Apple's winning strategy: Lower prices

Once known as a company that sold niche products at high prices, Apple has since been able to match or beat the competition on cost, thus winning over a larger slice of the consumer market, according to a New York Times analysis.

In the past, Apple had always been seen as a company selling niche, high-quality products at high prices. In recent years, however, it's captured business by keeping costs more competitive.

The company's lower price strategy applies not just to its iPhone and iPad products, but also to the MacBook Air--all have been able to meet or beat the prices offered by some of its rivals, according to an analysis in yesterday's New York Times. But Apple also keeps its own internal costs down by locking in prices on huge amounts of hardware components through multi-year deals with manufacturers.

Looking at the iPhone 4S, Apple sells the entry level 16 gigabyte model for $199. That price comes in lower than some of the popular Android handsets, such as Motorola's Droid Bionic ($299 through Verizon Wireless), though as CNET's review points out, the cost drops to $199 if you shell out $50 for a data plan.

The Times also noted that the Samsung Galaxy S II sells through T-Mobile for $230, though it's available through AT&T for $199 , while the HTC Amaze 4G costs $260 through T-Mobile, but it can also be had from such retailers at Amazon for $199.

However, smartphone consumers who don't want to choose an expensive data plan, switch carriers, or check Amazon for better deals could easily see the iPhone as the best option based in part on price.

Then there's the iPad.

The first crop of Android tablets that hit the market failed to come close to the iPad's entry-level price of $499, with the Times specifically pointing to the Motorola Xoom, which was priced at $800 off contract. The failure of Android tablet makers to compete on price or quality gave Apple the opportunity to corner the market.

Now, of course, rival tablet makers have finally caught on and are quickly introducing models that match or beat the iPad on price. Amazon may present the biggest challenge when it launches its $199 Kindle Fire next month. But even though the iPad's share of the tablet market has dipped over the past several months, Apple is expected to hang on to its leading share at least over the next several years.

Even Apple's traditionally high-priced laptops have seen their prices chopped. In July, the company tweaked its MacBook Air and cut the entry-level prices to $999 for the 11-inch model and $1,299 for the 13-inch edition.

Finally, Apple's own costs are kept in check, noted the Times, as the company uses its hefty war chest to stock up on large quantities of flash memory and other components. This puts its rivals in a difficult position as they then have to pay higher prices for the small amount of memory left in the marketplace.

Yankee Group analyst Carl Howe told CNET that the pricing strategy shows current CEO Tim Cook's hand at work, as he had been running the supply chain for 13 years.

"This is not a new thing," Howe said. "They started this process in 2005 when they prepaid $1.25 billion for flash memory. It was an unheard of deal at the time that they would pay in advance for access to a large amount of flash."

Howe added that it's the type of strategy that a company like Apple, which has a ten-year horizon, can pull off. But companies operating quarter to quarter "don't have a chance."

 

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