iPhone Price Drop: Don’t Panic, It’s Really the Perfect PhD Thesis

The just announced price drop of the iPhone to $399 is an interesting launch price scenario that would make for an interesting research piece or PhD thesis.

During the launch of any product now, people go look at eBay as the “marketplace” for judging hype and of course, supply & demand.

Interestingly enough, during the few days and weeks after the launch of the iPhone, prices did not “go crazy” leading some with no greater understanding of the marketplace to conclude that the iPhone wasn’t as hot as it could be.

But really, the brilliance of everyday on eBay for most everything is that you do get a snapshot of a live supply & demand and in most cases, as pure as can be. Unlike even a swap meet, eBay is global and 24/7. Buyers from around the globe can instantly decide if the pricing falls within their interest – there are virtually no barriers other than having an internet access.

What was eBay and eBayers really saying? For the most part, most iPhones sold at a slight premium or virtually none at all. In the first days, people were willing to pay an extra $50 to $100 for no standing in line but as supplies were replenished, by the 3rd or 4th day, it was clear “street” supply was meeting demand so ultimately, pricing essentially moved to the $600-$650 range.

For Apple, it meant they pegged pricing and demand pretty much perfectly. They knew they could sell @700,000 phones at @$550 (presuming they sold more 8GB phones at $599 than 4GB $499 phones). And after that, they knew the price point had to be moved lower which they did. They guessed the early buyers were willing to pay a premium and eBay along with their supply line answered that Apple was essentially correct.

In other words, Apple managed not just the launch but also the revenue and profit from that frenzied launch.

Why is that important?

It is important to get hype – whether it’s the launch of the PlayStation 3 or XBox 360 or the iPhone but a real ongoing business means you have to go beyond day two and answer – where is my revenue & profit from this?

Where Sony & Microsoft fell down is they delivered a limited amount to a small subset of the ready and willing buyers and pretty much called it a day – happily and really, stupidly basking while watching the frenzy of activity on eBay. Acting gleeful as if PR hype and eBay sales were the true measure of success? Really, how smart is that? How smart is it to take a loss on a product and turn your profit over to a third and distant party? Not even your retail partners but literally some guy off the street willing to sleep there to be first to put it on eBay and reap $500, $1,000 or more? Sure, it’s hype but how exactly does that build profit, and customer relations? Basically, they turned away hundreds of thousands of people willing to pay $399 or $599 – how smart is that strategy? It’s great for eBay and random people on the streets with plenty of free time … but that just having $399 or $599 (plus more if you add peripherals) is simply not a good enough to be their customer – you must brave a cold night on a sidewalk?

Apple was certainly willing to be coy but when asked, they were honest in saying there should be enough – of course, they wanted people to leap to the wrong conclusion and presume it would be like the PS3 or XBox 360 … but in the end, by 9PM in most Apple stores that night, they still hand stock in hand because they guessed reasonably well how many they could sell in the first few days, weeks and months at max price and more importantly at max revenue.

Then after that, they would re-set the price to bring in the next group. Perhaps perfectly played? Instead of eBay & eBayers making most of the margins, Apple actually managed to pocket 80% of the “premium” the first group of users/buyers were willing to pay?

Perhaps that is the reason, they are amortizing the revenue from the iPhone over many quarters instead of one – they didn’t want to unduly raise expectation on margins if this quarter were to spike very high only to see it drift back towards the norm 25-35% range.

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So unlike Sony, MS & even Nintendo who watched eBayers make a 20-300 percent return – they should have been smarter in their pricing.

Of course, the problem with $300+ plus is that people start to think of it as “real” money 🙂 and the first phase is fraught with difficulty because while you want to maximize profit, you want to create the illusion of affordability – perhaps what they should have done is sell a thousand at $1,500 dollars with everything going to charity and then next 25,000 going at $1,000 with some limited item included that’s really just a hunk of plastic …this way the early fanatics and those who absolutely have to be first can feel special (though with $1,500 out of pocket) … you made some money, then after that, you release it at your “regular” pricing … of course, supply should meet demand a few weeks down the line, otherwise, why bother throwing away millions of dollars of PR. The bottom line is when people are ready to buy – you better be ready to sell. If you wanted a limited audience, then price it as such – $1,500, $5,000, etc, etc … if you are selling to the masses and want a mass market audience – don’t annoy YOUR customers!

As for the price drop of $200 and the so called buyer’s remorse? First, other than the people who work at the music labels or NBC, digital and tech stuff costs less and less as we move along the cycle – not MORE and more – it’s normal course of business for prices to drop.

It should be pointed out this is an everyday occurrence – that the first days you drive your new car off the lot, you’ve just spent $5 to $10k driving around town.

So, for those who are panicked at the alleged drop in margins, really, maybe Apple already figured all this out. That instead of selling the first million at $399 only to realize they could’ve sold 700,000 at $599 – that’s EXACTLY what they already calculated. You can do the math of $200 more revenue times 700,000 🙂

And now, every news station is delivering another $100 million dollar FREE ad/PR campaign for Apple and telling people the iPhone is $200 less than before … so, is that good enough for you? Who else can orchestra all this?

