Apple pricing strategy case study

Presentation Apple Case Study

CASE STUDY APPLE INC. 11

Case Study: Apple Inc.

Datta Venkatesh Kadiyala

New England Collage

Abstract

Apple Inc. is an international company and it has its headquarters in California. It is popularly known for manufacturing and selling personal computers, electronics, and computer software. It was established in 1977 as Apple Computer Inc. but in 2007, its name was changed to Apple Inc. This paper gives an overview of the company in terms of location, products offered, main competitors, its market structure, as well as how it is regulated. The paper will also explore the demand analysis, production and cost analysis and the pricing analysis of the company.

Keywords

Demand, supply, consumer, production, competitive advantage, competitors.

Introduction

Apple Inc. is a company that produces, manufactures and sells media and mobile communication equipment, personal computer hardware and movable digital music players. The company offers the following products and services: iPhone, Apple Watch, Mac, iPod, iPad, Apple TV, an assortment of professional and user applications of software, iCloud, iPhone OS, watchOS, and OS X operating systems, Apple Pay and a variety of service, accessory, and support offerings, Yoffie & Baldwin (2018). The company sells its products via retailers, wholesalers, resellers and third-party cellular networks.

Location and Other Operating Divisions

Apple Inc. has its headquarters in Cupertino, California but it has other operating divisions in America, Japan, Asia Pacific, Europe and Greater China, Yoffie & Baldwin (2018). The Americas division constitutes South and North America. The company’s division in Greater China consists of Taiwan, Hong Kong, and China. The division in Europe is made up of India, Middle East, Africa, and the European countries. The division in the Asia Pacific consists of all the other Asian countries that do not fall into the other divisions and Australia.

Competitors

Apple Inc.’s 2018 revenue was $ 260.2B based on the 2019 SEC filings. Its closest competitors are Samsung with annual revenue of $196.9B in 2018, Google with annual revenue of $155.1B in 2018, Microsoft with annual revenue of $129.8B in 2018, Huawei with annual revenue of $104.9B in 2018 and Sony with annual revenue of $81.8B in 2018. Most of Apple Inc.’s competitors sell computers and mobile phones that are designed using different operating systems and they compete mainly via aggressive pricing of their products and cost structures that are very low. These pressures can unfavorably impact the financial situation of the company and its operating results. ‘The key competitive features fundamental to the Company consist of service and product quality, relative price and performance, design innovation, distribution and marketing capability, service quality and reliability, support and corporate reputation and, accessories ecosystem, (Apple Inc., 2018).

Market Structure

The Apple Inc. company is both a monopoly and an oligopoly. It is a monopoly in that it commands a large consumer base making it hard for its close competitors to convince its consumers to switch products, Cheng (2019). Apple Inc. has been in the market for 43 years offering quality products and services to its customers. This reliability has given the company a competitive advantage over its competitors because its customers trust its services and products. The company’s products are tied together through various applications, for example, iTunes and iCloud and this gives the company an advantage in the industry.

How Apple Inc. is Regulated

According to Terry & Gunter (2018), all cellphone industries in the United States must adhere to government policies and regulations. If the US Food and Drug Administration finds that a cellphone is releasing too much radiofrequency energy it has the power to ask the company to recall the cellphone to either repair or replace it. The US Food and Drug Administration in conjunction with the Federal Communication Commission ensures that all cellphones being sold meet these standards.

Demand Analysis for Apple Inc.

The Law of Demand and Supply

According to the law of demand and supply, an increase in demand leads to an increase in price level holding supply constant. Apple Inc. has defied this law in several ways. Throughout the years Apple’s products have maintained a high demand. Even though the company has maintained high prices and keeps on increasing the supply of its products, the demand exceeds supply. This has given Apple Inc. competitive advantage, particularly in the smartphone market as its iPhone continues to thrive favorably. For example in 2018 the net sales for iPhone were $ 166,699 million which was an 18 % increase from $ 141,319 million in 2017 (Apple Inc., 2018).

Apple Inc. demand increases monthly by approximately 7.2% and this, in turn, translates to an average demand for approximately 5 million of products. Economists have argued that this is because of the excellent marketing and promotion strategies that the company has employed. Before launching a new product into the market, Apple Inc. carries out widespread marketing and promotion initiatives. Once the product is in the market, the company continues to advertise to keep reminding the consumer of the suitability of the product. This has contributed to the constant growth in demand for its products.

Price Cuts

Price cut strategies work wonders for Apple Inc. to maintain high demand for its existing products, Apple has embraced a price cut strategy over the years. By September 2019, Apple launched the iPhone 11 which started at $699, a lower price compared to an already existing product, iPhone XR, which was selling at $749 in 2018. The XR price was decreased substantially by $150 only after a year. This is a major reduction in the history of the iPhone. The iPhone 8 launched in 2017 is now going for $499 also down $150, whereas the Apple Watch Series 3 launched the same year was dropped to $199 from $279, Dave (2018). Economists have argued that this price reduction strategy will help Apple to compete better with Fitbit Inc. and acquire more subscribers.

Constant Supply Levels

Apple Inc. has continuously improved its supply competencies owing to the increasing demand for its products. Although the company has been facing tough competition from other smartphone manufacturers like Samsung, its supply levels have effectively served the goals and objectives of the company in terms of the supply being lower than the demand. This way Apple Inc. will maintain high price levels for its products, Dave (2018).

Diversification of Products

Diversification of product range is one way Apple Inc. has used to ensure a continued increase in the demand for its products. Apple Inc. has been expanding its product mix over the years and this has created anticipation among its consumers, Şekerli & Akçetin (2018). This product mix comprises of services and goods that use information technology, but, Apple Inc. is working on the likelihood of creating products that are not related to information technology.

