Android’s Penetration Vs. Apple’s Skimming Marketing Strategies

by John Kirk   |   March 21st, 2013

images-45Technology pundits and press, alike, seem obsessed with market share. But obtaining large market share is just one of many successful business strategies. Android follows a penetration pricing strategy. Apple uses a skimming strategy. Neither is inherently superior to the other. Like any strategy, each has advantages and disadvantages and their ultimate success often depends upon both circumstances and execution.

Penetration Pricing

Penetration pricing occurs when a company launches a low-priced product with the goal of securing market share. For example, a sponge manufacturer might use a penetration pricing strategy to lure customers from current competitors and to discourage new competitors from entering the industry. If the sponge’s price is low enough, consumers will flock to the new product. Competitors who can’t produce and promote sponges for such a small profit will avoid the market, freeing the sponge company to maximize brand recognition and goodwill. ~ Stan Mack, Demand Media

Price Skimming

A price skimming strategy focuses on maximizing profits by charging a high price for early adopters of a new product, then gradually lowering the price to attract thriftier consumers. For example, a cell phone company might launch a new product with an initial high price, capitalizing on some people’s willingness to pay a premium for cutting-edge technology. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers. ~ Stan Mack, Demand Media

Apple has added a twist to the skimming strategy. Rather than introducing their products at a high price and then lowering their prices later, Apple stakes out a price and then maintains and defends that price by significantly increasing the value of their products in future iterations.

For example, over the past six years, the average sales price of the iPhone has remained remarkably stable with the subsidized price remaining at ~$200 and the unsubsidized price hovering around $650.

Advantages and Disadvantages Of Price Skimming

Price skimming offers four major advantages…. It can offer insight into what consumers are willing to pay. It can create an aura of prestige around your product. If the initial price is too high, you can lower it easily. Finally, late adopters might be pleased to get your prestigious product at a bargain price, which creates goodwill for your company. A major disadvantage, however, is that large profits attract competitors, so this price strategy only works well for businesses that have a significant competitive advantage, such as proprietary technology.

The argument against Apple’s price skimming strategy is that the competition has caught up with the iPhone and Apple is no longer able to compete unless they lower their prices. But do the facts support this argument?

First, the iPhone has received 8 (EDIT: make that 9, as of March 21, 2013) straight J.D. Power and Associates awards for customer satisfaction and Apple reported that four times as many iPhone users switched from an Android phone than to an Android phone in the fourth quarter of 2012. Clearly Apple’s cachet is not on the wane, at least not in the minds of phone buying consumers.

Second, in 2012, Apple garnered 69% of all mobile phone profits. Further, they did it with only 8% of the total market share. That means that the remaining 92% of the market provided only 31% of the sector’s total profits. That’s price skimming at its finest.

Conclusion

The current meme is that Apple MUST abandon their skimming strategy and pursue a price penetration strategy instead. However, the facts simply do not support this contention. Apple could, of course, “buy” more market share simply by lowering their prices, but this has two major disadvantages. First, the market share that they would be buying is worth far less than the market share that they already own. Second, a lower price would lead to lower profits as well. It is obvious – or rather it SHOULD be obvious – that this could be counter-productive.

There’s nothing wrong with market share and I’m quite certain that Apple would be more than happy to expand their market share – but not at any price. For example, Apple has some 70% market share in iPods and around 50% market share in iPads. Yet they are doing this while still maintaining their price skimming strategy.

Price skimming is neither the only strategy nor is it the only superior strategy. It is just one of many marketing strategies. However, Apple is executing the strategy of price skimming brilliantly…even if Wall Street and the pundits stubbornly refuse to acknowledge it.

John Kirk

John R. Kirk is a recovering attorney. He has also worked as a financial advisor and a business coach. His love affair with computing started with his purchase of the original Mac in 1985. His primary interest is the field of personal computing (which includes phones, tablets, notebooks and desktops) and his primary focus is on long-term business strategies: What makes a company unique; How do those unique qualities aid or inhibit the success of the company; and why don’t (or can’t) other companies adopt the successful attributes of their competitors?
  • Glaurung-Quena

    “Apple has added a twist to the skimming strategy. Rather than
    introducing their products at a high price and then lowering their
    prices later, Apple stakes out a price and then maintains and defends
    that price by significantly increasing the value of their products in
    future iterations.”

    You forget that they are *also* doing traditional price skimming, because the older versions of their phones remain on sale for progressively lower prices, down to $0 with subsidy. Likewise with the introduction of the 3rd gen iPad, they kept the 2nd gen on sale for $100 less. I very much expect them to continue to offer an older, cheaper Ipad next to the “new” ipad, and do something similar with the Ipad mini, which will produce a price spread from $500 down to, I guess, somewhere around $200-250.

    This is of course exactly the model they’ve pursued with their Ipod line — filling every price point, while maintaining a “premium” air around their brand, so that there’s essentially no reason for anyone in their primary market (North America) to buy someone else’s product.

    It’s still early days for the Ipad lineup, so there’s still a price “umbrella” beneath the Ipad Mini. And even today, there remain a ton of cheap 3rd party MP3 players available for less than an Ipod, but only the most cash-strapped customers buy them. Likewise there are soon going to be a ton of cheap, underspec’ed no-brand tablets available for around $100-150 — but will anybody be using them?

