How Apple Runs the Industry.
It goes without saying that profits are the key determinant and the very foundation of the success of any business endeavour. As such, product pricing becomes a complicated decision. Pricing products for low-profit margins drive demand upward and increase profits due to the volume of sale. At the same time, pricing products with wide profit margins causes the demand for them to fall but lead to accretion of profits due to high profit per unit sold. Thus, a company can have either wide profit margins or high sales volume to maximise profits. But what do we call a company who manages to attain an extremely paradoxical goal in business-wide profit margins coupled with high sales volume? We call that company Apple.
Pricing a low-cost product for a premium that is way too much and then selling it in humongous quantities is how Apple has managed to become the most profitable company of all time. Apple has a universe of its own and plays by its own set of rules. It has redefined the limits of what a company can be and has transcended horizons. It exercises influence over its consumers, dominance over its competitors and even sways politics to its advantage. It has developed into a religion with the most faithful of all devotees (read, fanboys). It has even grown to the stature of a powerful country with a valuation that is greater than the GDP of over 90% of the world’s countries and a sea of cash reserves which is roughly equal to the GDP of Denmark.
The Cupertino company has only grown manifold over the past couple of decades, especially with the introduction of the 1st iPhone in 2007. Since then, it has successfully sold over 1.2 billion iPhones! In fact, by the time you started reading the article, another 395 iPhones have been sold!
Sky’s the limit? Not for Apple. But how has this company managed to attain success (and profits) at such an unprecedented and outlandish scale? How has it managed to secure the aforesaid paradoxical goal? Let’s find out.
Apple cannot be, and should not be, perceived as a tech company when it is, in essence, a luxury brand. Apple and everything about Apple bespeaks luxury – its products, its retail outlets, its advertisements, and even the packaging its products come in – they are all so simplistically elegant. It is this very luxury, before anything else, that differentiates Apple from any other technological corporate giant and makes it the monarch of the smartphone industry. While its direct competitors in the smartphone market – Google and Samsung – may produce equally great products and with similar prices, they can never emanate the luxury that Apple commands.
The luxury quotient enables Apple to price its products expensively while paradoxically, the high price in itself, naturally makes the brand luxurious. People characteristically have an inherent tendency to do (and buy) things which make them feel superior and satiate their inner urge to climb up the social ladder and belong to the privileged class of the elites. No wonder the simplest way to belong to the aforementioned strata of society is to own an iPhone.
Consequently, an iPhone not only reflects the prosperity and social superiority of an individual but also indicates the economic standard of the neighbourhood as well. iPhones are commonplace in an affluent neighbourhood like Manhattan while Android is the norm in a place like New Jersey where the average income plummets. Either way round, you have got to have an iPhone in the Manhattans to keep up with the status quo while you need to have an iPhone in the New Jerseys to satisfy your psychological instinct. No matter the social and economic conditions, the answer always is iOS.
Another factor associated with luxury is scarcity. Luxurious products are scarce and consequently possessing them makes one stand out of the multitude. We all know about the water-diamond paradox, right? Water, essential for our very existence and yet does not command a price. And diamond – with practically no use whatsoever, and yet out of the reach of the majority on account of its scarcity. How does Apple fit into all of this given that Apple does not squeeze its production to make its iPhones opulent? Well, the scarcity here has its origin in the demand side of things. Only 1% of the world population can rationally afford an iPhone. The strong drive within to belong to the 1% makes all non-rational buyers turn a blind eye to the signals of the mind such as – “You can’t afford this” or “This really makes no sense.” Hence, more people end up buying an iPhone than those who essentially can.
While Apple commands a market share of 15.6% of the global smartphone market, it drives away 86% of the industry’s profits!
