Apple Pricing Strategy

According to the article “Apple Pricing Strategy: Don’t Diminish the Brand” published on 6^th March 2009, (http://www.macobserver.com/tmo/article/apple_pricing_strategy_dont_diminish_the_brand) the article states that Apple doesn’t try to compete with PCs directly on price for several reasons that are well known. Cut throat pricing leads to diminished profits and loss of shareholder value. It diminishes the hard won reputation of the Apple brand.”

 In Malaysia, Apple is a well known company which is a premium brand of computer and smart phone. Can a reduction on price of products increase the quantity demanded for the products as well as the revenue of the company? Firstly, we know that Apple is an oligopoly company because there is more than one party in the industry which is producing the same product like Apple. On top of that, Apple has a few numbers of firms such as Microsoft, Samsung, HTC, and so on to compete with. An oligopoly is like monopolistic competition, it lies between perfect competition and monopoly. It either produces some identical product or differentiated product which is only compete the price of other competitive party. Therefore, they have to stay aware what kind of pricing strategy is best suits for them in order to not to let their loyal customer flow to others competitive company. On top of that, before setting up a price of the product, they have to aware whether the demand on their product is elastic or inelastic in the market. If the demand of their product is elastic in the market, setting up a higher price on the product might cause them to lose customer. People may look for substitution brand such as Samsung and HTC. In short, demand elasticity will affect the total revenue of a company.

In the law of demand, it says that the lower the price of a good, the larger is the quantity demanded and the higher the price of good, the smaller is the quantity demanded holding other variables constant. Generally in an economic form, if Apple increases the price of their product, quantity demanded of the Apple product will be decrease. This is because Apple product such as iPhone and iPad are considered as luxuries goods. People can still live without using a smart phone. A rational consumer will seek for substitution brand such as Samsung which produce a most likely the same product like Apple. Therefore, an increase of price will decrease the demand of a good. In other words, the price elasticity of demand for Apple product is elastic whereby increase in price will result a huge reduction on the quantity demanded of the good. Let’s see the situation in a graphical way.

The above figure shows the relation between the price and demand of the Apple Macbook. Assume that the price of a Macbook increased and the demand for the Apple Macbook is elastic. Initially the market price of Macbook is set at P1 and the quantity of demand is set at Q1. When there is an increase of price, there will be movement along the demand curve. The price will goes up from P1 to P2. Increase of price will decrease the quantity demand of Macbook because people will look for substitution brand such as Samsung. Therefore, quantity demand will decrease from Q1 to Q2. From the above drawing, we can see that the demand curve is flatter. This is because changes of price will leads to a bigger impact on the changes of the quantity demand.

According to the Apple’s profit margin in America, Apple has a shockingly high profit margin from the year 2008 to 2012.  From the report, we can’t deny that Apple has a very good market value and the company has developed very well.  The question is how could they maintain their sales in the market when the market competition is getting higher and higher from time to time? This is mainly because they have strong and excellent business strategies such as having the highest prices and lowest unit costs in the industry. They understand the market demand very well. A product of Apple such as iPhone is a very good example. The new launched iPhone always brings the new features and new design to iPhone market. However, the price of the new launched iPhone is most likely the same from time to time. Referring to iPhone’s  comparison chart in America, the price of the new launched iPhones are always the same which is $199 for a 16GB iPhone, $299 for a 32GB iPhone, and $399 for a 64GB iPhone. In an economical theory, a luxury is always having an elastic demand. Apple understood this theory and they applied this in their pricing strategy. That is how Apple preserves their market’s value until today. Figure below is showing the relation between total revenue and a price cut effect.

If the demand of Apple computer is elastic, a price cut will increases the total revenue, which is shown at the left area of the graph. On the other hand, if the demand of Apple computer is inelastic, a price cut will decrease the total revenue, which is shown at the right area of the graph. When the demand of Apple computer is at the unit elastic, the maximum of total revenue can be achieved, which is shown at the highest point of the revenue curve.

As for today, I personally think that the economical theory mentioned above is not applicable in every country. In fact, it depends on which country and also the consumer background. Let’s use Malaysia as a selected country. I personally think that price elasticity of demand on Apple iPhone in Malaysia is not elastic but it is inelastic in reality. Somehow if there’s an increase of price on the new launched Apple iPhone will not really affect the sales of the iPhone’s market because Apple tends to have a lot’s of loyal customer and the products are recognized by the public. For those who are affordable, they will still demand for the product of Apple as using a Iphone seems very normal to them. It is not like an increase of price of iPhone will cut down the sales of the product. From my own experience, whenever a new generation of iPhone is pre-launched, we can see the curiosity and a great feedback from the people, whereby everyone is discussing what would a new feature will have in the coming new iPhone product? How does the new iPhone design going to look like? Some people even created some fake information about the new design of iPhone 5 previously and the information was spread via the social network, Facebook. This is proven that Apple is a premium brand and it is recognized by the public in the country like Malaysia. This is because people believe that Apple products have a good quality and it is worth to buy.

 On top of that, if the price elasticity of demand is elastic, a minor increase of price on the new launched iPhone will reduce a great amount of buyer of iPhone? From what I see today, I doubt that. We can see a lot’s of iPhone user in Malaysia especially in the crowded city such as Kuala Lumpur. This is because Apple owned lot’s of loyal customer in Malaysia as people believe that it is worth to spend the money on buying a quality products from Apple. Unless the market has come out some product which is better and more innovative compare to Apple current product such as Iphone 5, in that case it might influence Malaysian from choosing Apple’s product and Apple product will be takes over by the new market probably. Otherwise, I don’t think that increase in price of Iphone will bring much negative effect on the Apple market such as decrease of demand of Apple product in Malaysia.