How Apple can increase iPhone profitability by selling more iPhone models. - March 2009.

1. Strategy and Tactics of Pricing
(Marketing 469)
Final Case Presentation - iPhone Pricing Model
Team 5: Vibhor Chhabra, Arshi Singh, Derek Vaughn

2. Agenda
Business Problem
Differentiating Factors
Sales & Pricing
Proposed Pricing Models
Recommendation
Appendix

3. Business Problem
How can Apple increase profits and increase
market share in the smart phone segment
without sacrificing the premium or exclusivity
associated with its iPhone?

4. Proposal - Offer 3 Price Options
Price Sensitive Luxury/Lead
Enthusiast
Consumer Consumer
New model
unlocked
Current iPhone 3G New model
Distinctive
16GB bluetooth headset
8GB
32GB
$199 with a two $499 with a 1 year
contract $799 without a
year contract
contract

5. Value chain
The value chain below illustrates the context
in which Apple delivers value to the customer
with the iPhone:
Network Billing Design Build O.S. Apps Branding Marketing Customer
Any change to pricing must take network
provider incentives into consideration.

6. Factors differentiating the iPhone
‣ “There is an app for everything”
‣Ease of use, fashionable, media capabilities, synchronization,
touchscreen, app store, and functionality
‣ Primary Weaknesses are carrier availability and affordability
10.0
7.5
5.0
Affordable 2.5
Fashionable
Web Browsing 0
Carrier Availability
iPhone Blackberry Pearl Motorola RAZR
Functionality

7. Smart and Easy to Use
Smart
iPhone
Android
Nokia
Hard Easy
Moto Q Palm
to use to use
Other
Not so smart

8. Growth phase of iPhone
Sales
Time
Introduction phase (Skimming) Growth phase (competitive pricing)
‣High perceived value ‣Subsidized phone
‣Leaders less price sensitive ‣Expansion of customer base
‣High price to signal high quality

9. Consumer surplus & Demand
Source: Gizmodo.com Source: Fortune

10. Sales Pattern
7,000,000
5,250,000
3,500,000
1,750,000
Q3 2007
Q4 2007
Q1 2008
Q2 2008
0
Q3 2008
Q4 2008
Q1 2009*
Source: Apple.com earnings release

11. Price-Volume Interpretation
‘07-’08 Sales ($500) ‘08 - ‘09 Sales ($200)
7,000,000
5,250,000
3,500,000
1,750,000
Q3
Q4
0
Q1
Source: Apple.com earnings release
Q2

12. Proposal - Offer 3 Price Options
Price Sensitive Luxury/Lead
Enthusiast
Consumer Consumer
New model
unlocked
Current iPhone 3G New model
Distinctive
16GB bluetooth headset
8GB
32GB
$199 with a two $499 with a 1 year
contract $799 without a
year contract
contract

13. Proposed Pricing Model
Price Cost Demand Profitability ($) C
U
8 GB $525 $170 10,000,000 $3,550,000,000
R
16 GB $625 $180 5,000,000 $2,225,000,000 R
E
Net Profit $5,775,000,000 N
T
Price Cost Demand Profitability ($) P
R
Base $525 $170 10,000,000 $3,550,000,000 O
Premium $600 $200 7,500,000 $3,000,000,000 P
O
Luxury $800 $200 1,100,000 $660,000,000 S
Net Profit $7,210,000,000 E
D

14. Proposed Pricing Model
Revenue Subsidy Demand Profitability ($) C
U
8/16 GB 2160 $325 15,000,000 27,525,000,000 R
R
Net Profit 27,525,000,000 E
N
T
Revenue Subsidy Demand Profitability P
R
Base 2160 325 10,000,000 18,350,000,000 O
P
Premium 1200 100 9,750,000 11,000,000,000
O
Luxury 0 0 0 0 S
E
Net Profit 29,350,000,000 D

15. Recommendation
Base
‣ Offers lower priced handset option
‣ Increased market penetration that complements externalities
Premium
‣ Captures value from customers who want the latest technology
‣ Visual distinction from standard iPhone increases exclusivity
‣ Increased revenue from more frequent repeat purchases
Luxury
‣ Same Benefits as option 2
‣ Offers flexibility to choose network providers
‣ Capitalizes on growing market for unlocked iPhones

16. Questions

17. Appendix

18. History - iPhone
The iPhone is a smart phone that combines a web browser, email,
iPod and personal computer into a single, fashionable, easy-to-use
device.
Price: Introduced at a price of $599, dropped to $399 for an 8GB
model. Current prices are $199 for an 8GB version and $299 for a
16GB version
Weakness: Customers must sign a 2 year contract; AT&T is the
exclusive carrier
iPhone customers:
Initial - Tech Savvy ( Early Adopters)
Today - Students, Teenagers , Business users, Tech Savoy
Distribution channels: Apple Store, Online, Walmart, & Best Buy

24. Cost to the consumer