iFlop? 3 Lessons from Apple’s Pricing Strategy Dilemma

For years, no one has questioned Apple’s product or premium pricing strategies. But now, in the face of increased competition from Samsung, Google, HTC, and Motorola cutting into the iPhone’s market share, the company is revisiting its strategy with the iPhone 5S and 5C. What lessons can SaaS companies learn from Apple’s gamble on price?

Lessons from the Apple iPhone Pricing Strategy

It wasn’t long ago that demand for the iPhone was skyrocketing. But with the emergence of Android and others, the  U.S. smartphone market has become more and more saturated. In order to remain competitive, the company now finds itself looking to broaden its appeal in order to regain and capture new share, and expand into the developing world market. In order to pull that off, however, that likely means lowering prices, and for Apple (as for any high-end luxury brand) that introduces an interesting pricing dilemma:

Is it possible to maintain a premium value brand while introducing lower-end products into the market?

Apple may be trying to have it both ways with its release of the iPhone 5S and 5C, but what lessons can its approach (and approaches from other companies) help SaaS companies formulating their own pricing strategies?

In this post, I’ll explore the pros and cons of competing on price, and offer examples of companies who have found success with a variety of pricing strategies.

The Stakes

Apple’s brand has tremendous value. According to WPP’s BrandZ™ Top 100 Most Valuable Global Brands study, Apple’s brand is the world’s most valuable at $185 Billion. By lowering its prices the company runs a risk of destroying the cachet that made it such a hit in the first place. As the New York Times’ Brian X. Chen wrote in an article last week, there’s a fine line between “cheaper” and “cheap,” and if Apple crosses that line the company will almost certainly regret it.

For software companies, pricing out customers can be a big concern, especially early on when the goal is more or less to acquire customers, period. But as many SaaS experts have pointed out, offering low entry-level prices can sometimes be just as damaging. So what’s a company to do?

3 Lessons SaaS Companies Can Learn from Apple’s iPhone Pricing Strategy

Lesson 1: Competing Solely on Price is a Bad Play

When competition gets stiff or you’re trying to quickly acquire as many customers as possible, it can be tempting to try to win with lower prices. However, in doing so you run the risk of a “race to the bottom” in pricing that might prove to be your undoing.

As Patrick McKenzie points out in this excellent post for the blog SaaS Pricing, very few SaaS businesses can scale (let alone survive) by selling their products for slightly above zero. While there are a few exceptions to that rule, of course (e.g., Netflix, Dropbox, and others), it is not a prescribed course of action.

Competing on price alone is problematic for growing companies for three big reasons:

  1. Someone will always be able to do what you do cheaper (namely, bigger competitors with bigger budgets)
  2. Lower prices is an unsustainable competitive advantage, particularly for smaller businesses without the benefit of economies of scale
  3. Lower prices attract lower-value customers that still cost your business the same amount to acquire and support

Traditional PC makers such as Dell, Gateway, and IBM have learned those lessons the hard way. The fierce competition between the PC makers pushed prices down and resulted in razor thin margins. In the end, both Gateway and IBM ended up exiting the PC business and Dell continues to struggle.

Lesson 2: Competing on Price Can Actually Work (Under the Right Conditions)

Businesses can and have succeeded by being the low-cost option in their market, and price is often a quicker route to capturing market share in emerging markets like the ones that Apple is currently competing for.

In fact, as serial entrepreneur and investor David Skok writes in this post, setting low prices in the early days of a company’s development can actually prove to be a smart strategy. Doing so ensures that a business doesn’t scare away price sensitive users, while also giving the company a way to compete for more customers in a crowded marketplace. Good examples of that approach include tech businesses like 37Signals and Evernote, which essentially gave away their products early in their development in an attempt to quickly acquire users.

The iPhone 5C, while not the lowest cost product, is Apple’s first attempt at catering to the mainstream price sensitive market.

As Chen points out in the aforementioned New York Times post, the company’s profit growth has been slowing for some time, as competitors like Samsung have made significant headway by offering smartphones in both the high-end and low-end markets.  This has enabled Samsung to gain traction in emerging markets such as China and India where smartphone sales are surging. Lower-cost options are popular in these markets as they appeal to what analysts call “aspirational consumers” — buyers who will only splurge on a fancy brand if the price is right.

