Pricing of iPhone

Group 7
Tzu-Ling Huang Wei-Wei Lee

Jun Kyo Lee Larry Liu

Yong Ho Park

Outline
Background of Apple Corp. Breakthrough of iPod Competitor Analysis

Customer Value Analysis

Conjoint Analysis

Cost Analysis
Other Considerations Conclusion

Background of Apple
Funded in 1976 Macintosh in 1984

Nowadays

Lisa in 1983

Worldwide annual sales of $19.3 billions in 2006 170 retail stores and over 20,000 employees Apple Computer Inc. Apple Inc. Thinking Differently!

Breakthrough of iPod
First launched in 2001. 48% of annual earnings was made from iPod sales. Total unit sold by Jan. 2007: 88,701,000 units. 70% of market share in US. Best selling digital music player in US by 2004.

iPod Generations

Competitor Analysis

Competitor Analysis
--- Current Smartphone Market
Vendor Nokia Blackberry Panasonic Motorola NEC Others Total 2006 Shipments 38.7 6.0 5.0 4.9 4.8 21.1 80.5

2006 2005 Market Shipments Share 48.1% 28.5

7.5% 6.2% 6.1% 6.0% 26.2% 100.0% 4.1 5.5 2.4 5.5 10.7 56.7

2005 06/05 Market Growth Share 50.3% 35.8%

7.2% 9.7% 4.2% 9.7% 18.9% 100.0% 46.3% -9.1% 104.2% -12,7% 97.2% 42.0%

Market shareof smartphone by region: Asia Pacific 29%; North America 6.3%. Shipment of music-enabled mobile phone will be doubled by 2010.

Competitor Analysis
--- Existing Smartphone Model
iPhone Moto Q
blackberry

Nokia

Palm Treo

Price Weight Dimensions Talk Time

$499
4.8 ounces

$199.99
4.1 ounces

$199.99
3.1 ounces

Free
5.1 ounces

$399.99
5.4 ounces
4.4x2.3x0.8

4.5x2.4x0.46 4.6x2.5x0.45 4.2x1.9x0.57 4.6x2.8x0.7

5 hrs

4 hrs 212 hrs

3.5 hrs 360 hrs

5.5 hrs 336 hrs

4.5 hrs 360 hrs

1.3 megapixels

Standby Time ?

Camera Memory Wireless

2 megapixels

1.3 megapixels 1.3 megapixels NA

4 GB build-in micro SD

micro SD

mini SD

mini SD

Wi-Fi

wireless

wireless

wireless

wireless

Competitor Analysis
--- Steve Jobs Perceptual Map of iPhone
Smart

iPhone

Hard to Use

Nokia E62 Moto Q Palm Treo

Easy to Use

Blackberry

Cell Phones

Not so Smart

Customer Value Analysis

Customer Value Analysis

--- Conjoint Analysis
1.

Experimental Design Deciding Products Factors and Levels

Brand Function 4 GB wide-screen iPod Design Price

Apple Motorola Basic F Include Normal D or Palm Enhanced F Non-included iPhone D Second-tier iPhone F Brand

$ 399 $ 499 $ 599

Total Virtual Products Number : 3 *3*2*2*3 = 108 Main-effects model (Virtual Product No. for experiment) (3*3*2*2*3) / (3*2) = 18

Customer Value Analysis

--- Conjoint Analysis
Function

Basic

All the standard smart phone functions - making phone call, - SMS, email, internet, camera, - photo management
2MP camera Rich HTML email Full web browser Visual voice mail Conference call, google map Super friendly user interface (such as easy finger control )

Enhanced

Basic

iPhone

Basic

+
Enhanced

Customer Value Analysis

---Conjoint Analysis
Design
Normal iPhone

Customer Value Analysis

--- Conjoint Analysis

When : 2/26/2007 3/5/2007 Who : GSM Students and friends How : Surveymonkey (On-line) No. of respondents : 95 people (Invalid data: 33) Analysis Tool : SAS
One of virtual products (phones) Sample Questionnaire of Survey

Customer Value Analysis

--- Conjoint Analysis

One of virtual products (phones)

Utility & Relative Importance

Relative Importance of Function =

( Max Min) Factori

Factor 1

= 15.9/(49.97)= 31.9%
i

(Max Min)Factor

Relative Importance Analysis

40.0%

35.0%

30.0%

Apple computer Us er ipod us er nonapple us er Total

25.0%

20.0%

15.0%

10.0%

5.0%

0.0% Brand Price Function i-Pod Design

All groups put higher priority on Function factor when buying Phone Next, they consider Brand factors. If so, is Price the least consideration when buying this phone ? Maybe, Not !!! Why ? --- B/S there is some limitation in our Survey Design

Price Bias Problem

This survey result is not based on the conjoint analysis. This result tell that most people(78%) is not satisfied with $499 ! They answered: THE RESONABLE PRICE JUST $199 !

Factor 1: Brand
Br and U t ilit y
6.0

Apple Motorola/Palm Second-tier Brand

4.0

2.0

Apple Computer
(2.0)

i - Po d u se r

n o n - A p p l e u se r

To t a l

G r ou ps

Use r

(4.0)

(6.0)

(8.0)

Apple Computer User shows higher utility at Apple Brand All groups put highest utility on Apple Brand All groups will exclude the second tier brand

Factor 2: Price
Price
Uti l i ty 5.0

4.0

3.0

$ 399 $ 499 $ 599

2.0

1.0 Grou p

A ppl e Com pu t e r
(1.0)

Us e r

i- P od u s e r

non- A ppl e u s e r

Tot a l

(2.0)

(3.0)

Apple Computer User shows higher utility at $399 All people think all price levels are too expensive * Price levels (range) are not useful at this conjoint analysis

