Apple’s iFolly: pricing strategies with the iPhone

The Chip Insider –

September 21, 2007 –Maxims applied: Apple’s iFolly: pricing strategies with the iPhone

MAXIMS applied: the distillation of today’s strategic and tactical thrusts.

The iPhone pricing gaff of taking a $200 haircut from retail is one of the rare instances where Steve Jobs has made a major blunder. It’s probably the price Apple has to pay for having someone so brilliant. The problem is not in cutting the price. It is a fundamental principle that prices are far more difficult to raise than they are to cut. Entering the cellular handset market at an $800 selling price was clearly a gamble on Apple’s brand value. Lowering the price is the simple recognition that the gamble failed and it’s time to move on. Here’s the rub:

Everyone of the Apple faithful who waited in line to get an iPhone — some camping out for days — has just been made a fool. Every marketing pro in the world has marveled at Steve’s ability to launch products so successfully. One of the biggest issues in selling tech products is to get the early adopters to opt in. Steve has managed to get around this by carefully building a cult of early Apple adopters who have total trust in the company to take care of them and bring “insanely great products” to market. How Apple dealt with the early adopters of the iPhone is a major disaster that will affect this company for years to come.

By adjusting price to demand, Apple created an extremely dicey marketing situation that was easy to overlook because companies cut prices every day and because it’s so easy to get greedy about the sales you’ve already made. But Apple failed to take into account its cult status. Next to Harley-Davidson, Apple is one of the few companies in the world with a logo that people will tattoo onto their bodies. This is phenomenal loyalty. Apple is almost a religion for these people. This pricing blunder is like the joke about “Jesus loves you; it’s just that he’s seeing someone else” — as all the early adopters have been taught a very bad lesson: don’t buy early because you may get burned. After all, dropping prices by $200 is a 25% cut.

If Apple is to act they need to act fast and decisively. So far they have acted slow. First they ignored the Apple faithful. Then they reacted with a $100 store credit that they made incredibly painful to get — especially for people who bought the phone at an Apple store where they only give receipts if you ask for one. It turns out that you need this receipt to get the refund, even though Apple has all the data about your purchase in its store computers. So, it’s another insult.

Now Apple argues that early adopters of the iPhone had the privilege of having something exclusive to show off for a couple of months. True, but when you make the Veblen good argument, you had damned well better keep your prices high, since it is price that determines exclusivity. Imagine what would happen if Toyota dropped Lexus prices to Camry levels: they would destroy two brands at once. This is essentially what Apple has done because it has dropped prices to typical high-end handset levels. So now, it’s nothing special and certainly nothing exclusive.

They couldn’t avoid this. But to maintain the special status of their early adopters, Apple should have rewarded them, not punished them. If Steve had been truly innovative on the pricing front, Apple would have come in with something greater than the $200 price cut — say an easy to get, free new video 8GB iPod Nano on top of the store credit. Otherwise people will say there are two things to learn this year, Don’t buy Chinese and wait to buy anything from Apple.

Maxim: “an expression of a general principle.”  – Webster’s Dictionary