"Good marketers don't lead with price." -- Carl Howe |
Apple is a premium brand of computer. Apple doesn't try to compete with PCs directly on price for several reasons that are well known. Cut throat pricing leads to diminished profits and loss of shareholder value. It diminishes the hard won reputation of the Apple brand. Finally, it's too early for Apple to jump on price decreases before it fully understands the the impact of the Jan-Mar quarter sales.
Another reason is that dropping prices for a premium brand has to take into account Apple's experience with the price elasticity of its products. Price elasticity is defined as the response in demand for a product as the price decreases. For example, if Apple were to drop the price of the low end Mac mini from US$599 to, say, $399, would the demand increase so much that the new production rate would lower costs and make more money for Apple? Or would the price reduction simply reduce Apple's earnings? Based on what we've seen from Apple lately, the answer has to be the latter.
I suspect that Apple has some fairly sound computer models that suggest what the impact would be of various price reductions. To put it euphemistically. Tim Cook, Apple's COO, has a sharp pencil and a sharp mind. He knows, to the penny, the bill of materials for each Apple product, what the new cost would be based on an increased order, and how his gross margins would be affected.
Recession Realities
It's a fact of life that people who are concerned about getting laid off tend to avoid premium products. That said, Apple still has to ask itself some hard questions about what the impact of lowering prices would be on the company. Eventually, the U.S. and the rest of the world will climb out of this economic mess. How would customers react in the future to Apple raising prices back to original levels? (I remember the outcry when Apple actually raised memory prices a few years ago. One would think Apple ran over a grandma, on crutches, in the parking lot.)
Does Apple have enough cash assets to weather a 10 percent drop in sales in order to preserve its premium brand for the future? (The answer is yes.) History has shown that Apple appeals to prosperous customers, so will a 9 or 10 percent unemployment rate affect a company that only has 10 percent of the total market share of computers in the U.S.? And 3.5 percent worldwide? Will the current mental state of of American consumers drive sales down dramatically or just a bit. Apple is watching and evaluating.
When observers of the Apple scene suggest that Apple sell a $500 netbook or lower the prices of their notebooks drastically, it seems more like a knee-jerk reaction and wish fulfillment for a "cheaper" Mac than a considered judgment about all the factors I've mentioned above.
Contrasting Apple to Car Companies
A lot of people like to contrast Apple to the American car companies. They wonder what GM or Chrysler would be like if Steve Jobs were the CEO. The reason we're titillated by that prospect is because we intuitively know that the American car companies have operated like Apple under Messrs. Spindler and, to a lesser extent Amelio.
Before Steve Jobs came back to Apple, it was a needy company. It gave away money and computers. It spent lavishly on the Apple Masters program, essentially a bribe to famous people to encourage them to love their Macs and show it. Apple execs stuffed the reseller channel in the vain (and criminal) hope that lots of Macs shipped would substitute for lots of Macs purchased by customers. Many of its products were mediocre and the selection was confusing. (But not my beloved Power Mac 8500!)
If we look at the Detroit auto makers, we see similar things. Rebates essentially bribe customers into buying mediocre products. Also, there are lots of products being built but few great products that cause people to stand in line at oh-dark-thirty to buy them. While Toyota invested heavily in hybrid technology, because they knew that offering cutting edge and responsible products would some day pay off, GM was patting itself on the back over Hummer sales. No one really gets excited about Buicks, but show me someone who doesn't drool over a BMW. That isn't crass thinking, rather, it's just a common sense recognition of the spectrum of quality in products -- an enduring fact.
Basic Human Psychology
Part of the psychology here, by Apple, is that if something is just a little bit out of the buyer's price range, it's desirable. At some point, a dream will come true (or an income tax refund check arrives) and the dream can be fulfilled.
I've handled a few netbooks at Microcenter in Denver, and, believe me, these computers are nothing to drool over. They're work horses for someone who needs a computer to take on travel for surfing, twitter, chat and e-mail. That's it. They do the job nicely.
But when people use low end stuff for a living, its likely that their only available rationalization is how little they spent. Similarly, ask any IT manager about how proud he is about how little money he spent on the computers he bought for his staff. It's a comfortable conceit. Apple knows all about it. These people are not its customers. Should Apple gamble that they should be?
Basically, Apple, as a business, has to make a considered judgment about its own best interests, both now and in the future. Pleas by customers for Apple to give them gifts aren't typically part of the equation. And yet...
Recession Proof?
Apple is definitely not recession proof. The collective consciousness of the country, even though about 91 percent of people are still working, is in the dumpers. Each day brings bad news, and Apple sales will be down this quarter. They may be down for a few quarters. Even so, Apple has the luxury, by virtue of its assets, to avoid a hasty, emotional decision. Peter Oppenheimer, Apple's CFO, has suggested this during the last few earnings reports.
Also, analyst perceptions about how well positioned people are to actually buy Apple products affects their valuation of Apple stock. So despite great products, if fewer people can afford them, then Apple's viability as a company is affected. The question for Apple, however, is deeper. Does lowering prices increase revenues? Does it portend profits that encourage investment? Again, from what we've seen, Apple may not believe that right now.
How far would Apple sales have to drop before Apple needed to take drastic action? What would that action be if Apple sales fell by 50 percent, like the U.S. car companies in February? Macs at 50 percent discounts? Not with gross margins of only 31 percent. On top of that, no business cause and effect is linear, so an X percent drop in sales doesn't instantly dictate an X percent drop in price. It's that elasticity issue again. Finally, can a company with US$28 billion in cash and short term investments weather a more probable 10 or even 20 percent slide in sales for a few quarters without damaging its brand? I think the answer is yes, and I think Apple is betting on just that based on the pricing of the latest iMac, Mac mini and Mac Pro updates.
At least for now.