Apply managerial economics' pricing strategy concepts/tools to review Apple's pricing strategies. See attached 4 questions (pdf). Thanks.
In the mid-to-late 1980s both Apple and other firms like Compaq and IBM were using high profit margin, premium-pricing strategies. In the 1990s most computer firms reversed this strategy by slashing prices and reducing margins, although Apple did so reluctantly and was a laggard.
In the past few years most PC makers have been offering PCs for under $1,000. While Apple had traditionally been "'Apple priced', rather than 'affordably priced'", their newest entry, the iMac series, while still slightly premium priced, is more affordable. The same may be said of the iPod - slight premium, but affordable. Note that innovative differentiated products can support higher margins.
An initial target for Apple in the 1980s was a 50% gross margin, evidently across their entire product line. Apparently this 50% gross margin target was used in the early 1990s as well. Most times the true elasticity of demand is not known precisely, but by trial-and-error one can arrive at a good approximation of the elasticity of demand. Apple seemed to ignore completely the demand they faced in setting the 50% gross margin.
Comment on the price strategy used by Apple. Was the use of a 50% gross margin a good strategy? Is holding gross margins above 50% to pay for R & D a good idea? Should the two be tied together in any way? Was Apple "thinking strategically" when it set prices? "Strategic thinking is the art of outdoing an adversary, knowing that the adversary is trying to do the same to you." Was Apple concerned about its adversary and/or aware of their strategies? Do lower margins mean lower profits? When are high margins justified? Were high margins ever justified for Apple? Were the strategic effects of Apple's pricing strategy beneficial (rivals become less aggressive in pricing) or negative (rivals become more aggressive in pricing)?
Price: The price is what the customer pays. It includes direct and indirect costs as well as opportunity costs. (Hutchens, S. 1998). Pricing may impact the bottom-line and top line in a significant manner. Hence a higher or lower price can dramatically change both margins and sales volume. The various factors which will affect the company's pricing policy are the costs, competitors, positioning, strategy, government ...