Understanding Apple's positioning: Part 2 - the strategic trade-off

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Jun
05

By: switchtoamac at: 8:00 AM on June 5, 2009 | Comments (2)

This is the second part in the series that analyzes the Apple product strategy with a specific emphasis on the Macintosh.  In the first part, I put forth the arguments that Apple is a premium brand that targets less price sensitive customers and that Apple's needs-based positioning is a byproduct of company's internal activities.  In this post I argue that Apple has conducted a trade-off in order to protect the brand's premium position.
The strategic trade-off
The criticism to reduce prices have in large part been ignored by Apple.  Why hasn't Apple lowered Mac prices?  In strategic terms, Apple has conducted a trade-off.  Continue to appeal to customers that have a willingness to pay (WTP) instead of appealing to a wide range of customer segments that have varying price sensitivities.  A larger customer base would not only undermine the company's strategic position but it would also be misaligned with the company's internal activities.  At a basic level of analysis,  a price reduction will set a precedent that will not be easily reversed.  More damaging however is the potential for brand erosion and customer confusion about the brand.  Then there's the confusion that is likely to arise amongst Apple's employees.  Should employees approach product design, features, and customer service in an effort to appeal to price sensitive customers or should employees and product teams allow their core competencies to drive product innovation and service?  We saw what happened when Apple lowered the price of the first-generation iPhone a few months after it's release.  There was an uproar from early adopters which caused Apple CEO Steve Jobs to offer a $100 Apple store credit to calm the storm.

Digging deeper into the strategy, the trade-off protects Apple's unique position.  Competitors have two main ways to imitate an incumbent.  A competitor can (1) reposition itself or (2) straddle, an approach that attempts to match the incumbent's position while maintaining its existing position.  By maintaining its price premium at the expense of unit volume, Apple has created an imitation barrier that competitors cannot easily cross.  PC competitors cannot realistically enter Apple's space by transforming themselves into a premium brand without alienating or pricing out existing customers.  If a competitor decided to reposition or straddle it would have to compete with Apple's decades long premium brand equity.  Thus, PC vendors have two transformational issues working against them, time and cost.  Apple's competitors will not be able to transform their brand image overnight.  Any such effort will take considerable amount of time on numerous dimensions ranging from product design to marketing.  This leads to the second issue, cost.  Any transformation undertaken by a competitor will cost tens or perhaps hundreds of millions of dollars in a sustained re-branding and advertising campaign.  In today's marketplace, a cost of this magnitude is not feasible.  From a trade-off perspective, Apple has systematically analyzed what not to do; attempt to compete at lower price points.

In part 3 the series (to be posted tomorrow), we'll analyze the entry barriers competitors must cross in order to compete with Apple.

Other Articles in the Series

2 Reader Comments

"We saw what happened when Apple lowered the price of the first-generation iPhone a few months after it's release. There was an uproar from early adopters which caused Apple CEO Steve Jobs to offer a $100 Apple store credit to calm the storm."

I just had a thought which I have not read anywhere since that ^^^^^ .

What if Apple had a deal/bet with ATT that the numbers had to be REALLY GREAT and then ATT would have to cough up a big subsidy. That would explain how/why that happened. A couple of months for the numbers to come in and stabilize, then bing, here's a big check to Apple.

I agree that Apple should not lower its price.

First, because sales have not dropped sufficiently to warrant it.

Next, It sets a bad precedent to copy Wintel.

And finally, Apple does not know what the future will bring. I suspect that the extreme budget deficits and bailout bills will produce price inflation by the end of the year. Therefore, Apple might have to increase its prices if its cost increase due to currency fluctuations, taxes or increased regulations.

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