As I mentioned in the last post on this topic, I was very surprised Apple went for the $329 price point for the entry-level iPad Mini – it was too high I thought. Beth Quartel asked a question in the last post:
I do agree with you that the price is too high, but maybe part of Apple’s decision was they didn’t want the mini-iPad to cannibalize sales from the larger iPad? Based on the pricing decision, I think they were only looking inward rather than looking at the competitive marketplace.
Beth – you, me and everyone on the planet except those who have the company names Amazon, Google, Motorola, Samsung, or Microsoft on their business cards thought Apple priced the iPad Mini too high. Here’s my thoughts from the last 24 hours as I have tried to think of every logical reason why Apple aimed so high price-wise for the iPad Mini.
-Cannibalization is clearly one argument. Not only could the Mini cannibalize some of the $399 and $499 iPad sales, it also has the potential to eat into some of the new iPod Touch sales at $299. That said, Apple has never been shy about cannibalization as long as it was Apple eating into Apple’s sales and not some other competitor.
-The Asian supply chain is also another plausible argument. It is well known, that Apple was having problems sourcing and manufacturing the iPad Mini so I doubt the retail channel numbers are has high as Apple wanted them to be. One way to limit demand is to raise price.
-Related to this, the Apple faithful tend to be agnostic when it comes to price and Apple could move a number of units to the diehards for the first 6 to 12 months on the market. When that demand dries up, Apple could drop price to increase demand for those who have been sitting on the sidelines.
-The higher price (and therefore higher margins) will help with the initial R & D costs with first time development of the new product. Manufacturing of scale effects will kick in with iPad Mini 2 and we will see a lower price.
-Apple could also have numbers and forecasts indicating that the tablet marketplace – particularly the smaller 7-inch segment of the marketplace – will not grow as fast as most analysts think over the next 12 months. Why not take a better margin at $329 with lower volume and then be ready with supply chain issues remedied and economies of scale kicked in?
-In today’s 4th quarter earnings call, we were not surprised that the pricing of the iPad Mini was one of the earliest questions. In response, CFO Peter Oppenheimer towed the standard Apple line listing the “profound” difference in quality between the Mini and the competition, stating its “more expensive to build,” and finally, “gross margin is significantly below” corporate average – adding “hoping to become more efficient.” Nothing new in those comments.
Not that any of the items listed above are mutually exclusive but if there was Asian supply chain problems, no economies of scale (e.g., margins are lower now), competition was very weak (e.g., at least 12 months away from something good), and a certain percentage of the Apple faithful will buy something new at a fairly high price, Apple could decide to be very conservative with pricing the iPad Mini the first go around. Moreover, this is very Apple thing to do this – remember the first iPhone started at $499.
Mark my words – the price of the Mini will drop by this time next year – either $279 or $299. In addition, the price will drop to at least $249 for the iPod Touch as well as this product shares many of the same parts as the iPhone 5; more supply chain/economies of scale issues worked out by then.
The competition has a whole year to breathe as Apple gave them 12 months to figure out their next chess move. Personally, if I were in the Apple war room, I would have advocated to go in for the kill – go for the jugular – margins be dammed. At $249, there would be no competition to talk about for 2013 Christmas season. (Well perhaps Amazon – Bezos lives on razor thin margins).
Something to think about today…
Daniel M. Ladik, PhD
Associate Professor of Marketing
Stillman School of Business
Seton Hall University