That Steve Jobs guy, I’m telling ya – he might be smarter than you think 🙂

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14 Comments

Filed under Advertising, Apple, Computing, iPhone, Marketing, Media, mobile

14 responses to “iPhone Price Drop: Don’t Panic, It’s Really the Perfect PhD Thesis

  1. D9

    Maybe so, but “that’s what happens” is going to come back to haunt that man. Consumers are smart too, and we will quickly catch on to these tactics. Loyalty will be a cachet that Apple can no longer count on, much less favorable word-of-mouth.

    I for one, will never buy a new Apple product again. It pays to wait until Apple feels the burn of stalling sales, and as we can see, it comes faster these days.

    As the saying goes, “Fool me once, shame on you. Fool me twice, shame on me.”

  2. Emad

    The iPhone is a better deal than the iPod. Check this

  3. mikhailovitch

    There are NO indications, anywhere on the internet, that iPhone sales were falling off before this announcement. This price drop has been done for two main reasons.
    Firstly, to position it appropriately in relation to the price of the new iPod Touch.
    Secondly, to wrong foot competitors who have been desperately burning the midnight oil to produce competitors for the iPhone selling at the higher price. Think of the way the release of the solid state iPod Nano completely demoralised the opposition by moving the goal posts, just at the point where the opposition were almost ready to release products that rivalled the old model. Apple is playing with the minds of its competitors again, this time on price.

  4. kevinp

    I also wonder if there is some kind of subsidy coming now from AT&T that accounts for part of the price drop.

  5. Darryl

    A price cut on the iPhone can be easily summised by what’s right in everyones face.
    Look at it this way:
    Apple introduces 8 & 16 GB iPod Touch at $299 & $399.
    (Clue-16GB flash memory available.)
    Apple cuts price of 8GB iPhone from $599 to $399 matching price of 16 GB iPod Touch.
    Discontinues $499 4GB iPhone.
    (Note @ $499 & $599 Apple has sold close to 1Million iPhones in 1st quarter of availibility. Meaning customers are willing to pay price for product. History shows that Apple never walks away from customers willing to pay premiums for its products.)
    (Note-Apple plan Euro launch of iPhone by end of 2007, which mostly uses 3g mobile network.)
    Reasonable assumption:

    Before Euro Launch of iPhone Apple will:
    1)introduce $499 16GB iPhone
    2)introduce $549 8GB 3g iPhone & $599 16GB 3g iPhone

    It would also seem reasonable that by Euro launch there will be upgraded camera features, maybe even the addition of video capabilties.

    Seems logical. Technology is already available. Euro market will demand 3g network capabilty. Reasonable explanation for price drop so soon after introduction.

    If you look at the patterns that Apple has displayed with product introductions since the return of Steve Jobs, then one would know certainly know that Steve and Apple would never leave a robust market for a $600 product behind.

    Apple got the market primed with the original pricing struture of the iPhone and proved to the Market that they can compete on the high end. They then turn around a drop that high bar for entry and hit the market with a new high end.

    I never try to predict what Apple will do next but these moves are so obvious that I’m willing to go out on a limb on this one.

    If nothing I’ve learned, being one that watches Apple, is that Steve Jobs has figured out how to play the market like a fiddle in many cases. What’s astounding is that analyst and journalist and Wall Street hasn’t figure this out yet.

  6. Domo

    And of course, mikhailovitch & Darryl, you both are on the Apple Board of Directors, or Apple’s Executive Management team so you’re obviously correct in your assertions as to the true reason for the iPhone’s price cut.

    Give me a break!! Any moron could figure out that if they were selling those iPhones like the hype that when into them, there’s no way the price would have been lowered…that’s just common business sense. No, you guys just provided us with your patronizing opinions which as the saying goes, everyones got one just like their @sshole.

    /

  7. iVoltage

    An interesting piece but you extrapolate from a fundamentally flawed premise. Gauging demand for the iPhone from the amount of activity it generates on eBay leads nowhere. At the time, it was unclear whether the iPhone would even work without an AT&T contract and, consequently, had only a notional value for anyone wishing to use it on a different network. However, I agree with your belief that Apple intentionally lowered prices. The early adopters, despite their whining, will still buy the next gadget to come out of Cupertino. That is for certain. More to the point, they will attract a huge number of new devotees praising them for their apparent generosity. Don’t forget these products run OS X. OS X is Apple’s lifeblood and embedded devices are the future. They would never let boutique pricing thwart their effort to win over such a critical market. They have now stolen a march on WM6, Symbian and the Palm OS. It will be hard for the others to make up the lost ground. The battle for Troy has begun.

  8. bueller

    seriously, enough about apple and their stupid iPhone. a couple good articles here and there but everyone is killing it.

    ps – this was one of the few GOOD articles

  9. Pingback: Don’t panic…it’s really the perfect PhD thesis « Fiction was too banal for her…

  10. fluvial

    This is a fantastic entry. I find this whole iPhone craze irresistable to watch and I’m glad someone wrote something intelligent about it! I’ve linked it on my blog.

  11. coollikeme

    I can buy it now. Yip!!!!!!!!!!!!!!!!!!!!!!!!!!

  12. That smell is the competition crapping their pants.

  13. ricky

    nice to see. but where can i buy in india or in bangkok or in hongkong . please inform i reall wnt to buy.

  14. ricky

    nice to see. but where can i buy in india or in bangkok or in hongkong . please inform i reall wnt to buy.send me price also

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