Will Apple introduce $299 iPad?

There  are rumors in Tech Blogs that Apple might introduce a cheaper iPad – could be a 8GB version or a 7-inch version, priced close to $299. The argument goes, Apple does not want to yield the lower priced tablet market to Amazon. If Amazon took the risk to invest in 7-inch tablet and uncover a market for it, there is likely no risk for Apple to take its share of the market.

So should or will they do it? (Let us not consider here what Mr. Jobs said about 7 inch tablets)
If three to five million people bought 7-inch tablets in the last two quarters, isn’t that an opportunity for Apple? Not to mention, those who are on the sidelines, because they did not like Kindle Fire and could not afford $499 price tag may enter the market, expanding the pie.

All highly likely scenarios. But there is a third scenario of similar likelihood that most ignore when making a case for introducing a new lower priced version of the product. It is those who currently buy their $499 version switching to the $299 version.

Without going into the details of Second Degree Price discrimination here is a brief description. When there is no $299 version of iPad, if the $499 version offers you enough consumer surplus you will buy it. When there is a $299 version as well, you will pick that instead if it delivers more consumer surplus than the $499 version.

The question Apple will ask (but not the Tech Blog savants who are often wrong but never doubt their claims) is,

Is the foregone profit from those trading down made up by profit from new customers we acquired?

You can see their track record of past product versions (iMac versions  and MacBook Air versions)  we can say with high degree of certainty that Apple will ask this question.

If we used the previously published numbers by iSuppli and others on cost of iPad, it costs Apple about $249 to make $499 iPad. Say their gross margin remains the same for $299 iPad (i.e., cost drops to $149). Then for every customer trading down from $499 to $299 version, Apple has to bring in 1.67 new customers.

That is just to break-even the trading down customers. In addition they need to find millions more  to justify their investment.

Can they do it?


Side Note 1: When you uncover a new market or spend your resources to develop a new market, it is not all yours. Others will swoop in and get their share.

Side Note 2: If you run a frozen yogurt chain and want to offer a lower priced plain yogurt version, this is the question you should ask – Am I losing profit from those trading down to plain yogurt because they get better consumer surplus at its price point?

2 thoughts on “Will Apple introduce $299 iPad?

  1. Apple doesn’t need to build a new product to reach this market, it is already capturing some of it with refurbished models of the iPad. The iPad original refurbished hit $299 recently (see store listing here: http://store.apple.com/us/product/FB292LL/A

    In my opinion, the best part about the iPad 3rd generation is that Apple has dropped the prices for the older models so that it now has a wide range of iPads from $300 to $500 for entry products (http://wp.me/p1tPc3-cd). While some of these are refurbished, I think the price is right for many consumers. It still isn’t Kindle Fire prices, but the iPad (even a refurbished iPad) is a much better product than other low priced tablets on the market.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s