Back in 2007 when first iPhone was launched by Apple, it was first of its kind, Apple had the first mover’s advantage with smartphones. What made iPhone a hit was not just the fact that the consumer based never had such a product before, but what the customers could do with it. The apps made the smartphone more than a phone, it was like a mini multimedia device with the capability of browsing the internet, playing music and watching videos. After that lot of other manufacturer brought smartphones to the market but Apple still enjoys a premium.
We are going to focus on iPhone 7. According to ZDNet Apple spends around $219.80 on components to make iPhone 7 32 GB. But please keep in mind, Apple invested money on R&D to come up with the product and of course there is an assembling cost. And Apple retails the product for $649. So we can see Apple enjoys a premium margin of more than 100%. And this is a good example where customer perceived value is greater than the price and the price is way greater than the cost.
The target segment was the Apple customers in North America and Europe who were already using Apple products, but not only those but any tech-savvy mobile phone user who needs the experience of the great product quality and ease of use Apple offers. In this case, Apple’s customer information was critical because it is an expensive product. And Apple cannot target just any market, because the customers might not have purchasing power. So their target markets are where people can afford an iPhone. And then the customer who is already using Apple products are first adopters. Because they are familiar with Apple products, they are loyal to the brand. The brand Apple has another point of attraction because, not everyone can afford an iPhone, because of its premium pricing.
Apple can use the same information about its customer base and use it to price the products. So every year they bring in new products adding some new features, and their loyal customer base is usually the first to buy the product mostly because of the new offering in that product. And the loyal fan base usually wants to be the first one to own the product, because there is a prestige involved. Some actually wait for the price to go down, although they appreciate the quality of Apple product along with the ease of use they know the prices drop pretty quickly so they wait it out and purchase after the price drop. But the major reason is the inflated perceived price, and below are few reasons behind that –
- Apple provides an ecosystem, with MacBook, iTunes, iPod, and iPhone, so the user of all these products find it easy to share, store digital information
- The quality of hardware and the ease of use is of course great
- The after sales service is best in class
- You get iPhone with any major carrier, so the phone is widely available
- Apple has an investment in advertising and established itself as a distinct brand
Apple has developed such a loyal customer base and brand value that they can bring $1000 iPhone, but it was not a hit. Personally, I think the customer base does not perceive an iPhone to be so expensive.
My next brand is one that I personally use and especially a fan of – Nike. When Phil Knight started the company European running shoes used to dominate American market. When Nike started it focused on runners as target market segment. And Nike was committed to providing better running shoes those were lighter and cheaper than European contenders. Now Nike sells pretty expensive brands like Air, Jordan etc. those are premium shoes. According to solecollector.com Nike spends $28.50 on a $100 shoe that they sell on the market(Dunne, 2014). Nike can charge this premium because of few reasons, and it is not just quality. Let us discuss those.
- Nike is very much quality-focused brand, they always deliver great quality products
- Brand building was done by brand promotion by great athletes like John McEnroe, Michel Jordan, Tiger Woods all prominent figures endorsed the brand over the years.
- Nike is called a technology company at the time, because of their innovations with products, and Nike has a great online presence too
Nike has a loyal customer base, mainly runners and fitness enthusiast. The perceived value of Nike products is more than they price them. Although there are millions of other running shoes those are cheaper, serious runners and fitness enthusiasts do not compromise with quality to avoid health implications. And Nike has the brand reputation they go for despite the premium price Nike charges.
Kingsley, A (September, 2016). Here’s how much the iPhone 7 costs to make. Retrieved from http://www.zdnet.com/article/heres-how-much-the-iphone-7-costs-to-make/