The iPad Average Selling Price Erosion

I have written at length about value waterfall and price waterfall. Value waterfall is a model to understand what prevents you from getting your fair share of the value your product creates for the customer. It is marketer’s failure to understand customer choices, buying experience, sales process and mostly a messaging failure. Price waterfall occurs in most cases because of the markup mindset which leads to discount after discount to a low pocket price or average selling price. Price waterfall leads to low average selling price (ASP) and hence lost profits.

You would not think of Apple committing either of these mistakes. There is no question about Apple’s monomaniacal focus on value messaging and setting prices to capture its share. Apple does have to give better pricing to channel so its ASP is not same as MSRP but we hardly ever see any discount on Apple’s products. Apple does join Black Friday for minimal discount but nothing you would call as significant price leak.

But take a look at this chart of ASP of iPad till date since its introduction in 2010. This is the blended ASP, that is across the mix of all iPad models computed from Apple’s earnings reports.

What we see is the ASP erosion from its high of $662 to $433.There are two reasons for this erosion

1. Every time Apple introduces new iPad models it drops the price on previous gen models by $100.
2. Apple introduced iPad Mini whose MSRP is $100 lower than iPad Air.

The previous gen models are still value rich and compelling. iPad mini was attractive to a large segment that prefers the compactness of the device. Together these two changes nudged customers to pick models that are lower priced, resulting in lower ASP. This ASP erosion is brought about by product mix not discounts.

ASP drop is not all bad if that makes up in volume. Unfortunately you can see in the chart how far the volume has fallen.  Apple tried to help fix the ASP with another product mix change when it introduced 16GB, 64GB and 128GB getting rid of 32GB models. But that change did little to ASP as you see the near flat ASP curve in the last 5 quarters. Counterfactually we could say the change helped step further erosion.

Let us break the ASP down further and compute ASP for iPad and ASP for iPad mini. For this we need percentage of each.in the sales mix which Apple does not report. Using the devices share mix reported by Localytics  I computed the sales mix to,

iPad 57%  (current and previous gen models)

iPad mini 43%  (current and previous ten models)

Looking at iPad ASP in quarter prior to introduction of iPad mini in November 2012, we see $467. Using this with the sales mix and $433 blended ASP we get iPad mini ASP o $380.

What is left for Apple to do? It tried the 32GB level but didn’t move the needle. The two ASPs are not going to move much. So it did the only option available, introduce another product at much higher price point, the iPat Pro that starts at $799. In addition it introduced iPencil and Keyboard which can be attached to sale of $99 and $169 respectively.  Together it hopes to get iPad Pro ASP as much as $800 (after channel pricing etc).

In last article I made a prediction of number if iPad Pro models Apple will sell this quarter. With individual ASP numbers and the volume predictions the blended ASP of three models come to $471. A 10% increase, not bad but not enough.

$800 ASP for iPad Pro is far better that $467 for iPad Air. And Apple will try hard to split the market between Pro and Mini by not introducing any more innovations to Air.