Retaining Pricing Power – iCloud Case Study

When rumors about Apple’s iCloud started appearing I was surprised that they were getting ready to give up the biggest pricing lever they have – Flash Capacity. If files were stored in the cloud and streamed to the device then does it matter whether you have a 16GB iPad or 32Gb iPad? Will customers bother to pay more just to get additional capacity?

In the past I wrote at length on how Apple practices effective price discrimination with its pricing for Flash capacity in its iDevices.  Here is the chart I used that shows the price curves for different iDevices.

How Apple prices Flash capacity has nothing to do with what it costs them. iSuppli breakdown showed that price difference between 16GB and 32GB iPad is only  $15 while the price jump is much more than that.

Another noteworthy aspect of this Flash pricing is the price jump is not the same for all iDevices. As you can see from the chart, the curves get steeper as the screen size and functionality of the device increase. Clearly, the value from additional 16GB flash to an iPad customer is lot more than that for iPod or iPhone customer.

So the same capacity is priced differently based on the value to the customer.

The final and crucial piece of price discrimination puzzle is the absence of arbitrage. Apple completes its power to practice price discrimination by eliminating arbitrage (in this case alternatives). A simple way for customers to add more capacity is through extension slots but none of the iDevices provide that feature. So if we want more capacity we better be ready to pay more, lot more.

With iCloud is Apple likely to lose this pricing power by creating arbitrage?  It would have if the files were really streamed from the cloud like Amazon and Google. But true to their pricing mantra of capturing all customer surplus upfront the iCloud solution does not permit any arbitrage opportunity for the customers. The Journal sheds more light on the iCloud implementation that is very different from that of  Amazon and Google

Apple’s strategy, on the other hand, rests on consumers storing their content locally on their devices. Its new iCloud service allows consumers to easily sync their music collections to any of their Apple devices. Aside from the initial sync, a Web connection isn’t necessary.

In other words, the need for bigger capacity on iDevices still exists. Customers cannot trade iCloud capacity and streaming to offset the higher price premium they pay for bigger flash capacity. We will continue to pay $100 for our perceived need for higher capacity.

Apple will continue to capture value from commodity components.

Despite the competitions and the disruptions, Apple continues to retain its pricing power – built into their product DNA is the need to maintain pricing power. What we see is an example of perfect alignment of product and pricing strategy that helps them with the real business goal – profit.

Is your product strategy aligned with your pricing strategy?