If Apple is able to cater to  that market — and continue to sell its higher-end products to higher-end consumers — then the company’s decision to cater to price sensitive markets with lower cost iPhones could pay off in a big way.

Lesson 3: Tiered Pricing Can be Incredibly Effective

The chief problem with Apple’s iPhone 5C strategy is that the company’s newest product offering might not be cheap enough to appeal to a broader market.

Examples of clear, transparent pricing

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11 SaaS Companies with Effective Pricing Structures

The primary goal of this move was to broaden the iPhone’s potential market in emerging markets where smartphones are not subsidized by the cell provider. Despite offering a lower cost phone, the iPhone 5C is still an astounding $549. According to this VentureBeat post, that translates to one month’s salary for average Chinese and Indian workers. That is compared to an average smartphone sales price of around $300.  As a result, some have wondered whether Apple was better off offering a iPhone 4C. It would have offered a more significant reduction in price while preserving the attractive packaging.

It’s surprising because  for years, Apple has successfully offered an array of products in their other product lines.

With several different models of laptops, desktops, iPods, and iPads, the company has successfully tiered its products to appeal to a variety of buyer types, without sacrificing its high-end brand reputation. And as Apple CEO Tim Cook recently told the New York Times, each of those models had a reason to exist. For instance, the classic iPod appealed to hard-core music fans who needed more storage, while the iPod Mini targeted exercise fanatics who wanted something that wasn’t cumbersome to carry. The key to their success was each product maintaining the look, feel, and quality that the consumer expects out of an Apple product.

Tiered pricing can be effective for SaaS businesses that offer different levels of products or services, because it gives them the ability to accommodate different customer segments, market to low-entry buyers, and upsell existing customers on feature upgrades.

Skok refers to that strategy as multi-axis pricing in this post, arguing that it’s actually one of the best tools for growing SaaS revenue, while KISSmetrics’ Lars Lofgren points out that the ultimate key to tiered pricing is to focus on value, not arbitrary dollar amounts.

Will Apple’s iPhone Pricing Strategy Succeed or Fail?

While critics are skeptical of Apple’s latest attempt to win over price sensitive smartphone buyers, there are plenty of examples of businesses that have succeeded in doing just that. The jury is out on Apple’s first move, but it is anticipated Apple will continue to broaden their appeal to their emerging markets.

For growing software companies, however, the one pricing rule to remember above all others is this: Keep it simple. Try not to overwhelm your customer with too many options. Instead, opt for simple pricing tiers matched to products that have a clear value proposition to your customer. My colleague Kevin Leary has an excellent blog post on providers who do this well.

What pricing dilemmas has your software company faced? Have you had success with a low-cost or multi-axis pricing model? Please feel free to share your experiences in the comments section below!

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photo by: Franck BLAIS

Share Your Thoughts

  • ipn_iyer

    I think apple needs to launch better variety of phones, both low cost and high end, giving more options for low/high income users.

  • Ed Arnold
  • Sudip Verma

    It’s just opening weekend, initial sales don’t speak to long term success of this strategy they’ve pursued. Apple has a loyal fanbase and unsurprisingly they’ve shown up to buy the phone. But are they going to recapture market share from Android? The jury is still out there and we will have to wait and see. Here’s a Cnet Article on Steve Wozniak’s thoughts on their new approach:

    http://news.cnet.com/8301-17852_3-57604085-71/woz-not-turned-on-by-iphone-5c/

  • Philippe Lyon

    Back in university, we were told that a “price war” should be the very last option ever, as it is extremely damaging to the company and the market (we would jokingly yell out “price war” when studying a case just to annoy our professors, with great success I might add).

    The thing is this: Before you reduce prices, be sure you build value in other ways before you try to compete on price. Just cutting the price will greatly cheapen your brand.

    In Apple’s case, offering a phone too similar to their higher-end
    offering will definitely hurt their brand image. Unless the 5C is
    differentiated enough from the 5S, they will likely lose out in the long
    run.

    Now, they can always market the more expensive phone as their “flagship” and then offer a downgraded version at a lower price, the thing is that the phones need to be noticeably different, while still being desirable enough compared to the competition.

    I guess time will tell how this will play out. The thing is that this is relatively new territory for Apple, seeing how they used to lead the pack with innovation, and thus had a competitive edge. Will the 5C be fashionable enough (like the ipod nano was)?

  • Ed Arnold

    Time is starting to tell: http://shar.es/KR3W6

  • Ed Arnold