Besides Steve Jobs’ well-publicized announcement of Apple’s new cloud and music storage service on Monday’s opening day of Apple’s Worldwide Developers Conference, Apple also announced that their new operating system, Mac OS X 10.7 Lion would be priced for download at $29. What’s interesting about this is that is represents an almost 80% price cut from their previous OS version (Cheetah – priced at $129). The obvious question to ask is why has Apple chosen to price what Steve Jobs called “the world’s most advanced operating system” at such a discount to previous versions? Even if you factor in that this $29 price is for the downloaded version only (distribution and packaging costs eliminated), it’s still a bit of a head-scratcher for me.
Some have speculated that this represents a continuing strategy where Apple is focusing more and more on selling hardware and as a result, willing to under-price their software in order to help drive demand for hardware. I’m not sure I agree with this–especially given the fact that their software represents equally high value for their customers. Others have suggested that this represents a new distribution strategy where the software is now priced appropriately based on lower cost (to Apple) downloads. Again, I disagree – for premium brands (and Apple clearly fits in that category), internal (distribution) costs should have no bearing on the price that customers will pay for the new Lion operation system.
On the other hand, the new pricing strategy does introduce two significant risks to their business model. First, the new $29 price tag represents pretty much a ceiling for all future operating system releases. It will be extremely hard for Apple to raise prices for new OS versions going forward – especially in an industry where there is such a strong bias towards lower prices over time. Even Apple is not immune to this – just look at the downward pricing trend for both iPod and iPhone products in the years following introduction.
The second risk is even more threatening to Apple’s long-term business model. The decision to discount their new operating system by almost 80% from the previous version can only hurt the perceived (high) value of Apple. It’s this perceived value that has allowed Apple to price their products and services at a significant premium to the marketplace. Remember, Apple’s operating system has always been considered superior in many aspects to its one main competitor–Microsoft Windows. Customers have always been willing to pay a premium for new versions of the Mac OS. And one of the reasons for this is that (higher) price has helped to have driven higher perceived value. I have a hard time believing that this phenomenon (of high prices driving increased value) will continue to be the case given the new $29 price.
I’m curious what my readers think. I encourage your comments–especially for those who disagree with my premise. Apple has always been a brand that has fiercely protected their pricing strategy. Again, this one’s a head-scratcher for me – I just don’t get it.
Here’s the takeaway: Pricing is strategic. And for premium brands such as Apple, changes in price can lead to significant changes in things besides just top-line revenue.
Patrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.