Strategy and Tactics of Pricing (Marketing 469)Final Case Presentation - iPhone Pricing Model

Team 5: Vibhor Chhabra, Arshi Singh, Derek Vaughn

AgendaBusiness Problem

Differentiating Factors

Sales & Pricing

Proposed Pricing Models

Recommendation

Appendix

Business ProblemHow can Apple increase profits and increase market share in the smart phone segment without sacrificing the premium or exclusivity associated with its iPhone?

Proposal - Offer 3 Price Options

Price Sensitive Consumer

Current iPhone 3G

8GB

$199 with a two year contract

Enthusiast

New model

16GB

$499 with a 1 year contract

Luxury/Lead Consumer

New modelunlocked

Distinctive bluetooth headset

32GB

$799 without a contract

The value chain below illustrates the context in which Apple delivers value to the customer with the iPhone:

Network Billing Design Build O.S. Apps Branding Marketing Customer

Value chain

Any change to pricing must take network provider incentives into consideration.

Factors differentiating the iPhone‣ “There is an app for everything”

‣Ease of use, fashionable, media capabilities, synchronization, touchscreen, app store, and functionality

‣ Primary Weaknesses are carrier availability and affordability

0

2.5

5.0

7.5

10.0

AffordableFashionable

Web Browsing

Carrier Availability

FunctionalityiPhone Blackberry Pearl Motorola RAZR

Smart and Easy to UseSmart

Not so smart

Hardto use

Easyto useMoto Q

Nokia

Palm

Other

iPhone Android

Growth phase of iPhone

Time

Sales

Introduction phase (Skimming)‣High perceived value‣Leaders less price sensitive‣High price to signal high quality

Growth phase (competitive pricing)‣Subsidized phone‣Expansion of customer base

Consumer surplus & Demand

Source: Gizmodo.com Source: Fortune

0

1,750,000

3,500,000

5,250,000

7,000,000

Q3 2007Q4 2007

Q1 2008Q2 2008

Q3 2008Q4 2008

Q1 2009*

Sales Pattern

Source: Apple.com earnings release

Price-Volume Interpretation

0

1,750,000

3,500,000

5,250,000

7,000,000

Q3

Q4

Q1

Q2

‘07-’08 Sales ($500) ‘08 - ‘09 Sales ($200)

Source: Apple.com earnings release

Proposal - Offer 3 Price Options

Price Sensitive Consumer

Current iPhone 3G

8GB

$199 with a two year contract

Enthusiast

New model

16GB

$499 with a 1 year contract

Luxury/Lead Consumer

New modelunlocked

Distinctive bluetooth headset

32GB

$799 without a contract

Proposed Pricing ModelPrice Cost Demand Profitability ($)

8 GB $525 $170 10,000,000 $3,550,000,000

16 GB $625 $180 5,000,000 $2,225,000,000

Net ProfitNet ProfitNet ProfitNet Profit $5,775,000,000

CURRENT

PROPOSED

Price Cost Demand Profitability ($)

Base $525 $170 10,000,000 $3,550,000,000

Premium $600 $200 7,500,000 $3,000,000,000

Luxury $800 $200 1,100,000 $660,000,000

Net ProfitNet ProfitNet ProfitNet Profit $7,210,000,000

Proposed Pricing Model

Revenue Subsidy Demand Profitability

Base 2160 325 10,000,000 18,350,000,000

Premium 1200 100 9,750,000 11,000,000,000

Luxury 0 0 0 0

Net ProfitNet ProfitNet ProfitNet Profit 29,350,000,000

Revenue Subsidy Demand Profitability ($)

8/16 GB 2160 $325 15,000,000 27,525,000,000

Net ProfitNet ProfitNet ProfitNet Profit 27,525,000,000

CURRENT

PROPOSED

RecommendationBase‣ Offers lower priced handset option‣ Increased market penetration that complements externalities

Premium‣ Captures value from customers who want the latest technology‣ Visual distinction from standard iPhone increases exclusivity‣ Increased revenue from more frequent repeat purchases

Luxury‣ Same Benefits as option 2‣ Offers flexibility to choose network providers‣ Capitalizes on growing market for unlocked iPhones

Questions

Appendix

History - iPhoneThe iPhone is a smart phone that combines a web browser, email, iPod and personal computer into a single, fashionable, easy-to-use device.

Price: Introduced at a price of $599, dropped to $399 for an 8GB model. Current prices are $199 for an 8GB version and $299 for a 16GB version

Weakness: Customers must sign a 2 year contract; AT&T is the exclusive carrier

iPhone customers: Initial - Tech Savvy ( Early Adopters)Today - Students, Teenagers , Business users, Tech Savoy

Distribution channels: Apple Store, Online, Walmart, & Best Buy

Cost to the consumer