I spend a lot of time tracking technology companies and Apple (NASDAQ:AAPL) happens to be the one which grabs my attention the most. In one of my recent reports on the company, I had spoken of rumors about Apple thinking of a $100 price hike for the next flagship iPhone. While I still believe Apple can’t go on increasing the prices for its devices for ever and the point of time has come for it to choose between margins and market share, another thought occurred to me. There is a possibility for Apple to be able to pull off the price hike this time also based on something I am about to discuss, after all consumer electronics is a highly dynamic space.
Apple’s Strength Lies in Its Brand
Every product has a target audience and Apple’s strength is in that exact place. The keys to the strategy that will work in the company’s favor are its brand recognition and brand association by the target audience. Apple makes premium products for premium customers – customers who like the fact that they own devices which are not very common, which not everyone can afford to own, which gives them a premium feeling, and which doesn’t erode in value very quickly.
- Warning! GuruFocus has detected 8 Warning Signs with AAPL. Click here to check it out.
- AAPL 15-Year Financial Data
- The intrinsic value of AAPL
- Peter Lynch Chart of AAPL
In simple words, Apple’s demand is largely brand-driven; its users associate themselves with the brand and feel their devices to be natural extensions of themselves – something that defines and says a lot about them. This feeling in its users combined with the company’s smartly planned strategies positions Apple as a very prominent player in the consumer electronics space.
How Apple Plays It Differently Than Its Peers
If you take a look at all Apple peers such as Samsung (SSNLF), BlackBerry (NASDAQ:BBRY), Sony (NYSE:SNE), and many others, one common thing that can be noticed is that they all practice penetration marketing very thoroughly and the penetration takes place very rapidly. They launch a new device and charge a premium price and within a month or two they slash the price substantially since they now want to target the next layer of buyers who will be willing to own the device at a little lower price. This way the process continues and within a matter of few months another device is launched and the same process is repeated again and again. As a result of this what happens is these brands are not able to provide its users with the satisfaction of owning a costly device.
In contrast to this, Apple tackles its target audience very cleverly. The company launches a new device once a year and keeps the price of the device fixed until it launches the next device in the following year. It then reduces the price of the older devices and thus also practices penetration marketing. However, the difference is in its penetration speed. Because of this Apple users are left with much more satisfaction of owning a premium product. They know at least for that year their model is the flagship one.
Again, Apple has purposely kept the prices for its devices a little high, since this help in maintaining the quality of its buyers, an essential component for creating brand value. Samsung caters to all layers of the market, right from the layer that wants the cheapest device as long as it can be categorized as a smartphone, up to that layer that is ready to shed a hefty amount to get their hands on polished and sophisticated devices. So, where’s the value in owning a Samsung? Everyone can afford one. It’s for the masses. Instead, Apple positions it to be for the classes. The company has only one flagship smartphone and it more or less maintains the price for that all through, making the brand’s value a lot less volatile.
Characteristics of Apple’s Target Market to Drive Its Success
The primary characteristic of Apple’s target audience is the price-inelastic nature where demand is mainly brand-driven. The high-end consumer market doesn’t get influenced much by rise or fall in the price of a product. Instead, the consumers are willing to pay more also if they feel the brand is worth it. The rise or fall in price of a product affects the demand for a product only when the demand is price driven, brand being not that important.
Thanks to this nature, Apple can still think of charging more for the iPhone 6. The device is rumored to sport a larger display. The company also plans to incorporate some substantial technical changes in the device as well and because of all this the cost of the device is moving up. Automatically in order to maintain profit margins, the company is thinking of the price hike. If Apple can offer a smartphone that will be perceived by the target audience as the next brand projector, which is very likely to happen, the company might flourish even with the price hike.