Business Monday

Apple’s new watch masters time-honored pricing tactics

These are good times for Apple. They just released quarterly earnings that blew away Wall Street’s expectations, thanks in large part to sales of their large-screen iPhones.

The company reported results that defy gravity — higher sales volumes, higher market share, higher prices and higher net margins. No other company has dominated their market like this since the heyday of Big Blue (aka IBM) in the mid-1980s.

How does Apple do it? Innovative products. Great marketing. And an absolutely brilliant pricing strategy that has lessons for all of us.

Take the company’s new small-screen product, the Apple Watch. Released a few weeks ago, the pricing strategy behind the Apple Watch is a great example of how a company can profit by capturing value in both volume and margin terms.

One of the great pricing challenges companies face is that customers value products differently. They have different levels of willingness and ability to pay, different preferences and different intended uses. When a company tries to serve all customers with one price, or one standard markup, it is forced to make huge tradeoffs between volume and margin.

On one hand, a one-price-fits-all approach enables some customers to acquire a product for much less than they are willing to pay for it, leaving a big chuck of profit on the table. At the other end of the spectrum, more price-sensitive customers are excluded. Even though the price they were willing to pay would still have been profitable.

But Apple will have none of that. Their product and pricing people have found a way to fan out all along the price/demand curve, making sure that everyone pays as much as they are willing to pay on one hand, and that virtually no one is turned away because the price is too high on the other hand.

To achieve this feat of pricing perfection, Apple uses a time-honored technique known as product versioning. But they take versioning to an extent rarely seen. The Apple Watch comes in more than 200 versions, ranging in price from $349 at the low end to $17,000 at the high end, with many price points along the way.

Each version of the Apple Watch uses more or less the same technological innards. What changes is the wrapper. Apple’s intention is to offer a look and feel to appeal to an extremely broad spectrum of personal tastes. From hip and cool fashion-conscious teenagers to hip and cool fashion-conscious senior executives.

There are two sizes to choose from. The watches are encased in six different types of metal, from aluminum to stainless steel to 18-karat gold. There are 6 different bands that come in 17 different colors, from lime green to bright red to basic black and brown.

And yet there’s more.

Upon checkout, Apple keeps working both ends of the willingness-to-pay spectrum. For those willing to spend a bit more, they push a band upgrade and their extended warranty program. Two highly profitable options.

Conversely, for those who might be hemming and hawing over the price, they offer to finance the purchase for qualified buyers. A $349 watch, which is admittedly a stretch for many of us, can be had from just $16.59 a month for 24 months. Apple’s payment-preference tactic widens the market among young people and those earning minimum wage, which is a huge customer segment that doesn’t traditionally purchase medium- to high-end watches.

It’s true that our companies are unlikely to ever reach the scale of Apple. But if we take a page out of their playbook and master the art of product versioning in our own businesses, we’ll get a lot bit closer.

Adam Snitzer is a revenue strategy expert and president of Peak Revenue Performance, a consulting firm that specializes in designing and executing innovative pricing strategies. He can be reached at adam@peakrevenueperformance.com, or via the company’s website at PeakRevenuePerformance.com.

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