The typical razor/razor blade pricing strategy is straightforward: lock the customer in by giving away the razor and reap high margins from blades. Makes sense, right? It's a popular pricing strategy that has been successfully employed in many industries including laser printers (printer/toner) and gaming (console/games).
Apple (AAPL) has reaped hundreds of millions of new profits by challenging this standard pricing convention by asking (and answering) the simple question of, "Why do we need to give away the razor?"
Apple realized that when competition is low or non-existent, you really don't have to discount razors. The laser printer and gaming console markets are highly competitive, for instance. If a manufacturer doesn't offer a cheap "razor" price, consumers will buzz by without purchasing -- they have plenty of cheaper alternatives.Competition was thin when the iPod was introduced, so what did Apple do? Reap high margins from its device and squeeze content providers with a "we are the only game in town" negotiating posture. With profits being decimated because the industry had failed to see that the future was "e," music companies succumbed. The result: 99-cent songs. Music companies that once prided themselves on offering highly differentiated content morphed into manufacturers of commoditized products that are sold in a vast 99-cent virtual store. Apple's pitch to consumers was appealing: pay a premium for your iPod and then fill your music library with great music at bargain bin prices. "Sign me up," rejoiced music lovers. Apple took a different tack with its entry into the e-reader market. Joining the crowded device market late, the iPad was rolled out at a lower then expected price. Most interestingly, instead of mercilessly negotiating with content producers for the lowest price, Apple opted to become the publisher's best friend. "Set whatever price you want and we'll take a standard 30% 'agency' cut," Apple cooed to excited publishers. With Apple in their pockets, publishers held their pricing ground with rival e-book sellers. The result: publishers are now calling the shots at setting content prices. Earlier this month, Apple rolled out its redesigned TV console. Guess what? Media headlines were less about the $99 Apple TV (which allows consumers to rent television shows and stream them to television sets) and more about "99-cent television shows." With few competing similar consoles on the market, the hip technology provider returned to its tried and true bag of pricing tricks: woo customers with low content prices. Apple's pitch to television networks is eerily similar to what Apple dictated to music companies: your profits are suffering, "e" is the next big distribution channel, and we are one of the biggest players in town. So far only Fox and ABC have bitten at the bait, but the chum is in the water.
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