Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: "Nope. What Steve Jobs sells is pricing."The article goes on to cite numerous behavioral economics "tricks" to get customers to buy more and at a higher price. Although it is interesting to think about "pricing trickery," the article as deeply flawed because it does not reference the standard explanation for strategic pricing: price discrimination.
Pricing? You bet.
As long as Apple is insulated from competition,* it has the ability to price discriminate (video here). Apple's ability to charge different prices for seemingly the same product is where Apple's true genius in pricing shines through. Apple is a master of market segmentation, which is is a better explanation for many of the pricing examples the article brings up.
For example, the article brings up the 7-inch screen mini iPad.
The Economic Daily News of Taiwan reported in August that Apple has started to build smaller, 7-inch versions of its iPad tablet, timed to hit U.S. shelves before Christmas. If you wonder why in the world Apple would add yet another potentially cannibalizing product to its lineup of iPods, iPod Touches, iPads, laptops and computers, realize that this gadget is likely a decoy.
Decoys, in marketing, are products, services, or price points that a business doesn't really want you to take, but rather use as a reference to make another product look better.
I usually appreciate cynicism, but it is overly cynical to suggest that Apple would produce a product that it doesn't really want to sell, just to "cloud your judgment." If the company made a living by swindling its customers, people would catch on and that would be the end of Apple because no one likes to be a sucker.
Most Apple customers are enthusiastic about their iProducts rather than feeling cheated. How do we reconcile this? Instead of being a decoy, Apple's 7-inch tablet is a method to more effectively segment the market. A 7-inch iPad appeals to a different group of customers than the full-sized iPad. Upon hearing the announcement, customers who have especially high demand for the 7-inch size screen will wait for the smaller tablet. Apple knows this and they can price better with this knowledge. And at the end of the day, the 7-inch tablet customers will be enthusiastic about their product. After all, it was designed for them.
Better pricing and happier customers. Unlike trickery, that's a good long-term business strategy.
The second main example that the article brings up is charging different prices over time. The author tries to label this technique as "setting a high reference price":
Apple has played this game with itself by launching products such as the iPhone at artificially high reference prices - the iPhone cost $599 when it first hit the streets - and then rapidly lowering that price. Today, a $199 iPhone seems like a steal; Apple in essence is using its first-iteration pricing as a reference to make its current products feel affordable. You may be on the fence for a $499 iPad, but if it drops to $399 by Christmas, won't you feel better?
Just like pricing decoys, the logic of setting a high reference price requires that people wouldn't ever want to buy it at the high price. If it were trickery, no one would line up for the absurdly high priced new product until the price went down, yet Apple always sells out its new product offerings. Usually when a product sells out, an economist would tell you that the price isn't high enough. But, reference prices only work if they are too high.
This is market segmentation, not trickery. Companies start with a high price and slowly decrease the price over time because the high price is for the customers who can't wait; the low price is for customers who signal they are price sensitive by waiting it out. You may even get a higher price because the company has to put a rush on the assembly line to get the product out during a busy time (and that costs more). Either way, customers pay for impatience.
On a final note, I am disappointed by the spirit of the article. The article suggests that pricing tricks are a great business strategy, but the problem with tricks is that someone has to be tricked for it to work. That's not a sustainable business strategy. Market segmentation need not be tricky. It can be about providing a product that people want or improving an existing product. That creates value and creating value is the only great long-term business strategy.
*The article starts off by claiming that Apple faces "fierce competition." This can't be true. Although Apple isn't truly a monopoly, it isn't right to say that competition is fierce. If this were literally true, Apple wouldn't have the ability to set prices: Any competition will undercut the profitable component of a pricing strategy. For pricing to be an issue with Apple, it must be the case that Apple is insulated from competition, so let's start from that assumption.