Ever since Apple successfully released the $249 iPod mini in 2004, defying analysts who expected more than a $50 price savings over the $299 full-sized iPod, criticisms of the company’s new product prices have increasingly been tempered with a caveat: “the price seems too high, but this is Apple, so it will probably sell well anyway.” While there’s some truth in that sentiment, “Apple knows best” thinking has become a blind spot for pundits; caught up in the hype of Apple’s media events and upbeat advertisements, many writers failed to realize that Apple had initially overpriced major new products such as the original iPhone, MacBook Air, and Apple TV, all of which subsequently required substantial price revisions.
While the iPhone and MacBook Air families became hugely popular after sharp price drops, the Apple TV didn’t: it was stillborn at its entry price of $299, didn’t move when lowered to $229, and has remained a “hobby” for Apple even at its current price of $99. Just like the iPhone and MacBook Air, no one suggested that the first Apple TV was a poor device; rather, most people couldn’t see the value in it, a perception that has lingered despite numerous improvements and a rock-bottom price point. So despite the iPod mini example—one of many times a new Apple product was priced low, but not as low as it would eventually go—there’s clearly some danger for Apple in pricing something new so incorrectly that the product line never catches on.
At a $329 starting price, is the iPad mini more like the iPod mini or the Apple TV in this regard? It would be easy (and provocative) to suggest the latter, but we’d bet on the former: even at a higher-than-expected initial price, the iPad mini will sell through all or virtually all of its early stock, though we also expect that more aggressive pricing will follow in the not-too-distant future. Here’s why.
1. Reality Check: $199 Was Never Realistic. Virtually every informed Apple watcher understood before the iPad mini was formally announced that Apple would not price it at $199. Despite far-fetched claims that Apple was targeting that price point to match Google’s Nexus 7 or Amazon’s Kindle Fire, the company’s track record strongly suggested that a $299 price would be more likely—back in May of this year, even $249 seemed like a stretch. Apple generally expects customers to pay some premium for higher build quality, thoughtful ease-of-use, and access to its accessory and app ecosystems. The only question was how much the premium would be.
2. Economics 101: Supply. Surprisingly few analysts consider how component and manufacturing issues—supply considerations—impact Apple’s pricing strategies, particularly in the earliest days of selling a new product. Ignoring simple Economics 101 lessons, many analysts’ price predictions focus solely on the demand curve: “the iPad mini will be a roaring success if Apple introduces it at $199, and sell fewer if it’s priced at $299.” That much seemingly goes without saying; demand is almost always higher for a good or great product at a lower price.
However, if Apple doesn’t have an adequate supply of products to sell, raw demand isn’t the correct metric. Even if Apple could sell an iPad mini for $199 while making its required 35% or higher profit margin—which it could not—it almost invariably launches new products with parts that are scarce or hard to manufacture in some way, leading to early supply limitations that will only be resolved later. Consequently, an aggressively low price would generate initial demand it could not fulfill, while Apple would make less money on each unit it can sell. That’s why Apple adjusts its initial pricing to come close to the intersection of its supply capabilities and demand at a given price; it’s also why the initial price of a first-generation Apple device tends to be higher than the mass market will pay.
3. The Impact of Too-High Pricing On Demand. The danger for Apple is in setting an initial price that’s so high that people will actually walk away from the product or the brand—scuttling interest or actual plans to make a purchase, perhaps forcing them to consider alternatives. Even a really high price (say, launch day first-generation iPhone or MacBook Air pricing) won’t dissuade the hardest-core, stand-in-line, wave-bag-triumphantly-in-air Apple fans. However, mainstream customers are more price-conscious, and will often buy things they know are inferior simply because they’re more affordable. Apple sometimes hints that it doesn’t care about the lower end of the market, but in reality, it still sells iPod shuffles, Mac minis, and two-year-old “free” iPhones—as well as numerous other products “everyone” can afford.
