A journalist asked me the other day about Apple’s rising stock price and why are buyers willing to pay such a high price for Apple’s stock. The article was post on Yahoo Finance yesterday (click here). To put it into perspective, since February 14th when Apple CEO Tim Cook came to New York City to speak at the Golman Sachs Technology Conference (click here), Apple’s stock is up over 22%, has hit 27 new highs in 31 trading days, gained nearly $110 in the 31 trading days and its market cap has grown by more than $104 billion (click here). What’s amazing is that $104 billion is equivalent to approximately one Amazon in market cap. WOW!
My full comments to the journalist are below including Dr. Dan-o “isms” such as “you price what the market will bear” and “consumer’s are voting with their lets.”
My name is Daniel M. Ladik and I am as Associate Professor of Marketing in the Stillman School of Business at Seton Hall University. Your request was forwarded to me as my main areas of teaching and research expertise include marketing strategy and social media/Web 2.0, as well as, personal selling and sales management. I blog at www.dignuggetville.com. I am also an Apple aficionado – see previous Apple comments in Forbes Magazine (click here).
When I read your request, two thoughts popped into my head. First, the most fundamental axiom in marketing theory when it comes to pricing is “You price where the market will bear.” In other words, one should set the price of a product or service at the price where the buyers believe the deal is worth taking. Toyota does a good job in this area with their Prius cars while GM did not with their comparable Volt car that recently halted production because too many Volts are sitting on dealership lots. The Volt should be a $25,000 car (after the $7,500 government incentive).
Second, and not independent of the first, competition of comparable products have a major impact on price. That said, for the months of October, November and December 2011, Apple sold 15 million iPads that accounted for 9.15 billion dollars or 20% of Apple’s revenue for the quarter. The closest competitor, Amazon’s Kindle Fire priced $300 cheaper, sold less than 4 million units during this same time period. Even at $300 more, the iPad is a superior product in every way, shape or form than anything on the market. By the way, the iPad also outsold more expensive PCs as HP, Dell, Acer nor Lenovo sold more units that iPad for the same three months.
Until competition can come close to the value equation (i.e., you get what you pay for) that iPad offers, Apple can command that premium price. You have to understand, what Apple pays to get the product made and how much margin per unit Apple earns is not relevant to consumers, just analysts. Consumers “vote” with their wallets and it does not appear price is hindering Apple in any way. By the way, iPad 2 was already significantly better than any other tablet on the market and it is now $100 cheaper. This was a smart move by Apple as it protects them even more from competition from below.
On a final note, pre-orders for the “new” iPad sold out worldwide in 2 days. Apple can justify the prices of their products because the market believes they are worth every penny.
If there are any questions or clarifications on any of the thoughts above, please call my cell this afternoon or send me an email.
Daniel M. Ladik, PhD
Associate Professor of Marketing
Stillman School of Business
Seton Hall University