With each introduction of new iPhones, loyal Apple users pack their sleeping bags, and ready themselves to attend the annual storefront line-up in order to get their hands on the new phones.
Regardless of what you may think of the quality of the iPhone, Apple has always been remarkable in their clarity of pricing. Notice that the iPhone 6+, for instance, costs €799 for 16GB, €899 for 64GB and a whopping €999 for 128GB. As some may have noticed, Apple has skipped the 32GB version. Why, you might wonder.
Price laddering: It all started in a movie theater in Chicago
The idea of having different versions of the same product can be traced back to a movie theater in Chicago. A young manager, who would later introduce menu bundling at McDonald’s (but more on that in a different post), was trying to determine how he could make more revenue from the concessions stands. What were the options he had? He could have chosen to introduce new products in the assortment, or perhaps even build a new, novel concession stand. However, what this manager chose in the end was a much simpler, elegant solution.
He decided to experiment with popcorn and introduce a second, larger bag of popcorn. The bag would contain 50% more popcorn than the original smaller one, while the price would ‘only’ be 20% higher than the former. The reasoning behind it was that the cost of popcorn was negligible, but customers would be willing to pay extra since they would perceive to be getting more value for money. When the manager later on decided to add an even larger bag to the popcorn stand, he was surprised to find out there were still people who opted for this enormous bag of popcorn.
It goes without saying that revenues increased heavily due to the pricing tactic he used. This particular technique in pricing, also known as laddering, is now being used in a wide range of industries, just like Apple is using it for their iPhones.
How Apple uses price laddering to boost up-selling
Taking a closer look at the buildup of prices for the iPhone 6+, we see that the starting price is €799 for the 16GB and €899 for the 64GB version. The price increase from the 16GB to the 64GB is approximately 12,5%, whereas the memory increase is 300%. Considering the 128GB (€999) in comparison to the 16GB version, we get a price increase of 25% and a memory increase of 700%. By removing the 32GB version of the phone, Apple has made the 64GB even more attractive. Since the additional profits outweigh the costs of additional memory, Apple can generate significant profits by luring consumers to the 64GB version.
By using laddering as a pricing technique, Apple taps into the rational side of people’s minds. Looking only at the iPhone 6+ versions, customers perceive better value for money as they go up the ladder. Only time will tell whether the laddering will help Apple to maintain its market share. But it is pretty safe to assume that many consumers will end up buying more advanced versions of the product, leading to large revenue and profit gains for Apple.