Sunday, September 30, 2007

A slippery slope

So many companies have learned the hard way that once you start down the slippery slope of price cuts it is very hard to wean consumers off the drug. The auto manufacturers know this all too well. We all know that if we wait just a bit longer the car we want will come handsomely equipped with a $3,000 cash back or 0% APR.

This week Macy's admitted its attempt to wean customers off the drug had backfired. The New York Times reported that Macy's tried to pull back on coupons and discounts after the company consolidated over 11 department store chains around the country under the Macy's brand. Macy's CEO Terry Lundgren admitted that abruptly curtailing discounts like coupons was Macy's biggest misstep, contributing to four consecutive months of falling store sales this spring. Macy's now pledges to offer plenty of coupons in time for the upcoming holiday shopping season.

Which brings me to Apple. For years Apple was a master of competing on price without overtly discounting. Each fall, to stoke demand for MacBooks among college students, Apple offers a free iPod with every MacBook. Classic strategy -- add value, don't discount. After the iPod first appeared Apple adeptly covered a range of price points by continuously introducing new models at lower prices (Mini, Nano) while simultaneously offering more expensive models with more content (video). This strategy left little room for any competitor to steal share with a lower price.

Which is why I'm still stunned at Apple's decision to cut $200 off the price of the iPhone. Apple sent a message that its most loyal early adopters are being overcharged and that, in the future, we should simply wait a couple of months before buying Apple's next big thing. Apple, to its credit, was quick to respond with Steve's open letter and rebate offer. But the debate in the blogoshpere is still raging. (My iPhone was the butt of jokes at a recent dinner party. When was the last time anyone was ever ridiculed for buying an Apple product?) I, for one, hope Apple doesn't become just another consumer electronics company that launches, discounts and abandons. I love the brand and hope it has learned from this mistake.

3 comments:

scott anderson said...

Indeed...this move by apple has created a very interesting conversation. More than a handful of colleagues have told me (with a straight face) they are convinced the price cut - and subsequent open letter and rebate for early adopters - was a well executed PR initiative (i.e., all the actions and timing planned well in advance). Hmmm.

Diggin' this blog David. Looking forward to your future posts.

David Murphy said...

I hope that isn't true. If it is true then Apple is beginning to behave in a very un-Apple way. Pre-planned price cuts? Locking customers' phones? Apple exhorts us to "think different" but is beginning to behave just like every other big corporation. (PS: I agree with Apple's decision to lock the phones of customers who hacked it to bypass AT&T -- Apple's contractual partner. But locking phones of those customers who added cool content?? Isn't that the creativity that Apple preaches? Apple is supposed to be the person throwing the hammer at the screen, not the dude in the screen.

mahuti said...

Apple is consistently lambasted for under producing product. In this case, they knew there would be a shortage of product and inflated the price well above where you'd expect, based on the raw costs of components & an average of R&D for the device. At the original price they were making above 50 points on the iPhone, which is a bit unusual for a higher priced electronic device. The artificial price inflation on the front end reduced demand and showed Wall Street that they could comfortably meet demand. I DO think the disccount was preplotted, but I'm sure they would not have offered a credit had there been no backlash. Turns out there was, they offered a credit, and still made a tidy profit on the initial "nerd tax" (no offense, I own an iPhone too.) I don't think that Apple is succumbing to discountomania, I think they made some very shrewd economic decisions, which had mixed results. Ultimately their stock made barely a wobble through the whole thing and is now trading at record levels. Looks like they have the show pretty well figured out.