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What other companies can learn from Apple's provocative pricing strategies.
Alix Stuart, CFO Magazine
November 1, 2011
Go ahead, shop around — you're not going to find a bargain on Apple products. That's because Apple executives keep a tight rein on pricing, allowing for little to no discounting. The $65 billion electronics innovator is so concerned about maintaining prices, in fact, that it has reportedly fought any giveaways that advertise "free" iPads or iPhones. "It's up to us to convince people to maybe spend a little more for a materially better experience of product," said then-COO Tim Cook in a July conference call (Cook became CEO in August when Steve Jobs resigned due to the health problems that lead to his death last month). "And we think that people will do that if the product is great and if it's messaged appropriately."
That doesn't mean Apple never budges on price. The iPod Shuffle has dropped to $49; one version of the iPhone, originally priced at $499 when it debuted in 2007, is now "free" (with a service contract). But unlike most companies, Apple tends to lower prices only on earlier-generation models as new discount-proof versions debut.
"Apple is in a unique situation in that it's constantly innovating and there aren't a lot of next-best alternatives," says Rafi Mohamed, a pricing consultant and the author of The 1% Windfall. That allows the company to "extract all it can from [higher-end] consumers, then move its products down to budget-focused customers" at its own pace.
While few firms can match Apple's record of innovation, quality, and brand loyalty, pricing experts say there are several lessons that both consumer- and business-focused companies can learn from the tech icon.
For one, more companies selling to consumers should copy Apple's tiered pricing model, in which several versions of a product are available at different price points, says Mohamed. "Good/Better/Best is a great pricing strategy, and Apple excels at it," he says. "It's often shocking how many customers will opt for Best." Others will initially opt for low-end products and then pay for incremental upgrades, reaching a total purchase price that would have initially scared them away.
For business-to-business firms, where pricing may not be standard or transparent, the important take-away for CFOs is to segment customers appropriately. "Apple's virtue is being very sophisticated in understanding how its customers make decisions, and that's something that many companies can be good at," says Craig Zawada, senior vice president of pricing excellence at PROS.
Zawada offers the example of an electrical distributor that varied its prices based on how frequently a customer bought from it. "If it were a large company tapping the distributor as a primary supplier, the distributor would give the company low prices to maintain loyalty," says Zawada, but if it were a large customer that bought infrequently, "the distributor would know that the company was buying because its primary supplier didn't have availability, and would charge the company 20% to 30% more."