Business 101 Cringley on Steve Jobs and iPhone pricing

alfredo

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Fri Sep-07-07 01:29 PM
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Business 101 Cringley on Steve Jobs and iPhone pricing

I admire Jobs for his vision and his business savvy. I don't know if I would like him as a person.

http://www.pbs.org/cringely/pulpit/2007/pulpit_20070906_002891.html

This week�s iPhone pricing story, in which Apple punished its most loyal users by dropping the price of an 8-gig iPhone from $599 to $399 less than three months after the product�s introduction, is classic Steve Jobs. It wasn�t an accident. It wasn�t a thoughtless mistake. It was a calculated and tightly scripted exercise in marketing and ego gratification. In the mind of Steve Jobs the entire incident had no downside, none at all, which is yet another reason why he is not like you or me.

Let�s deconstruct the incident. Apple announced a variety of new and kinda-new iPods dominated by the iPod Touch (iPhone minus the phone) and an iPod Nano with video (great for watching miniseries). At the very end of the presentation, Jobs announced the iPhone price cut. Why did he wait until the very end? Because he knew the news would be disruptive and might have obscured his presentation of the new products. He KNEW there was going to be controversy. So much for the �Steve is simply out of touch with the world� theory.

So why did he do it? Why did he cut the price? I have no inside information here, but it seems pretty obvious to me: Apple introduced the iPhone at $599 to milk the early adopters and somewhat limit demand then dropped the price to $399 (the REAL price) to stimulate demand now that the product is a critical success and relatively bug-free. At least 500,000 iPhones went out at the old price, which means Apple made $100 million in extra profit.

Had nobody complained, Apple would have left it at that. But Jobs expected complaints and had an answer waiting � the $100 Apple store credit. This was no knee-jerk reaction, either. It was already there just waiting if needed. Apple keeps an undeserved $50 million and customers get $50 million back. Or do they? Some customers will never use their store credit. Those who do use it will nearly all buy something that costs more than $100. And, most importantly, those who bought their iPhones at an AT&T store will have to make what might be their first of many visits to an Apple Store. That is alone worth the $50 per customer this escapade will eventually cost Apple, taking into account unused credits and Apple Store wholesale costs.

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If they hadn't priced it high at first, there would have been no way they could have kept up with demand. And yes, he did exploit those who wanted to get their hands on the new iPhone. To some being first is worth the $100 they dropped. That's a dinner for two at a top rated restaurant or a day at the ball park. Chump change. And yes, the ones that use the $100 credit will buy more. It's worth the money to Apple just to get them in the front door.