Five lessons in pricing from Apple


I bought a new iPad last week. More fascinating than the iPad were the pricing options, cleverly designed to optimise revenue for Apple. There is an offer pitched to appeal to every price segment from entry level at £199 right up to a rich geek’s novelty indulgence at £659. Let’s look at some of Apple’s smarter pricing:

Added on 19 February 2015 by Tony Cram

Woman holding an Apple iPad

Lesson 1.  

Apple might have offered a single iPad at a single price. The iPad Air with 64 GB priced at £479 is a popular and desirable model. However with only that model offered, they would have lost sales from all the buyers prepared to pay £199 – £399 but no more. That represents a lot of potential volume and therefore Apple offers eight models to capture that demand. A single £479 model would also have caused Apple to forego the potential margin from the buyers willing to pay up to £659 – Apple offer four models to capture that margin. So Apple’s first lesson is that multiple price points with varying specifications, can maximise volume and margin.

Lesson 2. 

Only a tiny number of buyers will buy the top spec model, but these buyers will pay for the best. So, set the price high for the newest, lightest, thinnest, latest, cellular iPad Air2 with 128 GB. The beauty of this strategy is that it sets an umbrella price, against which every other model in the range will appear to be better value. So the second lesson is to capture the value from the minority who seek only the best and thereby create a (helpfully high) benchmark.

Lesson 3. 

A large number of buyers will be tempted by the entry price model in the range. So to make the best return, Apple creatively endeavours to make this model less attractive to anyone who could afford to pay more. How do they do this? Well the iPad mini at £199 is a previous generation model, has a smaller screen, a quarter of the pixels of later models, only 16 GB of storage and is rumoured not to be upgradeable when the next version of iOS appears. These negatives encourage buyers who could pay more to look higher up the range. It is only £40 more to have an iPad mini2 with a faster processor and more pixels or step up another £40 and you get 32 GB, you will need the extra capacity if Games are your thing. The third lesson is to compel buyers of the cheapest model to sacrifice significant benefits such that only true budget buyers will choose it. Give other buyers attractive price steps to climb up the range.

Lesson 4. 

Within a range there are certain features that are disproportionately attractive and some key thresholds.  For example keen gamers will find that a 16 GB iPad is not man enough for current computer games.  They will need at last 32 GB. However, there is no 32 GB model in the iPad Mini3 and iPad Air2 ranges – buyers have to upgrade £80 all the way to 64 GB. The fourth lesson is to identify where buyers will pay a premium for a feature and set steps accordingly.

Lesson 5.

Apple understands iPad buyers and how they evaluate the benefits they seek. So lesson five is that you need to spend time, money and effort to understand what your customers truly value and match your offer accordingly.

Smarter pricing begins with understanding your customers, perhaps better than they understand themselves.

Learn more in our forthcoming Momentum event, Pricing for Results. How smart is your pricing? on 6 March 2014.

Tony also leads the open programme Marketing Drivers and is the author of Smarter Pricing, how to capture more value in your market, Financial Times Prentice Hall (2006).

Note: Tony is not affiliated to Apple in any way and the opinions he expresses here represent his own views only.