Factor 3: Function
Fu n c t i on
Uti l i ty 10.0 8.0 6.0 4.0 2.0 -

Bas ic F Enhanced F I - phone F

A ppl e Compu t e r
(2.0) (4.0) (6.0) (8.0)

U s er

i -P od u s e r

n on -A ppl e u s e r

Tot al

Grou p

Apple users show highest utility on iPhone Function All Groups(people) put higher utility value on iPhone Function

Factor 4: iPod Function

i-Pod Function 4.0 3.0 2.0 1.0 (1.0) (2.0) (3.0) (4.0) Apple Compute r Use r i-Pod use r non-Apple use r Total Included Non-Included

All groups show higher utility on iPod included Phone iPhone users have highest utility on iPod included Phone

Factor 5: Design

6.0 4.0 2.0 (2.0) (4.0) (6.0) Apple Compute r Use r i-Pod use r non-Apple use r Total Normal D i-Phone D

All groups shows highest utility on iPhone Design Apple computer users have highest utility on iPhone Design

Comparing Utility among Factors

10.0

8.0

6.0

Apple Computer User i-Pod user non-Apple user

4.0

2.0

Apple

Motorola/Palm

$399

$499

$599

Basic F

Second-tier Brand

Normal D

Enhanced F

I - phone F

(2.0)

(4.0)

(6.0)

Brand

Price

Function

i-Pod

Non-Included

Design

(8.0)

Apple computer users (Blue Bar) shows higher utility value at all factors

i-Phone D

Included

Conjoint Analysis Summary

Function and Brand factors are more important attributes for iPhone sales or marketing than others. Apple computer users is the most important target consumer for iPhone (Segmentation)

Customer Value Analysis

--- Limitations of Conjoint Analysis
Used to analyze new product with standard features, not for innovative products.

Only allow small number of attributes and

limited levels for each attribute.

Ineffective in presenting virtual products

to the audience.

Customer Value Analysis

Do you think iPhone is too expensive at $499 + 2-year service contract with Cingular?

No

21.90%

Yes

78.10%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Customer Value Analysis

If you think $499 is too expensive, what is the highest price you are willing to pay for an iPhone?
$399 6.50%

$299

28.60%

$199

46.80%

$99

18.20%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Apple needs to reduce price significantly to win mass market!

Customer Value Analysis

If you think $499 is not expensive, what is the highest price you are willing to pay for an iPhone?
$799 20%

$699

5%

$599

35%

$499

40%

0%

10%

20%

30%

40%

50%

If people like iPhone, most of them wouldnt mind to pay even more!

Customer Value Analysis

iPhones price perceived by different groups
% of people who think iPhone is expensive 35% 30% 25% 20% 15% 10% 5% 0% Apple computer users iPod users Non-Apple users % of people who think iPhone is expensive

Customer Value Analysis

---Potential Customers Estimation
~15M Apple computer users in the U.S. ~30% of them would perceive iPhones price as not expensive (from survey) ~40% of people who perceive iPhone as not expensive are Apple computer users. Potential customers who would buy iPhone: 15M*30%/40% = 11M

Customer Value Analysis

--- Summary of Survey
iPhone has its unique target customers.
The number of target customers who think the price is not expensive is about 11M. Apple is not targeting mass market at this stage. If they want to do it later, they have to reduce the price significantly.

Cost Analysis

Cost Analysis
Material and manufacturing cost

of iPhone estimated by iSuppli

Corp. is $245.83 for 4GB version, but this model will be sold at $499.

Material and manufacturing cost of iPhone estimated by iSuppli

Corp. is $280.83 for 8GB version,

but this model will be sold at $599.

Cost Analysis
Material and manufacturing cost of Motorola Q estimated by iSuppli Corp. is $158, but only has the retail price of

$199 when it first launch in

July 2006.

Cost Analysis
--- Price Premium of Apple Brand
iPod Nano 2GB: $147 vs. Sandisk e250 2GB: $105

iPod Vedio 30GB: $245

vs. Creative Zen Vision 30GB: $199

Apple product commands more than 20% premium!

Summary of Cost Analysis

iPhone charges higher premium

than iPod.

If iPhone commands the same

premium as iPod, the price would be ~$399.

Other Considerations

Other Considerations --- Pricing Strategy

Model (and generation)

Image

Capacity

Changes introduced

Original release date

Launch price (US$)

First

5, 10 GB

New model with mechanical scroll wheel.

23 October 2001

$399, $499

second

10, 20 GB

Touch-sensitive wheel

17 July 2002

$399, $499

iPod

Third

10, 15, 20, 30, 40 GB

Central row of touch-sensitive buttons.

28 April 2003

$299, $399, $499

$299, $349, $399, $449 $299, $399
(later $249, $349)

Fourth /photo

20, 30, 40, 60 GB

Buttons integrated to form "Click Wheel".

19 July 2004

fifth

30, 60, 80 GB

Slimmer design, introduced in white and black variants. Larger screen with video player and lyrics support.

12 October 2005

The Success of Motorola Razr

Weight: Dimensions: Talk Time: 3.35 ounces 3.86 x 2.08 x 0.54 inches Up to 7 hrs

Standby Time: Up to 12 days Nov. 2004: Launched at $499 with 2-year Cingular contract June 2005: Price cut to $199 Dec. 2005: Price cut to $99 Sold 750,000 units in 90 days, 5 million units over eight month, and 50 million units by July 2006.

Issues of iPhone
Cannibalization
iPod market

Battery Life
Talk time & Standby time

iPhone No Smartphone
Third party application

The Dispute with Cisco

Brand name of iPhone

Touch Screen
Fingerprint

Conclusion
At this stage, $499 is the right price.

It would be wise for Apple to cut the price later if they want to enter the mass market.

Q&A

Thank you!