As I was thinking broadly about Apple’s pricing shift with the iPad, it’s clear there is an important strategy coming into play for Apple. Any good analysis of Apple notes their value is in the ecosystem, the comprehensive whole of their offerings, not just one product, feature, or service. The more Apple products and services you use together, the better the whole experience gets. For Apple, the value runs deeper than just multiple hardware sales per customer. It’s also in understanding the customers who have more than one Apple product also spend more on apps and services and thus, are higher ARPU customers. While I don’t have the specific data to validate this, I’m confident owners of multiple Apple products are also more loyal than customers with only one Apple product. The key point is Apple’s market position strengthens when customers go deeper into their ecosystem.
With that in mind, it is now important to note that approximately 55-60% of Apple’s customer base is iPhone-only according to my model. Meaning, less than half of Apple’s total device installed base has more than one Apple product. The iPhone is the entry point (it has the largest installed base of any Apple product by far) and Apple’s strategy must include leveraging that relationship with an iPhone owner to get them deeper into the ecosystem by adding more Apple devices to their life. This is where their pricing strategy comes into play.
Neil Cybart from Above Avalon outlined the fascinating pricing strategy by Apple in this post. He expands on the observation that how Apple tends to be more aggressive on price in certain areas — Apple Watch, Airpods, even iPod — looking at it historically. This view stands in conflict to a general narrative that Apple’s product prices are always “expensive” or “high-end”. Furthermore, Ben Thompson expands on this pricing tactic with this sound observation:
…Apple is far more aggressive with pricing in these non-essential product categories: of course the company wants to provide a superior user experience and confer status, but it also wants to convince people to buy into the category in the first place. To put it in pricing terms, I strongly suspect the degree of price elasticity for a product is inversely correlated to the necessity of said product (that is the less you need a product the more sensitive you are to price).
Reflecting on both their points and looking back historically on how we have seen Apple operate on pricing strategy, it does seem clear there is a difference between how they price products they view as core or essential, like iPhone, and ones that are not. This pricing strategy is designed to get at the core of what I outlined. Apple wants to make it easy for customers to add more Apple products to their portfolio. If we follow this logic, Apple views the iPhone as essential and things like iPad, Airpods, Apple Watch, Apple TV, etc., as accessories. Sound logical — until I start to think about the Mac.
Is the Mac Essential or an Accessory?
The biggest question in my mind in Apple’s pricing strategy is related to the Mac and whether the Mac is an essential core product or one that is an accessory. There are sound arguments both ways. We can certainly argue the Mac is more like the iPhone and an essential product and I’d bet the ~100 million Mac owners out there would agree. Apple’s pricing of the Mac is more like the iPhone as it is priced well above the ASP of Windows PC market by roughly 2x. Yet, another argument can be made that Apple’s posture with the Mac is more it is a niche or non-essential product not everyone needs.
Steve Jobs’ own comments — the laptop/desktop form factor is a truck or a specialized category — would seem to support this view as well. Yet, reconciling their Mac pricing strategy within the pricing strategy of other categories continues to be a question mark using the essential vs. non-essential pricing concept. Obviously, the Mac is one of the more expensive products for Apple to make and that is a fundamental understanding. However, that does not mean Apple couldn’t create a lower-cost, entry-level Mac to entice more customers into adding a Mac to their portfolio of products. This is exactly what I’m going to argue they should do.
The shift in Apple’s iPad pricing suggests to me they understand the iPad may not fully be the PC replacement Apple hopes it would be. While they are advertising iPad Pro more aggressively with that goal, we will have to wait until the end of the year to see if these new campaigns have any impact. My gut tells me they won’t and I truly want my gut to be wrong because I believe so much in the iPad. However, nearly every data point we have from our research overwhelmingly confirms the strength of the notebook/desktop form factor for consumers. For this reason, I believe Apple should start to think about the Mac pricing strategy the same way they do with iPad and other products more complimentary to the iPhone. In fact, I’d argue the combination of Mac + iPhone is stronger in value than of iPad + iPhone. Clearly, all three together is the trifecta of computing experiences.
I’ve long argued Apple could easily jump to 10-15% share of the PC market with a simple pricing strategy for the Mac which included a price point of around $799. For example, take the current Macbook Air and offer it at $799 and I have a strong suspicion they could dramatically take share and impact the similarly priced Windows PC category. Better yet, add retina to Macbook Air and update the specs to modern components, keep it at $799 or even $899 and Apple would dramatically alter the competitive landscape of what we are seeing happen with Windows PCs and gain significant share in the worldwide notebook sales market.
Interestingly, even the iPhone has more approachable entry-level products. The Mac is the only line that doesn’t. Again, my conviction comes from a great deal of recent data over the last year or so which overwhelmingly confirms the importance of the traditional notebook form factor. If Apple was to offer an aggressively priced entry-level Mac, I’m confident this product would only strengthen their ability to attack the 60% of their base who only has an iPhone.
Apple may have thought iPad was the way to do this and that may be true. However, adding a similar strategy with Mac pricing will only help their efforts that much more.