Pricing Analysis for Apple Inc.

Luxury Brand

Apple Inc. has built a luxury brand through high pricing. Everyone wants prestige. A high price is a crucial aspect to inculcate an aspiration for something unique in the end-users. As far as the sales are concerned Apple Inc. is both a manufacturer and a retailer. This enables the company to set the standard prices for their products. Apple Inc.’s overall pricing strategy is through anticipation of consumer needs, Dave (2018). This way the company can offer its customers what they want. Even though some may feel that Apple Inc.’s prices are excessive, the truth is that these prices target high-end consumers that the company has hooked over the years and are always looking forward to the launch of the next product.

Product Differentiation

According to Şekerli & Akçetin (2018), an important feature of Apple Inc.’s pricing trend is product differentiation. Economists say that the company sells two types of products: high-end and medium-price. This enables the company to maintain its image of luxury and prestige while at the same time increasing the average price for its products even though the company risks selling fewer expensive products. For example, the iPhone XR is the product which the company is using to distinguish top devices from mid-range devices.

Apple Inc. designs its products in a way that enables them to be ahead of their competitors and despite the high competition, the company has maintained high product demand. Consequently, the company has commanded price control in several ways including differentiation of its products, brand loyalty through reliability, creative advertising and hype surrounding the new product launch. The company has created a false entry obstacle to its competitors by majoring in consumers’ willingness to pay more.

Minimum Advertised Price (MAP)

Apple Inc. has adopted a minimum advertised price (MAP) retail strategy whose policies ensure that dealers and resellers do not advertise the company’s products below a given price. Apple Inc. retains the popularity of its high-end products by providing a marginal discount to retailers, for example, Walmart and Best Buy. By so doing the company eliminates the direct competition of retailers and the company’s stores, Dave (2018). As a result, the company gets more returns while at the same time keeping distribution channels clean.

Skimming

Apple Inc. also employs skimming as a pricing strategy. It sacrifices sales to gain high profits by pricing its products highly. This is a strategy used by companies to enable them to recover the money invested in the production of the product, Potts (2018). Apple Inc. uses this strategy to target early customers because they are less sensitive to prices and their need for the product is high.

Production and Cost Analysis of Apple Inc.

Cost Volume Analysis

Cost Volume Analysis influences most of the decisions a company will make about its products and Apple Inc. is no exception. Apple Inc. makes the following assumptions based on Cost Volume Analysis. 1) Apple Inc. has a constant sales mix because it has many products, 2) should a product go down it will be substituted by another, 3) Apple Inc. will maintain constant selling prices. The price levels for the company’s product do not change even when volume varies, Nellis (2017). The company also does not vary the number of units produced which are equal to the total units sold. When Apple Inc. wishes to increase its returns, it changes the product’s model and this, in turn, leads to an increase in the price level of the product, fixed costs and the sales mix.

Activity-Based Costing System

According to Nellis (2017), Apple Inc. uses the Activity Based Costing System to determine the cost of manufacturing their products. For example, there are four categories of cost in the production of an iPhone: the cost of the components that make the device, warehousing and transportation cost, labor costs and warranty expenses. The average cost for producing an iPhone ranges between $12.5 to $30. The company also uses the Activity Based Costing system to calculate individual activities cost and diversify their products. The company produces several products through automated processes. Products that require complicated processes cost more to produce.

Control over Technology

Apple Inc. has taken great control over major technologies used in the production process to protect its heavy margin and place itself strategically for prospect invention, and particularly the augmented reality. Economists say that this strategy has decreased Apple Inc.’s reliance on external suppliers. For example, at one point, Apple Inc. relied to a great extent on ARM Holdings to create its iPhone core processor, however, currently, most of the chip is designed by the company itself and only relies on ARM for the basic architecture. In 2014 Apple bought Beats Electronics, a headphone company, and replaced the former communications chips with its WI Bluetooth chip which is custom-designed. Instead of outsourcing most of its design work Apple Inc. has opted for in-house designing hence cutting complexity, Nellis (2017). This has also helped the company in saving money and working faster.

Conclusion

Apple Inc. company is a leading organization in the communication market and since there is rapid advancement in technology, competition is very tight. Due to this growth, Apple Inc. needs to keep up with these changes in technology to maintain its unique position in the market. Apple Inc. should keep offering better, faster and new products to its customers to maintain its competitive advantage over its competitors, Sidorov (2018).

References

Apple Inc. Company. (2018). 2018 10-K form. Retrieved from http://www.annualreports.com/HostedData/AnnualReports/PDF/NASDAQ_AAPL_2018.pdf

Cheng, P. (2019). The importance and necessity of market structure management in the process of globalization.

Dave, J. G. (2018). A CASE STUDY ON MARKETING STRATEGY: APPLE i-Phone.

Potts, S. (2018). Apple’s Effective Use of the Extended Marketing Mix.

Şekerli, E. B., & Akçetin, E. (2018). Diversification Strategy in Internet Industry: Google Inc. Example. Afyon Kocatepe University Journal of Social Sciences, 20(3).

Terry, N. P., & Gunter, T. D. (2018). Regulating mobile mental health apps. Behavioral sciences & the law, 36(2), 136-144.

Yoffie, D. B., & Baldwin, E. (2018). Apple Inc. in 2018.

Yusoff, M., & Husnina, N. (2018). Determinants of Risks and Performance in Apple Inc. Available at SSRN 3181705.