How Apple Sets Its Prices

Apple pricing is unlike almost every other brand in consumer tech: consistent across each and every retailer, and rarely discounted. How do Cook & Co manage to pull that off?

MacWorld has an interesting article about the techniques which Apple uses to keep its prices fixed. From the article:

Most products move from manufacturers to retailers through a network of distributors. Even though each product has a "manufacturer suggested retail price" (MSRP), each retailer is free to set its own sale price...

[P]rice variability is possible because of the large difference (commonly from 30 to 55 per cent) between the wholesale price-what the retailer pays the distributor for each unit of the product-and the MSRP for each unit. That gap leaves enough room for each retailer to set its own policies and generate a sometimes significant range of market prices for a product.

Apple, however, extends only a tiny wholesale discount on its Macs and iPads to your retailer of choice. The actual numbers are a closely guarded secret, protected by confidentiality agreements between Cupertino and its resellers, but the difference probably amounts to only a few percentage points off the official price that you find at Apple's own stores. With such a narrow gap to tinker with, most retailers can't offer big discounts and still hope to turn a profit.

It doesn't stop there though. Apple will supplement its minuscule wholesale discounts with monetary incentives — but only if the retailer in question advertises its Apple products at or above a minimum advertised price. In turn, the retailer can make more money, but only if it does what Apple says. While it may sound like a technique bound to put retailers off stocking Apple, clearly it doesn't — there's a cache which comes from carrying the brand — but even if it did, it probably wouldn't harm sales dramatically, only serving to make the brand seem more exclusive.

It should be clear that it all benefits Apple massively: it keeps prices high so Apple never has to compete and prevents big retailers assuming a strong enough market positions to bully the folks at Cupertino. While all this sound faintly dubious, the techniques used by Apple are completely legal, and used — separately — by many manufacturers across the industry. It just happens that Apple has distilled them down to a killer model which gives them ultimate control over retailers. If you find all this interesting, you should check out the MacWorld article, which also dives into the murky world of iPhone pricing. [MacWorld]


Comments

    I was talking to a guy from a telstra shop a year or so back, he said they make as little as $10 on each iphone sold (pre-5), compared to the upto possibly hundreds for any other brand... he mentioned that the majority of his daily "returns/warranty" jobs were iphones.

    So i still dont understand why you would stock them, surely the overhead isnt worth the tiny profit?

      The prestige of being a launch partner, but really it is so that they can sign people up on two year contracts which is how Telstra would make their money.

      I doubt Telstra care too much about how much money they make on the phone. Few would drop a grand on a phone upfront if they can get it for peanuts upfront if anything on a contract.

      Last edited 16/01/13 9:02 am

      they made commission of the contract, but yes things like ipod touches you would make about %5 to %8 bit like gaming console nothing in them.

      Not stock some of the most desired products out there? Their best bet is to stock them and advertise the nuts out of it then, talk people out of buying them once they're in the store and instead buying something that A, is probably better and B, earns a better profit.

      The article briefly mentions it, but Apple provides further incentives, assuming you follow their rules.

      Essentially, while they may only make $10 off the phone sale, Apple will then give them items or money or whatever, which will help increase the profitability of a sale, though I wager it's still considerably less than what they'd get off most other companies(though we could get into economics of scale here, but since I have no formal knowledge in the field, I feel like that would be a waste).

      Probably because they are making their money on the contract itself. The iPhone plans generally aren't Telstra's cheapest, so presumably they make money back there. Many people base their choice of telco on the phone they want to use since they buy them in a plan together. If Telstra didn't stock the iPhone, it would surely lose customers to those that do.

      The Macworld article talks about phone retailers (in the US and Canada) selling the iPhone at a loss, and making the money back on 24-36 month contracts, so Telstra is actually doing well by comparison.

      So i still dont understand why you would stock them

      Because people want them.

    Almost like dictatorship!

      Almost?!

        I didn't know dictatorships were optional.

          Optional dictatorship is for pussies!

          Last edited 16/01/13 9:46 am

            WOW. What a load of off-topic drivel. WTF does Apple pricing have to do with Iran, extremism and being blown up?

              Dictatorship you silly rabbit! =P

          a dictatorship that is enforced by the people

    Having worked at a number of Apple Resellers over the past 15 years I can say that margins on the higher end products ie iMacs, Mac Pro etc where only 8%. Items like the Nano and Shuffle wheren't allowed to be discounted as the profit was around $10 or less. The money, at the time of course, was in things like APPs, software and service/repairs.

