Why does Apple cut iPhone’s Price?

A brand new iPhone SE was announced by Apple last month. This smaller iPhone has identical hardware as iPhone 6s and iPhone 6s plus, but it is much friendlier than previous iPhone do. It’s the cheapest iPhone ever. The new iPhone only sells from AUD $679. It sets at the lowest price tag that a new iPhone has ever had. This means that the world’s most profitable Smartphone just got a price cut.

Apple unveils the smaller, cheaper iPhone SE (CNET News) https://www.youtube.com/watch?v=XjxHgyu2IBY

Reasons for Apple cuts iPhone’s price

As we all know, Apple was always try to create premier product and charge at a premier price. Even Apple’s cheaper products like iPod also priced in the mid range. The company believe that they can charge a premium price as long as it has competitive advantage and they can ensure a high-quality user experience and providing a lot of value for the price.

iphonese-select-2016

However, with the increasing competition from Android and low-cost smartphones, the company now facing various risks in sales. During Apple’s most recent quarter, iPhone sales growth slowed down significantly to 1% year-over-year in iPhone revenue and nearly zero growth in iPhone unit sales. Further, a growing portion of sales are coming from emerging markets like China and India where the market desires cheaper smartphone than other developed countries. And Apple begins to turn its sights toward China and India market, which CEO Tim Cook called “Apple’s most important growth areas for the next decade”. Therefore, it may not be surprising that changes its pricing strategy and released a new low-priced iPhone SE.

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Apple-Q1-2016-earnings_

 

So urce: Apple

What’s the pricing strategy for iPhone?

The choice or pricing strategy is particularly important for high-tech products since its life cycles are short. Differentiation can lead to profitable success for such products. Skimming pricing strategy is beneficial for differentiating products. A skimming pricing strategy means charge high initially and subsequently lowered (Dean, 1950). The rationale of this strategy is to skim surplus in the product early life cycle. The initial high selling price can help the company cover the development cost from in the early stage. This enables company to strengthen their product innovation and development (Ravi, 2009).

Price skimming – explained https://www.youtube.com/watch?v=EsSZxJ6XE4c

Obviously, Apple adopts skimming pricing strategy in the past few years when the company first launched iPhone. When iPhone first introduced in the market, its price was high. Few people could afford it. With the passing of time, prices of iPhone decreased gradually. Many people nowadays can afford an iPhone.

Penetration pricing – explained https://www.youtube.com/watch?v=dVf-rRvS0m4

As iPhone has been introduced to the markets for several years, its enters to another product life cycle. With the increasing competition in Smartphone industry, Apple started to adjusting iPhone’s price. From the price setting of iPhone SE we can infer that Apple is switching from a price skimming strategy to a market penetration strategy. A market penetration strategy is charging a low price to reach a wide fraction of the market share and initiate word-of-mouth (Dean, 1950). Penetration pricing is designed to enlarge market share and exploit economics of scale or experience (Tellis, 1986). Therefore, we can say that the intention for Apple switching to market penetration strategy is their willingness of expending market share and strengthening competitive advantages.

 

Is it a right decision for iPhone and what’s the road ahead?

In reality, the increasing competition has caught up with iPhone. Many people concern the issue of whether Apple can compete with those competitors if they don’t lower the price of iPhone. Seemingly, this is also the main reason for Apple release a low cost iPhone SE. However, to my concern, changing pricing strategy cannot solve the problem completely. And we cannot judge the strategy only in a short term. In contrast, we need to look further. Maybe, cutting price can boost sales shortly. What about the future? Keeping lowering the price? How can Apple do to make iPhone increase its market share more steadily? This is the question that Apple need to think about.

BY:CHANGCHANG KANG 213589093

Reference List

Dean, J 1950, ‘Pricing Policies for New Products’, Harvard Business Review, 28, 6, pp. 45-53

Ravi, L 2009, ‘Apple iPhone Price Cut: Is it a Right Strategy?’, ICFAI Journal Of International Business, 4, 1, pp. 46-58

Spann, M, Fischer, M, & Tellis, G 2015, ‘Skimming or Penetration? Strategic Dynamic Pricing for New Products’, Marketing Science, 34, 2, pp. 235-249

Tellis, GJ 1986, ‘Beyond the Many Faces of Price: An Integration of Pricing Strategies’, Journal Of Marketing, 50, 4, pp. 146-160

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