13. New product pricing. Market skimming and market penetration.


Apple to Focus on Market Penetration instead of Market Skimming with 3G iPhone


Unless you’ve spent the past week living in a cave you’ve no doubt heard about the 3G iPhone announcement from Apple’s Worldwide Developer Conference (WWDC) last week. I’m not going to get into all of the new features introduced to the next version of the iPhone because they’re insignificant compared to the new iPhone pricing structure.

Apple’s Time-Tested Market Skimming Strategy

Market skimming is a pretty basic pricing strategy:

  • Release a new, exciting product at a high premium and skim the greatest possible margin from the customers with the greatest demand;
  • Once the sales volume begins to decrease at the original price, incrementally lower the price to increase sales again;
  • Repeat this exercise until a stable price with an acceptable margin is determined.

Apple has done this for all of their products historically; most notably was the original $599 iPhone. Remember all of the whining that occurred when Steve Jobs lowered the price to $299? Job’s mistake with the original price drop was doing it too soon - after all, his customers were willing to pay $599 just to be one of the cool kids with a shiny new iPhone a few months prior to the price drop.

However, the announcement of the new 3G iPhone brings with it an entirely different strategy than the original iPhone announcement.

Apple’s New Groove: Market Penetration

Market penetration is yet another basic pricing strategy:

  • Set an initial lower price on a new product release in order to achieve large market share acquisition;
  • This strategy is only effective in markets that are price-elastic (price-sensitive;)
  • This strategy is used best when the producer is a new market entrant or has relatively small market share.

Currently Apple does not have much in the way of Smart Phone market share compared to product lines offered by RIM (BlackBerry) and Palm (Treo.) The results of recent ChangeWave surveys indicate this:


The new 3G iPhone, which includes important business features such as access to Microsoft Exchange, is going to roll out on July 11, 2008 with a price tag of $199. This means that the iPhone’s price will be roughly equal to that of any new Treo or BlackBerry unit; in some instances the iPhone is actually cheaper than the alternatives.

The new, low price and the addition of key enterprise features means two major things for Apple:

  • The 3G iPhone’s first target is the business user; there are a lot of technical and infrastructural issues that might prevent businesses from adopting the iPhone en-masse immediately, but the iPhone’s features and price all fall within the same range as competing products offered by Palm and RIM. Apple is gunning for the business user.
  • The 3G iPhone’s price will drop from $199 to $99 at some point in the future, this much I can guarantee. When the iPhone’s price does drop the phone will be adopted en-masse by the general consumer market. Every ratty 12 year old with a $5/week allowance will be running around with an iPhone.

This time Apple is setting its price low and its volume high, gunning for the common man instead of the zombie fan.