    How do Apple keep their prices consistent across retailers?
    Simple, they have virtually no margin in their hardware. Less than 10% if you're selling at full RRP.

    There simply isn't enough room for retailers to move on the price - no-one (except Apple themselves) got rich selling Apple hardware. The money is in the accessories and services.

      Yes, At $78 for just an Apple ipad case Vs. $16 (including free shipping) for an after market one, I can easily see how filthy greedy they must be.

      This. Also, this is why all the Apple Resellers are/have going/gone out of business.

    I don't really think they got to #17 of the Fortune 500 by selling cases...

    Thanks for the link to Macworld. That article recommended I read the article - from September 19th - on how fantastic Apple Maps is. I needed a good laugh.

    This is, of course, great for shareholders but yet another reason that you'd have to have rocks in your head to be one of their customers.

      Because they tightly control the retail distribution? How exactly is that bad for customers?

        Lack of competition with retailers for one....

          That's not true though, it just happens on a smaller scale. Big W and Target sell the iPad at lower prices than Apple stores for example, and certain retailers have regular 10% sales on Mac computers.

          It just means that certain retailers aren't trying to rip you off with high margins. It means customers can buy with confidence that the margin is going to be fairly close at every retailer.

        Not because they control retail distribution - everyone does that - but because they stifle competition and force everyone to pay full price. It is similar to what we are seeing with petrol prices now. Once we had a weekly cycle and you could always fill up cheaply on Tuesday. Now the price cycle runs for two or three weeks, with prices at or near maximum for half that time, so most of us who need to fill up weekly now have to pay full price every second time. Of course, with Apple, you have to pay full price all the time while you can get substantial discounts on new PCs.

        My last two PC purchases are perfect illustrations. My Zenbook had only been on the market a fortnight but I didn't even have to ask to get the price reduced from $1594 (already a $100 discount from MSRP) to $1350. WIth my Series 9 I did have to ask but, without having to haggle at all, I got the price reduced from $1799 to $1300. That's 20% off the first one and 28% off the second. What's the biggest discount you've ever seen or heard of on an Apple product? You'd probably pay more for a used or refurbished one.

        Of course, it's not just Apple, Sony do the same things. I was stupid enough to pay through the nose for a Vaio once, I'll hopefully never be that stupid again.

        Last edited 16/01/13 11:32 am

    http://www.accc.gov.au/content/index.phtml/itemId/322982

    Apple walk a VERY fine line of legality in Australia actually... it's VERY close to Resale Price Maintenance - which is ILLEGAL here. The only difference I can see is that instead of Apple just ceasing to do business with a particular retailer who sells below MSRP, Apple just won't give them a monetary rebate (it's always money)... but then again... almost every distributor works like this... IMO it should be illegal.

    Back when I sold Apple products - the margin (we were told as salespeople) was ALWAYS exactly 10%... other companies were closer to 15%-$20% (except Sony who I suspect have a similar price protection model)... my friends who still work in that industry tell me that the supposed margin of 10% got reduced all of a sudden (probably because the retailer had a habit of selling Apple stuff cheaper than anyone else if you asked enough times - I obviously won't say who)... hmmm... sounds like more price protection to me!

    "the techniques used by Apple are completely legal"
    Um, no, not in Australia they are not. Specifically:
    "Apple will supplement its minuscule wholesale discounts with monetary incentives — but only if the retailer in question advertises its Apple products at or above a minimum advertised price."
    That would be "resale price maintenance", and therefore illegal here in Australia ( Consumer and Competition Act 2010)? The Act specifically forbids "the supplier inducing, or attempting to induce, a second person not to sell, at a price less than a price specified by the supplier", and a monetary incentive to sell at or above a certain price is clearly just such an inducement.
    Tho' I'll assume that apple don't actually do that here, and the article is just copypasta with no effort at localisation (this being gizmodo and all).

      I agree - if Apple is doing the same thing here then that sounds alot like Resale Price Maintenance. I presume that Apple is smart enough to change things enough to follow the CCA, but then again they've fallen foul a few times already (eg. warranties). Does anyone know how and/or if Apple's system is different in Australia?

      Apple not acting in accordance with Australian consumer and competition legislation? That would never happen...

      Apple would never say, for instance, that if you buy a non-Apple product from the Apple Store and it develops a fault after 14 days, you have to contact the manufacturer... http://store.apple.com/au/browse/olss/faq/returns/question2

    Like many of gizmodo's law related articles, this one is inaccurate regarding trade practices legislation in Australia. Have a read of price fixing legislation before referring readers to a US article that has limited bearing on the Australian market. #poorjournalism

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