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11 Pricing Strategies Additional Considerations

Chapter Preview

In the previous chapter, you learned that priceis an important marketing mix tool for both creating and capturing customer value. You explored the three main pricing strategies—customer value–based, cost-based, and competition-based pricing—and the many internal and external factors that affect a firm’s pricing decisions. In this chapter, we’ll look at some additional pricing considerations: new product pricing, product mix pricing, price adjustments, and initiating and reacting to price changes. We close the chapter with a discussion of public policy and pricing.

For openers, let’s examine Apple’s premium pricing strategy. Apple sets its prices substantially above those of even its highest-priced competitors. But Apple’s appeal to customers has never been about prices. Instead, Apple’s vision has always been to provide innovative designs and superior user experiences that make its prices secondary in the minds of customers who covet Apple products.

APPLE: Premium Priced and Worth It

Apple is the prototypical premium pricer. Whether it’s an iPhone, iPad, Mac laptop, or Apple Watch, customers pay more for an Apple than for competing devices—a lot more. Apple’s iPhone last year sold globally for an average price of $624, compared with $185 for the average Android smartphone. Even compared to Samsung, its closest high-end competitor, the latest iPhone commands a premium of $100 to $200 more than similar Samsung Galaxy models. Similarly, a standard MacBook Pro costs $300 more than a comparable Dell or HP computer.

Yet despite such sky-high prices, Apple’s products continue to fly off shelves, as eager customers get in line to snap up the latest models. For example, Apple sold more than 231 million iPhones last year alone. That leaves Apple in an envious position: It charges the highest prices and still captures market-leading shares in most of its product categories. How does Apple pull that off?

For Apple, success has never been about prices. Instead, it’s been about the Apple user experience. Many tech companies make products that just occupy space and complete the tasks at hand. By contrast, Apple creates “life-feels-good” experiences. Ask Apple users and they’ll tell you that their Apple devices simply work better and are easier to use. And they love Apple’s clean, simple designs that ooze style.

Apple’s obsession with deepening the user experience shows up in everything the company does. From the beginning, Apple has been an innovative leader, churning out one cutting-edge product after another. Making products customers want—usually before consumers themselves even know what they want—has resulted in one Apple-led revolution after another. Apple has always had a genius for wrapping technology beautifully around human needs in a way that puts its customers at the front of the crowd.

Photo shows the front of a tall building that houses Apple's office. Photo is taken from the ground-up. — Apple earns the premium prices it charges. Avid Apple fans have long anointed the brand as the keeper of all things cool.

Thomas Kurmeier/Getting Images

One of the best illustrations of Apple’s premium pricing power is the Apple Watch. Apple was hardly a pioneer in introducing its smartwatch. Dozens of companies were already selling wearables across a broad range of price points. In the year prior to the launch of the Apple Watch, competitors sold 6.8 million smartwatches at an average price of $189. Apple unveiled its own smartwatch in three versions. The least expensive version, the basic Apple Watch Sport, sold for $349, nearly twice the average industry price. At the other extreme was the ultra-premium Apple Watch Edition, made of solid 18-karat gold with sapphire crystal glass. Fully loaded, it sold for as much as $17,000. Such high prices did anything but scare away buyers. By one estimate, Apple will sell an estimated 21 million Apple Watches a year and now holds a 74 percent share of the greatly expanded smartwatch market.

More broadly, Apple’s ability to command higher prices and margins has produced stunning sales and profit results. In smartphones, for example, Apple captures an impressive 20 percent share of total global sales. However, it commands an even more impressive 50 percent share of the premium smartphone segment. Most remarkably, thanks to its premium prices, Apple routinely pulls in a lion’s share of industry profits. For instance, in one recent quarter, it grabbed a dazzling 92 percent of the total smartphone profits made by the world’s top eight smartphone makers. Similarly, Apple captures nearly 50 percent of the profits in the competitively crowded personal computer market.

Overall, in just the past four years, Apple’s sales have more than doubled to a record $234 billion, placing the company at number five on the list of Fortune 500 companies, ahead of traditional industrial giants such as GM and GE. Brand tracker Interbrand recently rated Apple as the world’s most valuable brand. And the company’s soaring stock prices have made Apple one of the world’s two most valuable companies, neck and neck with Google parent Alphabet.

Even with all this success, however, Apple’s premium pricing strategy does present some risks. For example, in some markets—especially the world’s rapidly growing emerging markets—Apple’s high prices make it vulnerable to low-price competitors. Consider China, which accounts for a full one-third of all smartphone sales worldwide. In China, Apple now places third in market share behind fast-growing, low-priced local competitors such Xiaomi and Huawei.

Chinese market leader Xiaomi has come from nowhere in just the past three years to become the world’s third-largest smartphone producer behind only Apple and Samsung. It produces low-cost smartphones, laptops, and other devices that are modeled closely after Apple devices. It even has a thriving iTunes clone that supplies apps, games, and other content. Xiaomi packs potent technology and stunning design into dirt-cheap phones that sell at a fraction of Apple’s prices. For instance, an entry-level iPhone sells in China for $833—that’s more than a month’s wages for the average Chinese buyer. By contrast, the average Xiaomi smartphone goes for only $149.

With its smart design and low, low prices, Xiaomi is targeting the “technically inclined, geeky, typically younger sort of customer who can’t afford a top-of-the-line Apple or Samsung phone,” says one tech blogger. Such consumers make up the fastest-rising tech segment not just in China but also in other emerging markets such as India and Brazil. And so far, Apple neither has—nor intends to have—an affordable answer for that type of consumer. Low-end products simply don’t fit Apple’s operating style or premium positioning.

However, Apple is still thriving in China and other emerging economies by catering to the also-burgeoning numbers of more-affluent consumers in those markets who want and can afford the luxury and status associated with Apple. Just like anywhere else, if you can afford it, an Apple device is well worth the premium price. In China, according to one analyst, “It’s a price people have been willing to pay, specifically because it is expensive.” For instance, remember that exorbitantly priced Apple Watch Edition? It sold out in China in less than an hour.

Thus, whether here or abroad, Apple’s premium pricing strategy will likely remain a winner. “The dominance of Apple is something that is very hard to overcome,” says an industry executive. “Apple has to stumble somehow or another, and I don’t think that’s going to happen.” The lesson is simple: Truly premium products earn premium prices.1

Objectives Outline

AS THE APPLE STORY suggests, and as we learned in the previous chapter, pricing decisions are subject to a complex array of company, environmental, and competitive forces. To make things even more complex, a company does not set a single price but rather a pricing structure that covers different items in its line. This pricing structure changes over time as products move through their life cycles. The company adjusts its prices to reflect changes in costs and demand and to account for variations in buyers and situations. As the competitive environment changes, the company considers when to initiate price changes and when to respond to them.

This chapterexamines additional pricing approaches used in special pricing situations or to adjust prices to meet changing situations. We look in turn at new product pricing for products in the introductory stage of the product life cycle, product mix pricing for related products in the product mix, price adjustment tactics that account for customer differences and changing situations, and strategies for initiating and responding to price changes.

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11 Pricing Strategies Additional Considerations