When it comes to buying luxury goods, the process is as significant as the product itself. You do not pay simply to procure the product but to savour the sheer experience of purchase. Apple threw open the doors of its first retail store to the public in 2001, at a time when e-commerce was gaining ground and seemed to be the future of all consumer purchases. What seemed to be an unwise move proved, and continues to prove, to be a game-changing move. Apple Stores redefined retail marketing. This is because Apple stores were not like any other retail store. They were glitzy, with glass walls and milk white interiors, with the Macintosh in the appearance of a monarch on his throne and elegantly dressed executives speaking in hushed tones. The same holds true today when the latest set of iPhones are displayed with such sumptuousness that they are bound to arrest the attention of each passerby, inviting him inside and driving the urge within to trespass rationale and procure this Holy Grail. The unfettered experience of purchasing an iPhone is unmatched. So to speak, one shells out a thousand dollars for the experience of shelling out the thousand dollars.
There is another reason why retail outreach continues to be one of the reasons behind Apple’s dominance. Apple has hitherto expanded to 24 countries with 504 strategically positioned outlets. This brick and mortar wall that the company has established over the years has kept competition away, as its adversaries don’t have a ladder big enough to climb over to pose a threat. Consider this – all the Apple Stores witness a cumulative footfall of a million people daily! That is 365 million assured visitors in a year, in the retail space alone! The numbers speak for themselves. No other company has managed to woo and invite an audience of this colossal a magnitude.
This aside, the 4th P of marketing – Promotion, has had to do a lot towards Apple’s continued dominance. Firstly, the luxury quotient creeps its way into advertisements as well, showcasing the latest iPhone in all its glory, from different angles, with a dark background and catchy music. The iPhone is presented as the ultimate showstopper. Such effective and impactful advertising again appeals to our psychological tendency to be and feel superior.
Secondly, Apple’s dominance over its competitors can be gauged by the fact that rivals, instead of advertising their own products, simply aim to denigrate Apple in their advertisements. Samsung recently came out with an entire ad series by the name of Ingenious wherein each ad took a dig at Apple and its iPhones. While the ads may be hilarious, sheer denigration of a rival product without promotion of your own product indicates your sense of insecurity and the dominance the other has over you. I personally believe that such ads can never be effective in swaying users away from Apple. This is because Apple fanboys are not consumers of a company but devotees of a religion; the disparagement of their religion induces them to protect it, and they end up being more loyal to their own religion than they were before.
Thirdly (and lastly), advertisement or no advertisement, Apple manages to capture newspaper headlines, social media posts, and public discourse. It manages to garner gargantuan amounts of publicity. From being applauded for its efforts towards sustainable energy to being under the scanner for tax evasion, Apple seems to be everywhere and somehow or the other, the word about Apple keeps spreading like wildfire. No publicity is bad publicity, right?
The surplus that Apple charges are not entirely because of the luxury factor. Luxury product aside, an Apple product will inherently be priced higher than a similar product of another company. This is on account of the massive amounts Apple expends on bringing out new technologies which propel the entire smartphone industry. Just imagine the number of experiments that must have failed before coming up with a successful feature and the cumulative amount that would have been spent on all of these failed experiments. In fact, Apple expended a total of $10.39 billion on R&D in 2016! Apple has to naturally cover such costs and this it does with premium pricing. To add to this, it is such features that other companies then incorporate (read, blatantly copy) in their own devices without spending an ounce on any sort of R&D. A major chunk of mid-range companies follow a simple policy, courtesy Apple – Integrating the latest iPhone feature (perhaps the Face ID or the notch) and boom – guaranteed sales! Apple thus streamlines the global smartphone industry which, to a certain extent, justifies the price tag on its products.
On the whole, this article primarily serves to delve into and analyse the high profit margin – high sales volume paradox, which has been so effectively attained by Apple. The luxury quotient associated with Apple, its products, its advertisements, and its retail outlets, the staunch following it commands, the publicity it garners, coupled with great tech makes Apple’s case for the most successful company. The article does not intend to question consumers decision to buy an iPhone. Rather it aims to provide an insight into behavioral economics and how a company can scale heights if it manages to make itself and its products THE ONE each consumer is in pursuit of.
So, what will be your rationale behind buying your next iPhone?
By Rishav Jalan.