Apple Case Study

Problem Definition:

Apple Inc., one of the largest companies in the world, has introduced the revolutionary IPhone 3G in the market. The managing team’s goal is to sell 10 million units in 2008, giving them a 1% market share. The issue for Apple was that when they experienced high customer satisfaction for the IPhone, they decided to make these devices more affordable by dropping the price by $200 after two months of going on sale. This affected the sales of IPhones as they were declining on a daily basis and their initial customers of the IPhones were very upset that they had to pay a higher price when the product came out on sale. Therefore, Apple must develop a price segmentation strategy to cater to their highly price sensitive customers and their less price sensitive customers in order to achieve their goal and ensure sustainable profits. They must also ensure they remain competitive, as they are entering a highly competitive market with large players such as IBM and Android.

Alternatives and analysis for critical issues:

Price segmentation is important when there is heterogeneity of demand. One of the alternatives for Apple is to use 3rd degree price discrimination strategy (including versioning) to target different consumers’ needs. Another alternative is to focus on complementary goods and add on price structures. Lastly, Apple can solely focus on a niche market such as the high-end consumer market, which includes technology enthusiasts.

Alternative 1 – Versioning

Third Degree price discrimination is charging different market segments a different price. Versioning or price discrimination is when different variations of a similar product are sold simultaneously. Some versions offer more features and benefits than others. Apple has already implemented the versioning strategy as seen in exhibit 1. They can, however, modify this strategy. Instead of offering two products simultaneously, they can introduce one version of their product, which targets the innovator and early adopters (see exhibit 2) and then release the second version of the product, which is made more affordable and has fewer benefits than its previous model. This product will be targeting the mainstream market i.e. early majority, late majority, and laggards. One of the advantages of this option is that strategy will increase consumer satisfaction and therefore, Apple will be able to increase their revenue. Another advantage is that option will remove the negative views from the early purchasers that they are paying more for the same product because now, instead reducing the price for the same model, Apple is just introducing another model, which is targeting a different consumer segment.

The disadvantage is that some early purchasers may still feel upset that they are paying more for a product, which only has a few more benefits than the more affordable version. Another disadvantage is that by not selling the two products simultaneously, Apple will need to increase their marketing expenditures to target the different consumer segments separately.

Alternative 2 –Complementary Goods and Add-on structure  

Steve Jobs feels that reducing the price of their IPhone to $399 to make it more affordable is a good option because of the network  (seen in exhibit 3). Therefore, rather using a price skimming technique they can offer the same model at the lower price and charge high for complementary goods (such as buying apps) and implement an add-on price structure. An add-on price structure will allow consumers to customize their value package specific to their needs. For example consumers may want a package that provides the IPhone with good quality headphones for purchasers that enjoy listening to music. The advantage is innovators and early adopters will no longer be dissatisfied with the differentiation in price for the phone. Also, with the add-on price structures, consumers can customize their phone package. With the sale of complementary goods and an add-on price structure this will generate more revenue for the company. In addition, complementary goods increase switching costs for customers. The disadvantage is that some consumers may eventually develop negative perceptions of the Apple brand because the company is charging their customers higher prices anyways for their additional products/services.