Lower Prices, Lower Margins, Better Apple?
A few posts back, I wrote about the dangers of seeing your favorite retailer slashing prices and offering sale after sale especially as the economy softens. In the ensuing week, I posted about the opportunity that I see for big box discounters and Apple, one of my favorite companies, trumpeted what seems to be a long term strategy to compress their margins. And, I have no intention of jumping on my soapbox and lambasting Apple’s management for such a decision. In fact, I have a feeling it might just be the kind of long-term oriented thinking that will be necessary to continue to drive the Apple growth story.
Discounts and sales resulting in lower pricing are often used as a crutch by management in an attempt to juice sales when a company finds demand lagging. Unfortunately, the problem with this strategy is that most companies that choose to go down this path are neglecting the true problem at hand. Consumer demand will usually lag, not because a product is too highly priced, but because it doesn’t deliver value to its consumers. Lowering prices is an easy way to trick consumers into trying your product, but if the product isn’t good in the first place then you lose the ability to raise prices back to their original levels and run the risk of permanently compressing your business’ margins.
This is not the case for Apple. Apple has more than established its credentials as an upmarket product. It’s name is synonmous with cool, trendy, and cutting edge. Apple has the luxury of being able to make an orderly and rational decision as to where it ought to price its products. As such, it can wield its pricing power as a competitive strength as opposed to using it as a crutch. Apple’s decision to allow margins to fall towards the 30% range (down from its traditional 35ish%) over the next year sounds like it’s being made with some serious strategic consideration. In fact, Apple’s CFO Peter Oppeneheimer’s describes the company’s plans as being designed to “deliver great value to our customers while making a reasonable margin, but not a margin so high as to leave an umbrella for our competitors.”
It’s clear from these statements that Apple sees itself playing a different game now. They’ve created the world’s most successful MP3 player, the most talked about mobile computing/cellular product in the US, and are fast catching the top computer manufacturers in the US in laptop and desktop shipments. With their popularity, growth in the upscale market won’t last forever. Furthermore, the success of its new forrays into mobile/personal computing will ultimately depend the mass market appeal of their product platforms. Apple can’t have the iPhone’s OS fall to second fiddle the way Mac OS once did in the 1990s. And, with the clout and media coverage it now has, it can afford to make a huge push to protect/create a “first-mover” advantage in this market. (I put that in quotes because many companies have played in this space before Apple. It just seems that none were smart enough to get it right and thus have ceded leadership to Apple.)
So, long explanations and rationalizations aside, it’s clear that Apple is embarking on a longer term strategy to expand its market appeal and begin making real inroads into the computing market that has long been controlled by Microsoft and legions of PC manufacturers like HP and Dell. The timing couldn’t be better. Vista is awful. Apple’s cache has never been higher. And, mobile computing is just one breakthrough away from widespread acceptance. If there was any time that Apple could successfully trade margin for enough market share compensate for the depressed profitability per unit, it’s right now.
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