mass market. So on January 11, 2005, the USD 99 iPod Shuffle was launched.
Thanks to the high reputation that iPod had earned over the past 3 years, many consumers who were stopped by the high price were now ready to buy. Many eCommerce websites offered services for purchasing in advance. The products were sold out before they even arrived in retail channels.
The root of the iPod's success is its product design and brand appeal. With product and pricing strategies fully in compliance with high-tech marketing theories, it proves to be an admirable classic case.
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