How many $399 iPad2 did Apple sell?

I showed you the way to do the math here.

Apple released its earnings today and we can do the math with their numbers to find how many $399 iPad2 they sold. Bear in mind that the new price was announced near the end of the quarter.

Last quarter:

Number if iPads sold = 15.434 Million
Revenue from iPad =      $9,153 Million  (treating revenue from accessories as negligible)
Average selling price of iPad = $593  <– we will use this number of new iPad

Current quarter:

Number of iPads sold = number of $399 iPad + new iPads = n1 + n2 = 11.798 Million
Revenue from iPad = $6590 Million
That is,   n1 X 399 + n2 X 593  = 6590

The number of $399  iPad2s work out to 2.09 millions. That is 17.7% of iPads sold this quarter were the lower priced versions.

That is a big number given that the lower price was effective only for a short period during this quarter. And its effect was felt in bringing down the ASP for iPad. The effect can get bigger in the next quarter.

A key takeaway is, lower priced iPad  may bring in new customers but is also attractive to those who would otherwise buy higher priced new iPad. This is basic second degree price discrimination at work.

When you introduce a second lower priced version of a product you always have to worry about its effect on the sales of the higher priced version. The sales are not all incremental.

Apple will likely rethink their rumored $299 7-inch iPad due to these reasons.

How can you find the number of $399 iPads sold?

When Apple announced their new iPad, they kept their current iPad2 model and said that they will sell this at $399. The $399 iPad2 is targeted at two segments

  1. Leaning towards Kindle Fire: Those who are attracted to Amazon’s $199 Kindle Fire but  now see higher value for their money in a $399 iPad (but do not find value in $499 iPad)
  2. Waiting it out: Those who do not find value in both the Kindle Fire due to its size etc.  despite its price  and  the feature rich $499 iPad due to its price

There is a third segment they don’t want to target but cannot avoid – new customers who would have picked the new iPad but find the $100 price drop attractive and hence choose that instead.

Add them up, you have the number of $399 iPad2 Apple will sell.

Why this is important? Because it tells us the market share Apple is going to take from Kindle Fire.

But we don’t have the customer segmentation data (Apple does). Furthermore, Apple does not breakout numbers on individual iPad lines.

We are not going to find the answer until next earnings report. But here is how you can model that number:

  1. In its quarterly earnings report Apple tells us the number of iPad devices sold and the revenue from the line. From these two data points we can find the average selling price (ASP)
  2. Luckily for our analysis Apple just kept one $399 model and discontinued all other iPad2 models.
  3. Last quarter they sold 15.5 million iPad2 units. Analysts are predicting similar number for next quarter. Any increase we see is from selling $399 units (n1)  and from increase in new iPad numbers  (n2) due to retina display  its support for 4G.
    n1 + n2 = the increase in number of iPad units from previous quarter
  4. We have two unknowns and one equation. We need one more equation
    For this we use the revenue from iPad numbers from Apple’s report. The change in revenue between two quarters is due to revenues from n1 and n2. ASP of n1 units is $399 and for n2 units we can assume the same ASP as previous quarter when there was no $399 iPad.
    n1 X $399 + n2  X last quarter ASP = Increase in iPad revenue

The number n1 will also tell us the market share Apple took from Amazon’s Kindle Fire.

Now you can be the first to report this number when Apple reports its earnings next quarter.

What if the reported iPad numbers are lower than previous quarter (or the same)? Not that difficult to do similar math and is left as an exercise to the reader.