Why Apple Is Targeting the Average Joe

NEW YORK (MainStreet) -- Apple (AAPL) may not have rolled out the much-anticipated iPhone 5 last week, but what the tech giant did announce was even more striking in some ways. No, I'm not talking about the iPhone 4S nor its quasi-artificial intelligence features, impressive as these may be (and it should be noted that iPhone 4S pre-orders did smash all previous iPhone sales debut records last week). The truly remarkable announcement was that Apple would sell the first two generations of iPhones for free to consumers who sign up for a contract.

Words such as "free" and "deals" are not normally in Apple's business vocabulary (unless one of their products is on the verge of being recalled). While it's true Apple has long tried to appeal to everyday users by making products simple to use, the company typically prices its products in a way that's geared to what analysts refer to as "premium customers," those for whom money isn't the primary consideration when shopping for a gadget.
Why is Apple trying harder to appeal to everyday users? Hint: It's all about the apps.

"I view Apple as similar to Mercedes and BMW," says Ben Bajarin, a consumer technology analyst at the Creative Strategies firm. "They have their $100,000 cars and their $30,000 cars. You could argue that if Mercedes sold a $15,000 car, they'd sell a lot, but the company has a premium brand experience at stake." Likewise, if Apple priced their products cheaply enough for anyone to buy, the company might run the risk of tarnishing its reputation as a seller of products one aspires to own.

Yet at first blush that's exactly what the company seems to be doing. When Apple's new CEO Tim Cook recapped the product launches and prices at the iPhone 4S event last week, it sounded more like a blowout sale at Target than an Apple event: the iPod Nano for as little as $129, a $99 iPhone 4 and, of course, the iPhone 3G and 3Gs given away for free with a two-year contract.

So why would one of the most successful tech companies in the world try to appeal more to frugal consumers by introducing lower price points? The short answer is because they can, and in the case of some products, because they must.

Two things have changed in recent years to push Apple to the point where it would offer once-pricey products for free. For starters, the longer a product line such as the iPod or iPhone is on the market, the cheaper it is to manufacture, making it easier for Apple to market various models according to what Bajarin refers to as the "good-better-best" model. The iPhone 3G, for example, is cheaper to make and less in demand for premium customers because it's out of date, so it can be priced lower to appeal to frugal shoppers who just want something that's good enough. Meanwhile, the more recent models are comparatively more in demand and priced accordingly, giving Apple an easy way to appeal to a wider range of customers without diluting the premium-brand aura that surrounds its newest launches.

Even so, there is a big difference between having a tiered pricing model based on the release dates for its four iPhone models and choosing to make two of those iPhones free. As it turns out, the smartphone market is just competitive enough that Apple has had to act more aggressively than usual in its pricing, though not for the reason you might think. Apple is doing it all for the apps. Or, at least, a big part of the motivation is related to apps. As previously reported, the tech giant is also making a huge push into emerging markets, where high-priced iPhones are a barrier to entry.

"I think Apple realized that Android has moved against them now for volume, and application developers generally go where the volume is," says tech analyst Rob Enderle of the Enderle Group. As Enderle explains, the premium market that Apple focuses on generally accounts for roughly 5% to 10% of the overall market for any product, while the rest -- known as the volume market -- is where the average Joe lives. And that market is increasingly being courted by Google ( GOOG) Android phones. To continue to attract the best developers to build eye-catching apps for its smartphones, Enderle says Apple has been forced to "move cheaper." Apple iPhone sales represent 5% of global handset sales, CEO Tim Cook said last week.

The same issue is brewing in the tablet market since Amazon's ( AMZN) launch of the highly competitive Kindle Fire tablet for $200, which has been billed as the first major threat to the iPad, but it may take a while before Apple adopts a similarly aggressive pricing strategy.

"Apple likes to keep their products toward the leading edge of technology, which will always be expensive," Enderle says. By comparison, Amazon might opt to cut back on certain manufacturing costs and even price the product at less than what it cost to build -- as they did with the Kindle Fire -- because the device serves as a "gateway to the Amazon store," Enderle says.

What Amazon loses from underpricing the tablet, it makes up in sales of e-books, MP3s, Amazon Prime memberships and more. Apple doesn't have quite the same monetary incentive, though once again, it could be persuaded to compete on price should the Kindle Fire's popularity explode, effectively luring away many of the application developers who would otherwise work with Apple.

"There is enough difference between the Apple buyer and Kindle buyer that Apple probably thinks they can withstand the threat, but if it starts crossing over, they might drop the iPad into a lower price market," Enderle says. "They don't want to be a niche player in any of these two markets because they lose app developers."

Who knows, perhaps Apple will start using the word "free" more often.

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