Thank heaven for Apple's (upward) pricing pressure

Pricing creates perceived value, something that Apple does exceptionally well and open source does exceptionally poorly.

As the economy has stalled, prices have fallen to match the increasingly frugal moods of consumers and businesses. Only Apple seems largely impervious to gravity, consistently scoring solid earnings and rising market share, all while keeping prices high.

You don't have to be an Apple fanboy to be grateful for Apple luxury. We all benefit from it, even if we've never bought a single Apple product.

iPad event
Apple introduced the iPad in San Francisco last week. James Martin/CNET

In economics, "anchoring" refers to a pricing strategy whereby a vendor sets a product's price high to create perceived value ("What a deal!") for other, lower-priced products, or for the same product when it is discounted at a later date.

Or, as BusinessWeek writes, it's a "high-priced product that may never sell but 'makes everything else look affordable by comparison.'"

Apple has done this exceptionally well with the iPod, then iPhone, and now with the iPad.

But Apple isn't the only beneficiary of its upwardly mobile pricing power. The entire industry benefits by having prices established higher than other vendors could muster.

Microsoft struggles to anchor high, as its PC manufacturer partners have discovered lately. (Microsoft has been able to maintain its prices for Windows 7 but its partners have seen their average prices erode considerably.)

At the opposite end of the pricing spectrum is open source which, as Gartner notes, "provides some downward price pressure on any market where its introduction has taken place."

This is good for customers, yes, but it's not necessarily good for vendors, and in the medium- to long-term that's a very bad thing. (For an excellent, and related, discussion, see Kevin Carson's "Abundance Creates Utility But Destroys Exchange Value" article.)

Open source anchors, but it anchors low. Perhaps too low. $0.00.

Ask any open-source vendor who its top competitor is and they will each (including Red Hat) tell you "ourselves." What they mean is that they compete against free adoption of their own technology more than they do against an Oracle or Informatica or Microsoft.

Apple, however, gives open-source vendors, as well as everyone else, some breathing room, especially in the personal computer and mobile markets where it competes. Windows- and Linux-based PCs can be $1,000, given that a similarly-specced Mac will be $2,000. (I'm a longtime Mac user who has been shopping for Linux-based PCs lately, and the price differential is staggering.)

Google's Nexus One could be significantly cheaper than the iPhone, though it's not, perhaps because Google, too, wants to anchor high. If a consumer is choosing between the two, she might erroneously think the iPhone is dramatically better if its price tag is higher.

Open-source vendors need better anchoring strategies, and they could learn a lot from Red Hat.

Red Hat doesn't cannibalize itself with low pricing anchors: it only sells Red Hat Enterprise Linux (RHEL), or other branded enterprise products like JBoss, and these are priced at a relatively high anchor point. Yes, Red Hat has Fedora and other community projects to attempt to anchor down price expectations for its competitors (and to generate community, among other things), but the company very shrewdly anchors RHEL pricing high to create perceived value.

We think "you get what you pay for" but really "you pay for what you think you're getting." A high price anchor connotes quality, something that Apple (and Red Hat) have done very well. Microsoft doesn't do this nearly as well, which is why we should be grateful to Apple for pricing high, thereby making room for the rest of us to price just a bit lower.

Now if only we could get Apple to enter more markets....

About the author

    Matt Asay is chief operating officer at Canonical, the company behind the Ubuntu Linux operating system. Prior to Canonical, Matt was general manager of the Americas division and vice president of business development at Alfresco, an open-source applications company. Matt brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. He is a member of the CNET Blog Network and is not an employee of CNET. You can follow Matt on Twitter @mjasay.

     

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