The Apple Price Ladder That Generates Billions

by George Lovell | | 0 comments

In a study investigating buying behaviour patterns, participants were given two options: Regular or Premium. 80% of people bought the more expensive premium product. When the researchers added a third, cheaper option, 80% went with the regular product - assuming that it was the most fairly priced. Thus, the company lost revenue.

When comparing products, people associate higher prices with superior quality. We can justify paying a little more for the next model up. But what about the next model up after that?

Companies like Apple use a myriad of marketing strategies and tactics to maximise revenue - one of which is the price ladder.

For most people, the entry level iPad will suffice. It will do everything they need and more. The extra bells and whistles that come with the Pro models are not required for checking emails, online shopping, and watching Netflix.

Look at this line chart.

At £370, the iPad 9 64GB is a great value tablet, suitable for the vast majority of users. (We rated this as 80% useful, which is very conservative).

We estimate that 90% of people looking for a tablet will do just fine with the entry-level iPad, but perhaps around 20% of people will buy it.

Remember how people don't like going for the cheapest option? The iPad 9 looks good, but the iPad 10 is surely way better, and what's an extra £130 whilst we're here?

Well according to our (perfect and precise) chart it's 5% more useful, and 35% more expensive.

Then there's storage. What if you run out of storage? You can't add more later. Is 64GB going to be enough to last through future software updates? Apple don't make a 128GB unfortunately - better get the 256GB then. That's £180 more for something you probably won't need. Storage chips are cheap to make, by the way. Huge markup. 

But oh doesn't the iPad Air look stunning... And the iPad Pro - well, who doesn't want to be a professional? I'm a professional. Checking emails will be so much easier on an iPad Pro. Notice how people can rationalise just about anything if it's "work-related". Maybe an iPad Pro will make you more productive and creative, I don't know...

Then there's the increased sense of status we get from owning high-end products from luxury brands. We know that 44% of people who buy luxury items don't have any savings, and 25% are low income. People want to show off their goods - hence Louis Vuitton CEO, Bernard Arnault is the richest person in the world (Net worth $220 billion).

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For each additional pound you spend, the relative value that you receive in exchange decreases. This is the law of diminishing returns.

It's easy to continue climbing the ladder, justifying each small price increment rung by rung, until we're perched at the top of the wall, where the view isn't really all that great.

If we start at the iPad 9, and climb all the way up to the iPad Pro, we spend 270% (£1000) more, to gain, at the most, 18% usefulness.

This is not to say that the iPad Pro is a useless, overpriced product that no rational person should buy. Some people really will benefit from the higher specs. A graphic designer or full-time content creator won't get very far with an entry level iPad. Some people actually do need a tablet that can take good photos. 

If we really push the boat out - opting for the 2TB model with Apple Pencil, Magic Keyboard and AppleCare+, we come to a grand total of £3346. I'd imagine that these are bought exclusively by the same people that fly first class everywhere without checking the price. 

You'll see this good-better-best pricing model everywhere:
  • iPhone SE > iPhone 14 > iPhone 14 Pro
  • Huawei P40 Lite > Huawei P40 > Huawei P40 Pro
  • Essentials > Standard > Premium
  • Silver > Gold > Platinum

Software, tickets, insurance, electronics, appliances, fashion, wine etc. (We all skip the cheapest wine on the menu)

Notice how the middle option is always "Most Popular" or "Recommended". Because only peasants get the cheapest one.

It's great having more options to fit every individuals needs and budget...

But how many times have you walked out of a shop, having spent more than you'd intended, for a premium product which you'll soon realise has no extra utility or value?

Careful on that ladder, Jim.

Thanks for reading!

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