iPhone pricing model
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Strategy and Tactics of Pricing (Marketing 469)Final Case Presentation - iPhone Pricing Model
Team 5: Vibhor Chhabra, Arshi Singh, Derek Vaughn
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AgendaBusiness Problem
Differentiating Factors
Sales & Pricing
Proposed Pricing Models
Recommendation
Appendix
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Business ProblemHow can Apple increase profits and increase market share in the smart phone segment without sacrificing the premium or exclusivity associated with its iPhone?
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Proposal - Offer 3 Price Options
Price Sensitive Consumer
Current iPhone 3G
8GB
$199 with a two year contract
Enthusiast
New model
16GB
$499 with a 1 year contract
Luxury/Lead Consumer
New modelunlocked
Distinctive bluetooth headset
32GB
$799 without a contract
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The value chain below illustrates the context in which Apple delivers value to the customer with the iPhone:
Network Billing Design Build O.S. Apps Branding Marketing Customer
Value chain
Any change to pricing must take network provider incentives into consideration.
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Factors differentiating the iPhone‣ “There is an app for everything”
‣Ease of use, fashionable, media capabilities, synchronization, touchscreen, app store, and functionality
‣ Primary Weaknesses are carrier availability and affordability
0
2.5
5.0
7.5
10.0
AffordableFashionable
Web Browsing
Carrier Availability
FunctionalityiPhone Blackberry Pearl Motorola RAZR
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Smart and Easy to UseSmart
Not so smart
Hardto use
Easyto useMoto Q
Nokia
Palm
Other
iPhone Android
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Growth phase of iPhone
Time
Sales
Introduction phase (Skimming)‣High perceived value‣Leaders less price sensitive‣High price to signal high quality
Growth phase (competitive pricing)‣Subsidized phone‣Expansion of customer base
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Consumer surplus & Demand
Source: Gizmodo.com Source: Fortune
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0
1,750,000
3,500,000
5,250,000
7,000,000
Q3 2007Q4 2007
Q1 2008Q2 2008
Q3 2008Q4 2008
Q1 2009*
Sales Pattern
Source: Apple.com earnings release
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Price-Volume Interpretation
0
1,750,000
3,500,000
5,250,000
7,000,000
Q3
Q4
Q1
Q2
‘07-’08 Sales ($500) ‘08 - ‘09 Sales ($200)
Source: Apple.com earnings release
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Proposal - Offer 3 Price Options
Price Sensitive Consumer
Current iPhone 3G
8GB
$199 with a two year contract
Enthusiast
New model
16GB
$499 with a 1 year contract
Luxury/Lead Consumer
New modelunlocked
Distinctive bluetooth headset
32GB
$799 without a contract
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Proposed Pricing ModelPrice Cost Demand Profitability ($)
8 GB $525 $170 10,000,000 $3,550,000,000
16 GB $625 $180 5,000,000 $2,225,000,000
Net ProfitNet ProfitNet ProfitNet Profit $5,775,000,000
CURRENT
PROPOSED
Price Cost Demand Profitability ($)
Base $525 $170 10,000,000 $3,550,000,000
Premium $600 $200 7,500,000 $3,000,000,000
Luxury $800 $200 1,100,000 $660,000,000
Net ProfitNet ProfitNet ProfitNet Profit $7,210,000,000
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Proposed Pricing Model
Revenue Subsidy Demand Profitability
Base 2160 325 10,000,000 18,350,000,000
Premium 1200 100 9,750,000 11,000,000,000
Luxury 0 0 0 0
Net ProfitNet ProfitNet ProfitNet Profit 29,350,000,000
Revenue Subsidy Demand Profitability ($)
8/16 GB 2160 $325 15,000,000 27,525,000,000
Net ProfitNet ProfitNet ProfitNet Profit 27,525,000,000
CURRENT
PROPOSED
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RecommendationBase‣ Offers lower priced handset option‣ Increased market penetration that complements externalities
Premium‣ Captures value from customers who want the latest technology‣ Visual distinction from standard iPhone increases exclusivity‣ Increased revenue from more frequent repeat purchases
Luxury‣ Same Benefits as option 2‣ Offers flexibility to choose network providers‣ Capitalizes on growing market for unlocked iPhones
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Questions
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Appendix
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History - iPhoneThe iPhone is a smart phone that combines a web browser, email, iPod and personal computer into a single, fashionable, easy-to-use device.
Price: Introduced at a price of $599, dropped to $399 for an 8GB model. Current prices are $199 for an 8GB version and $299 for a 16GB version
Weakness: Customers must sign a 2 year contract; AT&T is the exclusive carrier
iPhone customers: Initial - Tech Savvy ( Early Adopters)Today - Students, Teenagers , Business users, Tech Savoy
Distribution channels: Apple Store, Online, Walmart, & Best Buy
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Cost to the consumer