By now you likely have read all the articles on the design and specs of Apple’s new iPad Pro. People have also taking strong positions on its likeness to Microsoft Surface and on the $100 stylus. Let us look past all those and look closely at the capacity points it is offered at,
Two capacity points 32GB and 128GB for Wifi model and only 128GB for Cellular model. Let us look at these capacity points in the context of their entire iPad portfolio.
If you ignore the older models (iPad Air and iPad Mini 2) ,Apple had chosen 16GB, 64GB and 128GB as the standard capacity points. They do so for both Wi-Fi and Cellular models. In fact, even for older models they offered all capacity points for both Wi-Fi and Cellular. The choice of 16GB, 64GB and 128GB capacity points started with iPhone6 and later was carried over to iPads. I wrote at length about why chose these very specific capacity points and why they got rid of 32GB. It was about $4 billion in profit.
So why they broke this rule if it were so profitable for iPhone and iPads? Your answers should not include anything about technical limits or design. It is possible the way components are laid out in the cellular model may force a 128GB chip but that is farfetched and definitely not a insurmountable problem for Apple.
It is once again about profits except the constraints are different with a higher price point iPad Pro. Let us pose and answer related questions to answer the iPad Pro conundrum.
- Why isn’t there a 16GB iPad Pro?
It is based on product positioning. Unlike iPad Air and Mini the Pro is positioned as laptop replacement. So it is a different customer job to be done. For that purpose a 16GB version will fall short of customer needs. They also have a price point they want to hit , a 16GB version will not allow them make that price and the associated profit. Hence there isn’t one.
- Why didn’t they start with 64GB like they did for the rest?
Like the detailed analysis I showed in the past about those who would be tempted by 32GB version, a 64GB version will tempt lot more to choose it over the 128GB version resulting in profit erosion. Considering the purchasing power Apple has with its supply chain, it is safe to say 99% or more of the $150 additional price for 128GB goes straight to profit. Hence it is a profit driver reason for sticking with 32GB and not starting with 64GB.
- Why don’t they offer 32GB capacity for Cellular models?
If the price premium for Cellular is $130, why not a $929 32GB Cellular?
The reasoning is once again based on positioning and segmentation. Those who value the mobility of iPad pro that is used as PC replacement value it enough that they are willing to pay more than $130 premium for it. Furthermore, this segment values less the higher capacity. Key aspect of effect price discrimination for profit maximization is to take away temptations for customers who have higher willingness to pay. So if Apple offered a $929 32GB Cellular iPad Pro most who would otherwise choose the $1079 would choose the former. That is profit erosion.
(Note: For those design fans, look at the simple 3 pricing options. Won’t most gravitate towards the middle option?)
This is not new for Apple, they have followed this perfect product versioning recipe over and over across all their product lines. It is highly likely we may see similar capacity patterns with iPhone 7 models when they measure the performance of the iPad Pro versioning.
Do you look past the design and appreciate the real beauty in profit maximization?
Here is your moment of Zen – the incredible iPad family price spectrum
One of the previous articles has the same title and it talked about the need for incremental profit analysis before cutting prices to increase sales. Yesterday Apple announced a $100 price cut on its iPhone 3G model when they introduced the new iPhone 3G-S. Why is this a better move?
The price cut is only on the low-end version which not only has lower capacity (8GB) but is also limited in its benefits compared to iPhone 3G-S. So the price cut is not a generic, across the board price cut, rather a narrow one targeted at those who want an iPhone but are not willing to pay the $199. This brings in new segments who otherwise would not have bought an iPhone. A majority of those who already have an iPhone and eligible for upgrade will choose the newer version (otherwise they could simply stick with the version they have ). So this does not affect their premium segment that is willing to pay for the features of iPhone 3G-S.
This is a great move because it creates multiple versions of the product at different price points that grows the market share without losing profits from other segments.
As predicted by the Financial Times story Apple announced a 50% price cut on its entry level iPhone. It kept is price levels at $199 and $299 for the newer versions that not only have more capacity but also have better features, most important of which is shooting and editing videos. In the 2X2 map of price sensitivity of phones vs. plans, Apple’s move addresses the segment that has high price sensitivity for phones but leaves out the segments that have high price sensitivity to plan price.
I previously talked about at&t’s reported plan to either cut its cost for data plan or introduce a new plan for $20. It does not make business sense to cut the price of existing plan. So the right option is to introduce a new data plan for $20 but with restricted bandwidth.
at&t should design its versioning and pricing such that those with higher data needs will self select themselves for the higher rate plan. Another factor in all you can subscription pricing is that an average user should consume less than their allocated bandwidth and anyone who exceeds the limit must be penalized such that they are nudged to upgrade to the next higher plan.
