They decided to charge $499 for the basic model – almost twice the cost of a Kindle. The only question was how to justify it.
At the launch, before touching on price, Jobs spent a lot of time discussing the benefits and the superior features of the iPad. Only after that did he start talking about price. Look at the video below. He starts talking about price at 1:35 in the video clip. (Note this is an edited version of the launch provided by a news service.)
Notice when he starts talking about price, the price on the screen behind him is $999? This is called “anchoring”. He then goes on to talk about how they have been able to contain the price, but for a full 20 seconds, $999 stays on the screen. Then at the appropriate moment, the true price appears with great fanfare as a massive price reduction. So now everyone feels if they buy the iPad, they have just saved themselves $500, not that it is $240 more expensive than the Kindle.
Jobs then goes on to explain what the extra features cost. So now you compare everything to the base price of $499, clearly reasonable compared with the $999 anchor, and you are just considering which features you want in your iPad. That is the discussion is about scope not price.
You have just witnessed a Master Class on pricing. Notice that the product price is completely detached from the production costs enabling Apple to achieve high margins.
Will these margins be sustainable? In the medium term yes, while demand remains, but it appears that Kindle is likely to reduce their product to $149 putting pressure on the iPad pricing. However, it would appear that the Kindle does not have all the technology that the iPad contains, so the margin will remain justifiable. In the longer term there will be clones with similar technology that will erode the price, but with its well established brand, Apple will always be able to maintain a higher margin than its competitors.
Are you able to create an anchor for your prices?
Over to You. What do You Think? Post Your Comments Below.
Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.
The Australian Small Business Blog