    Apple’s problem, of course, is that they’ve built their price skimming structure for the Iphone on the back of the US system of buying subsidized phones with a contract. If they want to dominate elsewhere in the world with the Iphone as they have with Ipods, then they’re probably eventually going to either lower the price of their oldest phones, or start offering a prepaid-only unsubsidized version of the Iphone.

    But aren’t going to do that unless they can do it without damaging the premium aura of their brand and without damaging their profit margin too much. An unsubsidised Iphone would of course have to be inferior, spec-wise, to the oldest available subsidized iphone. So there’s a delicate balancing act between not undercutting their subsidized sales, and not delivering an unsubsidized product that would tarnish their brand.

    Eventually, however, they’re going to decide the technology has become cheap enough to produce an iphone for the prepaid market. And then they’ll introduce it at the premium end of the prepaid price spectrum (say $300-350), and iterate that on an annual basis with older models remaining available at lower prices until you can buy the oldest model for $100-200. My guess is any prepaid Iphone will be offered exclusively as an unlocked no-contract phone, and it will be GSM only, which will protect most of their US market from cannibalization and keep the US carriers happy.

    • mhikl

      Is the phone business entering its middle age? Feature phones are on a fast decline, but what is the prognosis of the tablet’s influence on the iPhone and the other smart phones. If Apple does bring out an iWatch, could an even smaller mini tablet, say six inches (as opposed the present <8 inch mini), take over some of a smart phone's jobs. A smaller mini would be a lot easier to search 'n navigate than even a larger iPhone and if it fit a pocket, could the iWatch become the phone, and the smaller mini piggyback off its cellular connection for texting, search and other apps away from home?

    • http://twitter.com/qka qka

      Enough already with this talk about subsidized prices. They are a market distortion technique cooked up by the carriers to hoodwink the American public.

      As for the prices for older iPhones, consider this – StraightTalk offers the following prices for various models:
      iPhone 5 $650
      iPhone 4S $550
      iPhone 4 $450
      http://iphone.straighttalk.com/

      So the postpaid carriers are “subsidizing” to the tune of $450, or $18.75/month. That is regardless of what generation of iPhone technology you are interested in. Of course they aren’t really subsidizing; they are burying that cost in the 2 year contract. And should you keep the phone past the expiration of that contract, that’s $18.75/month extra profit for the carrier.

      • Glaurung-Quena

        Yes, the “subsidized with contract” system is a stupid system possible only in the uncompetitive and unregulated North American wireless market. But it’s the system that Apple had to work with then they launched the Iphone and it has served them very well — 50% of new smartphone sales in the US are Iphones, which is pretty close to market dominance, and they make over 50% profit margin on each Iphone sale, which makes their shareholders very happy.

        My point was that now, if they want market dominance in smartphones worldwide, they’re going to want to transition somehow to another strategy, either one that involves lower profits on their phones, or one that involves introducing a low-end phone that they can sell exclusively in the prepaid, *un*subsidized market that is the prevalent model outside North America.

        • steve_wildstrom

          First, the subsidized-with-contract model is hardly unique to North America. It is also the way post-paid phones are sold in most European markets. Vodafone UK offers an iPhone 5 free with a 42 pound monthly contract. T-Mobile Germany sells the iPhone 5 for 70 euro on contract.

          Second, Apple actually tried and failed to break the subsidy system. The original iPhone was sold unsubsidized through AT&T for $600. Slow sales caused Apple to cut the price to $400. And resistance from non-U.S. carriers caused it to revert to a subsidy model and sell all subsequent flagship iPhones for $200.

  • Andrew

    Gotta wonder if part of the strategy is to come out with an iPhone 4-sized phone with the same specs as the iPhone 5 (except screen size), which would then allow for a lower starting price for a “current spec” phone, as well as perhaps dropping the prior spec phone to a still lower price. I don’t really think that Apple needs to drop their prices in a bid to gain more market share; you can have a prior spec phone for $0 on a contract. But maybe if Apple created a middle tier between the current spec phone (iPhone 5) and the prior spec phones (4s and 4), it might escape some of the current stigma that it’s too expensive for those who must always have the latest and greatest.
    And along with that change, it might be a good time to retire the iPhone numbers, as Apple did with the iPad. Make the bigger iPhone simply the iPhone, make the smaller one the iPhone mini, perhaps make room for an iPhone Max that’s bigger than the current iPhone
    5 (just to satisfy those who say the iPhone 5 is too small relative to the competition), and refer to them only by their generations in parentheses. That would allow 6 pricing points with 3 different-sized phones of current and previous generations. Perhaps then the financial community that warns that Apple is running off the rails would shut up.

    • steve_wildstrom

      One thing Apple has to keep in mind, though, is the potential impact of a proliferation of sizes on app developers. They don’t want to get into the Android swamps of dozens of variations of screen sizes and resolutions that make it very hard for developers to optimize apps for any device.

      • Lowry Brooks

        Which is why Most iOS apps look 100 times better than Android apps.

  • Alfiejr

    good piece about Apple, JK, except for one major thing: there is no “Android” as referred to.

    yes, there is a Google Android. and an Amazon Android. and now a Samsung Android. and then all the independent China/India Androids we never hear about in the US that probably amount to 1/3 of all Android stuff.

    but talking about Android as if there were a single OS there anymore, or ecosystem, or a single market strategy, and so on is just not correct. Google, Amazon, and Samsung are all doing something very different with it. what was predicted about Android’s ultimate complete fragmentation has now come to pass.