Recently, my spouse and I went into the Apple store to upgrade from the iPhone 5 to the iPhone 6. It was fairly routine until our kindly Apple professional informed us that we would have to walk several stores down to AT&T to smooth something over with our contract. While I completed my upgrade at the Apple store, my spouse, who had been all but ready to purchase the new iPhone, instead emerged from AT&T with the new HTC One M9.
While both products are debatably comparable (let’s not get into that particular brawl), this anecdote might suggest that Apple is losing the competitive edge in the smart phone industry, the opposite is true according to a new post in the Wall Street Journal. While the iPhone seems to be the most ubiquitous phone in circulation, that is mere perception—iPhones accounts for less than 20% of industry sales. Android’s sales are impressive. Consumers still utilize the Android platform. Yet Apple dominates the industry when it comes to profitability.
Shira Ovide and Daisuke Wakabayashi explain the incongruence succinctly saying, “The disparity reflects [Apple’s] ability to command much higher prices for its phones. Its rivals mostly use Google Inc.’s Android operating system, making it harder for them to distinguish their offerings, and prompting many to compete by cutting prices. Moreover, Samsung and HTC have made missteps in recent years.”
Figure 1, Inelastic Demand
Figure 2: Elastic Demand
What Do We Learn
Though it’s been a long time since we could consider Apple a “startup,” there’s still some neatly packaged business lessons here. While many startups focus on sales, sales, sales, brand might be equally important—are consumers willing to pay more for your product because it offers something polished, professional, and impressive? What can you do to drive your competitors to lower their prices and thus, profits? Is there something valuable about selling fewer products at a higher price?
When it comes time to price your product, Apple reminds us to review some of the basic principles of Econ 101. Consider: how elastic is your demand curve? An inelastic demand curve will allow you to change your prices without repercussion. Elastic demand curves suggest that raising your prices might hinder your ability to make money. This is the case when you lack a truly loyal customer base. If the pain of switching is too high—either the quality of your product knows no equal or the barrier to switch brings insurmountable cost—then you may have the edge. Ultimately however, this edge will only be maintained by further progress and is not to be enjoyed by kicking your heels up and sucking your customer’s wallets dry. Competitors will eventually innovate around you and make you obsolete if you are stagnant.
If you’re considering restructuring your pricing, survey your market to help predict the results or your re-pricing, up your brand’s game, and discuss with your CFO to decide what can be done to maximize your profits.
We all would love to position ourselves to be the next Apple; even if they lose one sale to Android, they’re still coming out on top.