By pricing the iPad mini at $329 rather than $299 or $249, Apple has taken on some very real risk with the price-conscious market segment at a time when such customers already have good options. Regardless of whether Apple wants to concede as much, Amazon and Google have firmly established the “expected” starting price for a 7.x-inch tablet at $200. Having chosen a larger but comparable 7.9-inch screen size with a lower but comparable 1024×768 resolution, then priced the base model nearly 65% higher than competitors, Apple has placed itself in a defensive position—one where it needs to explain its rationale. If the iPad mini had shipped with a Retina Display, there would have been no need for discussion, but it didn’t.
Hoping to stave off negative comparisons, Apple addressed the issue head-on at its media event, suggesting that competitors had “failed” with less expensive devices that were made from plastic and sported smaller screens with so-so apps. Yet Amazon and Google haven’t actually failed with their tablets. Kindle Fire HD sales have been so strong that Amazon—a publicly-traded company, accountable for such statements—recently reported the $199 tablet is now its number one best-selling product, worldwide. And the Nexus 7 has reportedly sold over three million units in roughly three months, while earning positive reviews from an increasing base of Android users. Both products have certainly been held back in sales while people have waited to see what Apple would do. Now that Apple has set a $329 asking price for the iPad mini, enough of a premium to leave openings for rival products, there’s no question that it will lose some subset of its sales to $199 rivals. It’s hard to imagine that Apple will lose loyal iTunes customers to the Android or Amazon ecosystems, but it’s possible—and new customers might well pick $199 Kindle or Nexus devices over both the iPad mini and current iPod touches.
4. The New Reality Distortion Field: Web Browsing As Proxy For Market Share. One thing that concerns us is Apple’s recent use of pseudo-statistics to obscure its market share relative to attractively designed, aggressively priced rivals. Long-time Apple watchers will note that the company has measured iPod market share by a fairly consistent yardstick for years: NPD, IDC, and related international unit sales reports, which it consistently noted were at or above the 70% level for iPods, a sign of actual dominance in the United States and other major markets. At Apple’s just-concluded media event, the company also had some huge iPad numbers to trumpet, including sales of 100 million iPads in 2.5 years, and quarterly iPad shipments that are now higher than PCs, not that they’re directly comparable.
But something was missing when the tablet-to-tablet numbers should have shown up. Apple CEO Tim Cook pivoted to a pseudo-statistic in an effort to show how thoroughly the iPad is dominating the tablet business: an unsourced pie chart of “tablet web traffic share” suggesting that 91% of web traffic comes from the iPad, with only 9% from other devices. He also repeated an earlier Apple suggestion that there may be many other tablets out there, but they’re not really being used. Why? According to Apple, people love their iPads. The claim is that people may be buying inexpensive tablets, tossing them into drawers or trash cans, and then moving on to superior iPads.
Even if that’s true, judging the iPad’s success by “tablet web traffic share” is meaningless: thanks to built-in and third-party apps, these devices can be used for innumerable purposes—video players, book readers, virtual cash registers, and gaming devices—so for Apple to try and focus attention myopically on any tablet’s dominance with just one app is at best misleading, and at worst, a sign that it’s becoming concerned about the real sales numbers. There’s no need to rely on pseudo-statistics when real ones look great. We’ll know how great they are not just from aggregate iPad sales, which will continue to accelerate as people become more comfortable with tablets, but from Apple’s share of the total tablet market as it continues to grow, likely diminishing the sales of traditional computers in the process.
Just like the iPod mini, the iPad mini offers a smaller than expected but still meaningful price break to consumers, expanding Apple’s addressable market both by lowering the family’s cost of entry and by increasing the device’s portability. It will not only be a success in the short term, likely selling millions of units in a shorter period of time than rivals, but will be a critical part of Apple’s tablet strategy going forward. That said, the way for Apple to “win” the tablet war is to release and market great products at the right prices relative to competing options. Although the iPad mini’s price is close enough to “right” now to win Apple its first round of happy customers, we’ll have to see whether a $329 iPad mini is still viable by this time next year. Our suspicion is that there may well be first- and second-generation models in the mix by then, and that prices could shift even more considerably as a result.