Total Profit = Profit per Device x Number of Devices Sold
Every high school pass out knows this equation. To maximize profit, you can either maximize the profit per device sold or you can maximize the number of devices sold. Profit has the tendency to stay constant. If you reduce the profit per device, the number of devices sold will increase.
Hence you either decide to price your product high, so that you can make more per device sold and call yourself a premium company or you can sell a large number of devices and call yourself a mass market company. In the end, the profit is the goal.
Now in a monopoly, it is pretty obvious that you would want to price your product at a high rate because there is simply no one else in the market. While, to enter an existing market you would want to reduce the prices on your product and try gaining some market share.
But Apple beats conventional wisdom, again.
The phone industry was as competitive as it could be at the launch of the iPhone. There was no monopoly, just cut throat competition. Apple should have kept the price of the iPhone low to be able to slowly leach in and gain market share. After all Apple itself said that in the next year, it would like to gain at least a percent of the market share. And that was an ambitious goal.
But Apple decided to sell the iPhone at a high margin of upto 40%! The iPhone is a pricey phone to say the least. And still, today four years hence, the iPhone has captured 5% of the mobile phone market. That is staggering.
In 2010, Apple launched the iPad. There was nothing like it in the market. It was an instant success. A monopoly in the true sense of the word.
Apple should have priced it at a thousand dollars. After all there is no competition! But again, beating conventions the iPad was priced at half of that, with just a 25% margin.
And therein lies the brilliance of Apple. Because it worked. Apple is making a ton of money. Both the product lines have been incredibly successful.
In the phone market, they knew that if you provide the customer with a good well thought out experience they would be ready to pay for it. So people who can afford a smart phone would most likely get the best phone available. And they made sure that this best phone was the iPhone. After all, reducing the price by 10% would not have increased sales by 10%.
In the tablet market, it was necessary to use the monopoly to establish total market dominance. And we see how it has worked. All the other competitors were quick to come out with their clones, but they failed to compete on the price.
If Apple had learnt nothing from the PC era, and had priced the iPad at an exorbitant rate, the competitors would have competed successfully on price and Apple would have again been left to a tiny market share. Thankfully, Apple did not err again.
A low price made it very lucrative to prospective buyers who didn’t have much idea how they were going to use this entirely new class of device. It was safe to try out this device solely on its ‘cool’ factor.
It is very interesting to see these traditional economics failing to apply as we enter this amazing new post PC era, and as Apple shapes the future of the tablet era, or more appropriately the iPad era.
Originally published at paramaggarwal.com.