Since the new iPhone 3G-S introduced yesterday have features that consume higher bandwidth it is expected that the average data usage on the newer iPhones are bound to be higher than what it is with current iPhones. If at&t were to introduce a lower priced data plan it should limit it to the low-end iPhone. This is also in sync with the positioning by Apple to target the price sensitive segment – the lower left corner of the matrix.
Together, the $99 iPhone and a $20 data plan (if introduced) capture three of the four segments identified and nudge the fourth (bottom right) to move to upper right and hence lead to profit maximization for at&t.
at&t is most likely to offer a new data plan at lower price for its iPhone subscribers. Previously I wrote that they should not simply cut the price of current plan. Such a price cut would require them to add subscribers at a much higher rate than they are adding today to recoup lost profits. Obviously at&t is considering price discrimination using multiple data plan versions. As the saying goes, if one price is good two prices are better. Reuters reports that at&t executive confirmed versioning:
The executive said it would be costly for AT&T to cut the price of its unlimited Web surfing service. The minimum plan for iPhone users is $70 a month, which includes unlimited Web surfing and a certain amount of voice calls.
at&t is probably looking at consumer surplus for different segments for these two plans to set the price of the new plan. The new version will come with severe bandwidth restrictions – it will be designed such that the new subscribers will self select themselves when presented with the two versions.
Those who want iPhone for its simplicity, cool-ness, music and games capabilities but do not care for bandwidth most likely did not get iPhone until now because of their lower willingness to pay for data plan. These will now be incented to pick the low-priced data plan despite the restrictions. (These could be customers who would prefer an iPod Touch that has mobile phone capabilities)
Serious iPhone subscribers with need for email and extensive web surfing will be nudged to pick the current data plan and not the low priced restricted option.
In fact if at&t’s market research data indicates that there is a higher percentage of the first segment then they might even increase the price of current data plan while introducing the lower priced version.
iPhone has both phone function and data capability over both 3G and WiFi. iPhone device however requires a monthly higher subscription charge for the data plan. BlackBerry devices support voice and data just over 3G services and the data plan is $40 a month. iPod touch supports data and VoIP over WiFi, no subscription charges and no phone support. Now does that leave a whole in the market for a device that supports 3G Phone + data over Wifi? It is an easy addition for Apple and will a gap in the market that needs iPhone’s capabilities without a higher monthly subscription fee.
Now that’s a device I will buy.
Back in July 2008 I wrote about Amazon’s Kindle Strategy. I said they are not in it to capture the devices market but rather win the distribution platform market.
It is driving the new format, reduce the value captured by publishers and position itself to be the distribution medium of choice. The goal is to capture the format market and control the value chain and not the devices market. Since no one else s making such devices amazon.com took this on itself.
There is news today from Amazon that signals the move in that direction. Amazon announced today that they will release a Kindle iPhone Application that lets iPhone and iPod Touch users read Kindle books on their devices instead of Kindle. This program is available for free, a right move that fits with the platform strategy to increase footprint. The Kindle App will be a bit with iPhone users and it will reach top 10 among most downloaded.
Is this program targeted at its existing Kindle customers or new customers? While Amazon says it is adding convenience to Kindle owners allowing them to read books while they are away from their Kindle device, it is directly targeted at converting new users and increasing Kindle format footprint. For the very near term (within days) even if 1% of 10 million (approximate) iPhone/Touch users bought just 1 book at $9.99, that is $1 million in new revenue. For the long term this translates into not only more revenue from repeat purchases and new customers but also delivers on Amazon’s goal to win he platform war.
Questions do arise on why Amazon introduced Kindle at all and why it did not go for iPhone application in the first place. I think Amazon’s strategy evolved since the introduction of Kindle. The biggest factor of Kindle device is the readability with its e-ink technology, there will always be a segment willing to buy this device for this factor alone. Techcrunch downloaded Kindle App for iPhone and reported they had same reading experience on iPhone as on Kindle. Amazon probably also wanted to be negotiating with Apple from a position of strength having a powerful BATNA (Best Alternative To Negotiated Agreement).
Other Winners and losers? By giving the program away for free Amazon denied any revenue to Apple. Authors and Publishers stand to gain more from increased book sales. Magazines and Newpapers that received subscription revenue from Kindle subcribers stand to lose any additional revenue from new subscribers. This is because iPhone readers can access the content using the browser and with existing online subscription instead of paying a separate subscription fee for reading on Kindle. To some extent Sprint Nextel that has the contract with Amazon to deliver books on-demand to Kindle devices stands to lose.
Overall, Amazon will win because of its clear strategy and flaw less execution.