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

Team 5: Vibhor Chhabra, Arshi Singh, Derek Vaughn
Agenda
Business Problem

Differentiating Factors

Sales & Pricing

Proposed Pricing Models

Recommendation

Appendix
Business Problem
How 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                           Luxury/Lead
                      Enthusiast
  Consumer                                 Consumer
                                            New model
                                             unlocked
Current iPhone 3G      New model
                                             Distinctive
                          16GB           bluetooth headset
      8GB
                                               32GB
 $199 with a two    $499 with a 1 year
                        contract          $799 without a
  year contract
                                             contract
Value chain
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




 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

                                                                                               10.0



                                                                                              7.5


                                                                                              5.0


Affordable                                                                                2.5
                Fashionable

                                   Web Browsing                                           0
                                                   Carrier Availability
       iPhone   Blackberry Pearl   Motorola RAZR
                                                                          Functionality
Smart and Easy to Use
                         Smart
                                       iPhone
                             Android

              Nokia
 Hard                                      Easy
         Moto Q       Palm
to use                                    to use


                         Other

                      Not so smart
Growth phase of iPhone
      Sales




                                                 Time

Introduction phase (Skimming)          Growth phase (competitive pricing)
  ‣High perceived value                  ‣Subsidized phone
  ‣Leaders less price sensitive          ‣Expansion of customer base
  ‣High price to signal high quality
Consumer surplus & Demand




Source: Gizmodo.com   Source: Fortune
Sales Pattern

                                                                                      7,000,000



                                                                                     5,250,000



                                                                                     3,500,000



                                                                                 1,750,000
     Q3 2007
                 Q4 2007
                              Q1 2008
                                        Q2 2008
                                                                                 0
                                                  Q3 2008
                                                            Q4 2008
                                                                      Q1 2009*




Source: Apple.com earnings release
Price-Volume Interpretation
                                     ‘07-’08 Sales ($500)        ‘08 - ‘09 Sales ($200)




                                                                                               7,000,000




                                                                                              5,250,000



                                                                                              3,500,000



                                                                                          1,750,000
Q3

                              Q4
                                                                                          0

                                                            Q1

Source: Apple.com earnings release
                                                                                    Q2
Proposal - Offer 3 Price Options
Price Sensitive                           Luxury/Lead
                      Enthusiast
  Consumer                                 Consumer
                                            New model
                                             unlocked
Current iPhone 3G      New model
                                             Distinctive
                          16GB           bluetooth headset
      8GB
                                               32GB
 $199 with a two    $499 with a 1 year
                        contract          $799 without a
  year contract
                                             contract
Proposed Pricing Model
            Price   Cost   Demand Profitability ($)       C
                                                         U
8 GB        $525    $170   10,000,000 $3,550,000,000
                                                         R
16 GB       $625    $180    5,000,000 $2,225,000,000     R
                                                         E
Net Profit                               $5,775,000,000   N
                                                         T

            Price   Cost   Demand Profitability ($)       P
                                                         R
Base        $525    $170   10,000,000 $3,550,000,000     O
Premium     $600    $200    7,500,000 $3,000,000,000     P
                                                         O
Luxury      $800    $200    1,100,000    $660,000,000    S
Net Profit                               $7,210,000,000   E
                                                         D
Proposed Pricing Model
            Revenue   Subsidy   Demand Profitability ($)     C
                                                            U
8/16 GB      2160      $325     15,000,000 27,525,000,000   R
                                                            R
Net Profit                                 27,525,000,000    E
                                                            N
                                                            T

            Revenue   Subsidy    Demand     Profitability  P
                                                          R
Base         2160       325     10,000,000 18,350,000,000 O
                                                          P
Premium      1200       100      9,750,000 11,000,000,000
                                                          O
Luxury         0         0           0           0        S
                                                          E
Net Profit                                  29,350,000,000 D
Recommendation
  Base
  ‣ 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 - iPhone
The 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

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iPhone pricing model

  • 1. Strategy and Tactics of Pricing (Marketing 469) Final Case Presentation - iPhone Pricing Model Team 5: Vibhor Chhabra, Arshi Singh, Derek Vaughn
  • 2. Agenda Business Problem Differentiating Factors Sales & Pricing Proposed Pricing Models Recommendation Appendix
  • 3. Business Problem How can Apple increase profits and increase market share in the smart phone segment without sacrificing the premium or exclusivity associated with its iPhone?
  • 4. Proposal - Offer 3 Price Options Price Sensitive Luxury/Lead Enthusiast Consumer Consumer New model unlocked Current iPhone 3G New model Distinctive 16GB bluetooth headset 8GB 32GB $199 with a two $499 with a 1 year contract $799 without a year contract contract
  • 5. Value chain 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 Any change to pricing must take network provider incentives into consideration.
  • 6. 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 10.0 7.5 5.0 Affordable 2.5 Fashionable Web Browsing 0 Carrier Availability iPhone Blackberry Pearl Motorola RAZR Functionality
  • 7. Smart and Easy to Use Smart iPhone Android Nokia Hard Easy Moto Q Palm to use to use Other Not so smart
  • 8. Growth phase of iPhone Sales Time Introduction phase (Skimming) Growth phase (competitive pricing) ‣High perceived value ‣Subsidized phone ‣Leaders less price sensitive ‣Expansion of customer base ‣High price to signal high quality
  • 9. Consumer surplus & Demand Source: Gizmodo.com Source: Fortune
  • 10. Sales Pattern 7,000,000 5,250,000 3,500,000 1,750,000 Q3 2007 Q4 2007 Q1 2008 Q2 2008 0 Q3 2008 Q4 2008 Q1 2009* Source: Apple.com earnings release
  • 11. Price-Volume Interpretation ‘07-’08 Sales ($500) ‘08 - ‘09 Sales ($200) 7,000,000 5,250,000 3,500,000 1,750,000 Q3 Q4 0 Q1 Source: Apple.com earnings release Q2
  • 12. Proposal - Offer 3 Price Options Price Sensitive Luxury/Lead Enthusiast Consumer Consumer New model unlocked Current iPhone 3G New model Distinctive 16GB bluetooth headset 8GB 32GB $199 with a two $499 with a 1 year contract $799 without a year contract contract
  • 13. Proposed Pricing Model Price Cost Demand Profitability ($) C U 8 GB $525 $170 10,000,000 $3,550,000,000 R 16 GB $625 $180 5,000,000 $2,225,000,000 R E Net Profit $5,775,000,000 N T Price Cost Demand Profitability ($) P R Base $525 $170 10,000,000 $3,550,000,000 O Premium $600 $200 7,500,000 $3,000,000,000 P O Luxury $800 $200 1,100,000 $660,000,000 S Net Profit $7,210,000,000 E D
  • 14. Proposed Pricing Model Revenue Subsidy Demand Profitability ($) C U 8/16 GB 2160 $325 15,000,000 27,525,000,000 R R Net Profit 27,525,000,000 E N T Revenue Subsidy Demand Profitability P R Base 2160 325 10,000,000 18,350,000,000 O P Premium 1200 100 9,750,000 11,000,000,000 O Luxury 0 0 0 0 S E Net Profit 29,350,000,000 D
  • 15. Recommendation Base ‣ 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
  • 18. History - iPhone The 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
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  • 24. Cost to the consumer