Introduction
Typical laws of demand and supply would indicate to a company that charges a higher price for the products is justified as long as the market can tolerate it. This strategy becomes more convincing especially when a company is introducing new and exceptional products in the market that other players do not have (Daly, 2002, p.61). However, such a strategy becomes almost unproductive when other players swayed and motivated by the high returns as well as low entry barriers infiltrate the market, thereby reducing the market share for the new products.
In determining the prices for particular products, numerous strategic considerations are evaluated that include: customer perception of value, the elasticity of demand, the cost structure of the product, the effect of volume on cost, the expected learning curve effects, current competition, the potential for future competition, features and usefulness of substitutes of the products, the pricing of substitutes and last but not least, the legal and ethical aspects for the product (Daly, 2002, p.61). Furthermore, it is important to note that pricing strategies are always enacted based on a company’s stated goals and objectives. This goal and objectives may include the aim to maintain a price leadership position, discourage competition, maximize short-term and long-term profits, increase and stabilize the market share, maintain channel loyalty and enhance company or product image (Daly, 2002). In a broader view, in determining prices for various products, situation conditions become vital.
Apple Inc. and iPad
The iPad is a kind of tablet computer that is part of Apple’s digital revolution; it has a flat-screen that usually uses a stylus, digital pen, or fingertip as an input appliance, instead of the keyboard or mouse. Largely, the gadget has been marketed as utilization of media that has features like published materials, music, and internet, all of which have been a common interest of consumers. Moreover, iPads have been successfully received in the market if the initial sales after launch are anything to go by.
Pricing iPads
Apple, upon introducing the iPads in the market, employed the market skimming strategy. This strategy is frequently used when a company is introducing a new, unique product in the market. By market skimming principles, Apple Inc. set the price for the products relatively high at $499 (Parrack, 2010). Convinced by the advanced features the iPads had and the enthusiasm of consumers, the company was convinced purchases would be high. This conviction has been Apple’s long-time pricing strategy. For example, Parrack claims that this overpricing strategy used by Apple Inc. has been a way of portraying the company’s products as superior and hence designed for elite people (Parrack, 2010).
Sherman, writing about Apple Inc. observed that the company was employing the limited quantity game where it creates an artificial shortage of iPads in its retail stores thereby creating a sense of urgency among the consumers (Sherman, 2010). Such a strategy for instance had resulted in Apple Inc. making a sale of 20, 000 iPads in an hour (Sherman, 2010). With such a strategy, the company can price its iPads at a high price without experiencing reduced sales, for instance, consumers become less concerned with the price of the product and put much emphasis on acquiring the product instead.
Apple Inc. has largely used the sequential skimming strategy in pricing the iPads, more so about production capacity. Sometimes the method has been combined with market segmentation strategy, for example, during back-to-school promotion, Apple has drastically reduced its price on iPads to levels such as $ 399 (GLG Expert Contributor). This again has occurred during the Christmas season. As a result, competing products have been forced to enter the market with low-cost designed products and this has locked some players out of the market (GLG Expert Contributor, 2010).
Analyzing the market trend for Apple Inc. products, Salil Sethi suggested that Apple could benefit by adopting the product-based price segmentation as a strategy to pricing iPads (Sethi, 2010). Here, the author looks at the success of iPads where they are sold at different prices in different market platforms and as a result, the company has been able to make big profits. Therefore, it becomes evident that Apple Inc. has successfully used this pricing strategy to enhance the iPads market.
Amazon and Kindle
Kindle is a software and hardware display forum that was created by Amazon Group. It has been involved in providing and displaying e-books and other related digital media. There are specific Kindle software applications that are supported by Kindle, such as “Windows, iOS, Blackberry, Mac OS X and the Android” (Caddell, N.d). In almost all instances, Kindle hardware normally functions through wireless mode and requires no rental payments for the signals on connectivity.
