How Apple sets its prices

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For retailers, these phone-and-service-contract deals are profitable not because of the hardware's selling price, but because of a commission that carriers pay them, depending on the length and the cost of the mobile plan that each customer chooses. This helps explain why many stores will sell you an iPhone at the discounted price only if you buy it together with "in-store activation"; otherwise, they'd miss out on the bulk of their financial gain from the transaction.

This fact also helps explain why stores sometimes break rank and offer discounts on Apple handsets. Such was the case with certain Walmart locations during this past holiday season, which offered consumers an iPhone 5 for $127--a $70 discount from the normal $199 price. The retail giant probably set up this special deal without Apple's involvement, and it produced repercussions in the marketplace as competitors attempted to match Walmart's prices.

The end of the road

The pricing techniques that Apple uses aren't illegal, and most of them are commonplace in the industry. MAP, for example, is almost certainly at play when an online retailer requires you to add a product to your basket before revealing its price; and carriers offer kickbacks to resellers for most smartphones. Apple has simply distilled these standard tactics into a retail strategy that, so far, has worked out very well--aided, in no small part, by the public's seemingly insatiable lust for its products.

The cumulative effect of Apple's pricing policy on consumers is hard to nail down. On one hand, we're deprived of the positive effects that price competition normally produces in a free market. The familiar phenomenon that Apple products tend to be more expensive than their competitors in the same market space doesn't just happen: You can easily find an inexpensive laptop, but it's much harder to come across an inexpensive Apple laptop.

On the other hand, it's also hard to come across an inferior Apple laptop--and this is true of every other product that leaves the company's manufacturing facilities: Generous profit margins and a tight control over its distribution channels have enabled Cupertino to produce higher-quality goods at prices that only modestly exceed those of rival products. Thus, arguably, consumers enjoy a better overall experience, dollar for dollar, in the long term.

Either way, Apple's pricing strategy is a fascinating aspect of the company's notoriously controlling nature. If nothing else, knowing that the prices of its products are so stable makes shopping for them relatively stress-free: The only patience you need is the patience to wait for the delivery guy to show up at your door.

This story, "How Apple sets its prices" was originally published by Macworld.

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