## 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.

## Xoom: Pricing is Wrong, Costing is Wrong or Playing for the Niche

Update 7/7/2011: Motorola cuts Xoom prices by \$100.

In my last article, Why there is no 16GB Xoom, I raised two possibilities

1. It costs them \$600 to make Xoom
2. Their costing is wrong – they incorrectly allocated a share of their fixed costs to every Xoom there by getting an inflated cost number compared to true marginal cost

Yesterday, iFixit did a tear down analysis of Xoom and found that the marginal cost is not much different from that of 32 GB iPad 3G.

So why is Xoom priced higher even though it is a new entrant with no track-record (like iPod touch, iPhone)? In an investor conference, Motoral CEO Mr. Jha said,

“Xoom deserves its higher price tag because of its quality and the free upgrade to 4G”

No product deserves higher price tag just because of its quality or because the marketer believes so.  Customers decide whether or the higher price tag is worth it.

Even if Motorola believe there is higher value to the customer and customers agree with that value proposition,  the reference price set by Apple brings down the price they can charge.

It is highy likely they got costing wrong. They may not be just looking at the cost to make each unit, like iFixit did, but including a share of their R&D, Marketing, other company overheads like executive salaries and other investments to each Xoom.

The next step in this slippery slope is to tack on a percentage margin and set a price, regardless of what the customers value, because all their products must meet an artificial percentage margin target.

There is yet another possibility. They are yielding the mass market to Apple and want to target only those customers who desperately need a tablet that is not an iPad and hence are willing to pay higher price for a non-iPad. It is not a recommended move when the market is just getting defined. There is no reason to slice a small niche within a niche especially when tablets threaten the PC market.

Net-Net, not having value based pricing, not having versions or pursuing a niche strategy are all bad moves.

We should expect significant price drop real soon, like after tomorrow.

## How will iPad2 be priced?

I do not know more about iPad2  or its release date than what is already known through news media. However, I am here to make predictions about how iPad2 will be priced.

Given than even iPod Touch has retina display and front/back cameras for Facetime, it is a safe bet that iPad2 will have these features as well. Traditionally, when Apple introduced nextgen of any of their product they added lot more features but kept the price the same.

So will a new iPad with additional features be offered at current prices of \$499, \$599 and \$699?

Apple most likely underestimated the demand for iPad and priced at inelastic part of demand curve. They are likely to consider better price realization with iPad2 and correct past mistake for at least three reasons

1. Demand will be at least as high as iPad
2. Considering all those who considered buying but sat out this version, the demand is bound to be higher