Pricing Kindle
Most internet products have a preferred penetration pricing strategy whereby a lower price is charged on commodities than the variable with intend to grow the volumes (Caddell, N.d). But for Amazon, it has tended to prefer the skim strategy of pricing for its Kindle products. Here, Amazon is keen on benefiting and establishing a market among the less but heavy readers who in many instances are insensitive to prices. Moreover, this group of readers tends to buy a lot of e-books to fill their Kindles (Caddell, N.d). From this, Amazon is viewed to be employing marketing and pricing strategy that usually postulate that, it is wise to design and make a product that will only be accessible to a limited, price-insensitive group of consumers and put a price that reflects much of the value created (Caddell, N.d).
In its new threats from Apple Inc. The company, Amazon faces stiff competition from Apple’s iPad. As a result, Paczkowski has suggested that for Kindle to sustain the competition and enhance its growth, a price reduction strategy is inevitable (Paczkowski, 2010); for example, the author is content that Kindle would still perform better if it reduced its price from $259 to $149 which would affordable to consumers while at the same time above the manufacturing costs (Paczkowski, 2010). At the same, some consumers have been appalled by the high price of Amazon on Kindle. Although the intention is for the limited market that is largely insensitive to price, the entrance of iPads should send alarm bells to the company and know that things may not be the same and therefore there is a need to review its pricing strategy.
Observing on how Apple Inc. was in dilemma on how to price e-books on its iPads, Thaler and Sunstein noted that, Amazon since introducing Kindle had adopted a pricing strategy that has been described as a reference transaction where Amazon had put the Kindle price at $9.99 for a long time without changing (Thaler and Sunstein, 2010). The authors observe that although this was a money loser price for Amazon, it did not hurt the company since creating e-books was relatively cheap if not free. In the future, the reference transactions have the likelihood to change, and as a result, the authors point out that when this happens the consumer reception is likely to be negative. Therefore, they propose that it is profitable and beneficial to have two prices when intending to sell a product. In the case of Amazon’s Kindle, they are convinced that the company would have adopted the first price where charges are made on products that are popular and profitable (skim marketing).
The discount price, which Amazon capitalized on in the first place, is seen as more flexible such that, having and removing it is less damaging than when increasing the price of the same product. For instance, with the removal of discounts, the consumers are still in a position to buy the product and are highly, likely to reduce the quantity of product bought if the price goes up. Therefore analysis this aspect of discount and reference transaction, the authors summarized by stating that, Amazon had used this price strategy to keep off Apple Inc. and that Apple Inc. was finding it difficult in formulating price strategy for books in iPads (Thaler and Sunstein, 2010).
Conclusion
Kindle and iPads have been the design of two major companies and their presence in the market is undoubtedly throat-stiffing for each one of them. Their price strategies are likely to change in the long run to accommodate the growing consumer market. Although Amazon’s conviction for its Kindle has been that consumers are insensitive to price, the entry of Apple Inc. iPad with advanced features for e-books will automatically send Amazon to the drawing board. But the companies will have to put other critical factors into consideration in coming up with a particular price strategy.
References
- Caddell, J. (N.d). Kindle helps illuminate the skim-pricing strategy in tech. Online Article.
- Daly, J. L. (2002). Pricing for profitability: activity-based pricing for competitive advantage. NY, John Willey and Sons. Web.
- GLG Expert Contributor. (2010). iPad likely to force Microsoft to lower royalties, Google to change strategy. Gerson Lehrman Group.
- Paczkowski, J. (2010). Kindles Killer App: A price cut. Digital Daily. Web.
- Parrack, D. (2010). Why the iPad is still part of Apple’s overpricing strategy, even at $499. Technology News. Web.
- Sethi, S. (2010). Apple’s pricing strategy for iPads applications. Online Article.
- Sherman, E. (2010). Apple Limits iPad Quantities to Boost Consumer Demand and sells 25, 000 an Hour. BNET News.
- Thaler, R. H. and Sunset, C. R. (2010). If Amazon could re-run history, here’s is how it could have handled pricing best-selling e-books. Online Article.