Europe: Apple's "Little Pricing Lab" for iPhones

Posted by: Peter Burrows on April 21

Since European carriers O2 and T-Mobile slashed the price of the 8-gig iPhone, consensus has been that this is just a typical fire sale to get rid of inventory ahead of the launch of the much-anticipated 3G model. Here’s one well-researched piece by The Times Online.

But Apple doesn’t usually do fire sales, under any conditions. The company has been religious about maintaining stable prices over the years, to great effect. While the price of PCs and consumer electronics products change too often for the average consumer to even keep track of, many consumers can recite the price of each of the products in Apple’s small portolio. And they know (with one famous exception) that the price of that Mac, iPod or iPhone is likely to remain the same for many months.

But now, for the first time, there’s not a single uniform price for a new iPhone. Analysts say it is the first time that any of the authorized carriers have sold the device for less than Apple does. And less by a lot—up to 75% for T-Mobile, if you sign up for a pricey two-year data plan. Such a major price difference is potentially hazardous for a company known for its premium products. “Apple doesn’t want people to think there’s always a lower price around the corner. That makes people wait before they buy,” says Piper Jaffrey analyst Gene Munster.

Apple sources suggest the company does not control its partners’ pricing, because that would violate restraint of trade laws. But I don’t buy that. Dan Fishback is CEO of DemandTec Inc., which makes software that companies use to help devise optimal pricing for their products. He says so long as all resellers have the same flexibility, a manufacturer can legally specify a price range for its products. And “it’s not uncommon for manufacturers to have provisions and agreements that change the terms, in advance of a new product being released”—say, so the reseller can cut prices of a product if sales don’t reach a certain volume. And regardless of what Apple’s contracts say, Steve Jobs has a proven ability to keep partners in line—or of making alternate plans if he doesn’t like what he sees. Remember hte Mac clones of the 1990s?

So then why sanction the lower prices?

Besides selling off unsold stocks, Munster suspects the price cuts (technically, they are two-month promotions, say O2 and T-Mobile) are Apple's way of running experiments to help it determine the right price for future iPhone models. "[The price cuts] probably weren’t Apple’s first choice, but it does give them a look at pricing elasticity trends. It’s almost like their running a little pricing lab.”

That's useful, since pricing iPhones is far more complex than pricing its other products. With just 1% or so of the vast, fragmented cell-phone market, Apple doesn't have nearly as much pricing power as it does in iPods, where it sets the trends. Plus, Apple doesn't hold all of the pricing cards. While the iPod runs Apple's own iTunes software, the iPhone is only useful with a cellular service package. Part of what Apple needs to figure out is what portion of the cost should be for the hardware and what portion should be for the service. Over time, says Fishback, the price of the package will become even far more critical. "As equipment becomes commoditized, Apple’s mix is going to have to change.”

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