One of the most captivating drivers of modern day capitalism is how pricing of a product is directly proportional to its sale. Behavioral scientists and marketing gurus at various companies have been involved to learn, experiment and implement different pricing strategies to better drive the sales .
How Apple prices their products?
Consumers normally try to buy a product based on value, use and longevity. Apple takes leverage of this notion and uses this trick called The Decoy Effect to increase their iPhone sales.
What is the decoy effect?
Decoy pricing is a strategy that aims to guide a potential customer towards a specific product by presenting an inferior choice.
In this above example, the vendor places an inferior product (the medium sized popcorn) as a decoy to make the large option look like the best deal and upselling it more than most of the other options.
Companies provide decoy option so that customer can compare Decoy option with an expensive option (and select the expensive one). In the absence of a decoy option, the customer is most likely to go ahead with the cheaper option. But with decoy option, the customer now compares the iPhone 14 Pro with the iPhone 14 Pro Max. In the above example, the iPhone 14 pro Max appears to be the most lucrative option for the consumer.
Charm Pricing
In Charm pricing, the price is set up slightly lower than a rounded number. It creates a measurement that the product/service is tagged at the lowest possible price. With charm pricing, the left digit is reduced from any round figure usually by one cent. We come across this technique each day we make purchases from a super shop but don’t pay proper attention. Psychology describes that our brain processes $5.00 and $4.99 as different values.
''To your brain, $4.99 is $4.00; which is cheaper than $5.00.''
Now that we understand the pricing strategy, how does Apple plan to grow their business through iPhone?
Firstly, Apple did not increase the price of their iPhone inspite of massive inflation impacting the global supply chain in 2022. This comes from Apple's financial strategy and planning. 80% of Apple's revenue comes from their product sale; 2/3rds of that accounts from the iPhone.
While their Services (iCloud, Apple One) accounts to almost 1/5th of their revenue with a 72% gross margin. So Apple has more incentive getting you plugged into their services where they make more profit than earning from selling an iPhone.
A following breakdown illustrates how Apple over an average customer life-time with their product, generates more earnings from the services than from a one-off device sale (iPhone or otherwise).
Reverse Razor Blade Strategy
The reverse razor blade model involves a business attracting consumers with a premium product and then selling them less expensive products over time. Apple was an early proponent of the reverse razor blade model, selling the iPod as the dependent product and songs from the iTunes store as the consumable product
These ancillary products and services make the main product way more attractive, thus, enabling the company to raise the price of the main product, and stay competitive.
Final Thoughts
Apple has realized customer loyalty is the most powerful sales and marketing tool that they have and that is what they leverage to disrupt different industries
( bringing airpods while removing the 3.5mm headphones, M1 chip for their laptops, and now slowly getting into the health space with the apple watch).
