Introduction
In economics, the laws of supply and demand interact to set the prices of an item. There are other factors that will affect the demand curve such as the presence of substitute products in the market, changing customer preferences and change in technology. Looking at the Apple Company, it has made high sales on its product the iphone. When the company announced its launch of the iphone in 2007, it was estimated that the demand would skyrocket. The forecasts were true. Every year the company has launched a higher version of the iphone and sales still continue to be high (Refer to Appendix 1 for detailed findings)
My hypothesis on this study is that the demand of the iphone is not driven mainly by the price but the availability of substitute products in the market and customer loyalty to the brand.
In this paper, I conduct a research on the price elasticity of demand on Apple’s iphone. I believe that a change in price of the product in the market leads to high sales. I carried out a literature review on the iphone demand, supply, competitor’s products, changes in technology and the prices of the product.
The Iphone Product Features, Demand, Supply and Prices.
The iphone is a technology that combines email-capability, internet access, text messaging, camera and PDA functions. The prices for the first iphone launched in 2007 were fixed by the company at $399 for the 8GB Model and $499 for the 16GB model (Yoffie, 22). Interestingly when Apple announced the prices of its iphones, the AT&T Company, Apple’s mobile operator did not offer a subsidy. Apple therefore faced a tough gamble for the sale of its
iphone, since the companies that sold phones that cost more than $300 only commanded 5% of the market share. In the United States alone, the mobile phone operators were very generous and offered high value subsidies. 80% of the phones in that country were being sold for prices less than $80. The iphone was being offered at the high prices for a two year contract. The service charge was set at $59.99 per month. AT& T Company was charging its customers $39.99 for the standard wireless service. The iphone service costs were higher but it also covered both voice and data services.
The apple company however was able to negotiate very good terms with AT&T that other mobile hand set companies had never been able to get. The company would be in charge of the development and branding of the iphone in the US market. AT&T would also not sell the product through other third party channels such as Best Buy and Radio Shack. The mobile operator also agreed to share the service charge revenue with the apple company. Out of the subscription fees paid by the Apple iphone user, AT &T would give $10 dollars to Apple. This was contrary to industry practice.
The company announced that it wanted to sell 10 million products by 2008. The demand for the Iphone was high with 6 million units being sold by June 2008. By the end of year 2007, the company had sold 3.7 Million iphones. 1 million sales of the phones accounted for the unauthorized distribution of the phones in countries such as Russia and China where Apple had not distributed its phones. People had purchased the unlocked apple iphones from unauthorized
dealers and used them in mobile networks that had no agreements with Apple. In the worldwide market it had a market share of less than 1% as consumers had purchased 1.1 Billion handsets.
However in the US market, the company had made considerable gains with 19.5% increase in the smart phone market. The consumers worldwide had purchased 120 million smart phones in the year 2007.
There were challenges with technology on the use of the iphone. The version relied on AT&T edge network that was quite slow. It was a 2G/2.5G technology. The Apple Company had been reluctant to offer the 3G technology initially as its use would be highly taxing on the phone’s battery. Secondly, the demand for the iphone was high even in the countries the company had decided they would not distribute in.
When it came to the year 2008, the Apple Company launched the iphone 3G version. The company considered different factors such as customer’s preferences on technology, pricing and demand. This was an upgrade of the earlier version. The company ensured that the phone’s battery life had been improved. Now customers could download data at a faster rate, two to three times faster than the Edge technology. The phone had no embedded keyboard rather it operated on a touch screen technology. Users would only have to drag or tap the screen to relay their instructions to the phones.
The phone came with an accelerometer technology which had great sensing abilities. It would know when the users had moved and adjust the screen appropriately so as to be comfortable for usage. The company entered into partnership contracts with Google and You Tube that provided the mobile users with search, mapping and video capabilities. Another great technology feature was that the iphone users could now purchase iTunes from the iTunes Wi-Fi music store. This time the iphone users could also download third party applications such as
games and business applications through a software package known as iphone 2.0. The old iphone users could also get the software and upgrade their iphones to enable them to download the third party applications for a fee of $10 dollars.
However the technology faced new challenges. It has a lower storage capacity compared with other music players. It lacked memory expandability. The battery retained charge for only five hours if one used 3G routinely. It had a low resolution camera and a lower level of GPS functionality than other smart phones in the market at that time. The battery had a predicted life of 1 year. There were reported cases of customer dissatisfaction with the AT & T low coverage area. There were even customers who reported that they were having 3G connection failures.
The Apple Company reduced its prices in order to record higher sales. Apple was able to secure a subsidy from AT &T Company. The service charge however would rise to $69.99 per month. The service period would be the same as before for two years. For the people who are not normally affected by the price, there would be an unsubsidized iphones that would be retailing at $599 and $699 for 8GB and 16GB phones respectively. This time AT&T would not share the service subscription fees from customers with Apple in exchange for the premium reduction on the phone prices. Secondly, the Apple Company allowed Best Buy to start selling their Iphones in the market in its stores that are over 1000. Prices were set at $199 and $299 for the 8GB and 16GB iphone 3GB respectively.
For the second version, the company increased the area of its distribution. The iphone 3G was launched in 22 countries including countries such as Australia, Mexico and Japan. It would be now available in over 70 markets including India and Latin America. Apple’s pricing and distribution strategies in the wider markets matched those in the United States. It was able to get subsidies from the mobile operators especially since it entered into no service charge sharing arrangements with any of them.
The 2007 version had only been sold in the United States and five European countries. For the 3G version, the lower prices and increased distribution into more countries helped the company sell 1 Million units by the first week of its availability in the markets. This pace enabled the company reach the 10million unit sales target before the year 2009. The Apple Company was able to sell the iphone 3G at lower prices due to the savings in manufacturing costs. The component costs in the industry had reduced. The company also operated with technology design improvements. All this enabled the company to offer the phones at cheaper prices in comparison to the first version launched in 2007. The costs of the 8GB first version had been $227 but now the cost was at $174.
Competitors were fiercer in 2008 and they rushed to offer the market with similar iphone technologies. The Google Company offered the Android technology for handset operators and
users to use it. The touch screen technology was offered by the Sprint-Nextel in the product Samsung Instinct while the Verizon Wireless distributed the LG Dare. The Blackberry Company also launched into 3G and touch screen technology. The company released the Bold 3G device in May 2008 while the touch screen phone Thunder was released by the end of the year. Other iphone competitor products in the market were the Nokia N95 and the Palm Centro. In August 2008, the T-Mobile company released the Dream phone that also had 3G and touch screen. The phone would be sold at the price of $150 in the period of a two year contract.
Apple is a company that has made a lot of profits as the product has a low price elasticity of demand. The price elasticity measures the percentage change in the demand of a product once the price of the product has been reduced or increased. The iphone is a luxury product and not a necessity. The consumers will therefore tend to watch the market to see whether the company will reduce the prices of the product. Lower prices are seen to increase the demand. The 2nd version iphone low prices increased the sales by a very high margin.
When the product launched initially there were no real substitutes. The demand of the product was not really influenced by the competitor products. However, the second version of the iphone has several substitutes in the market and the Apple Company in the future will have to offer even a more differentiated product. There have also been problems associated with the supply of the product. In China, the demand for the product exceeded or overwhelmed the Hong
Kong mobile operator, China Unicorn (Fletcher, 123). The old versions of the iphone were launched in the country in 2009 however the latest version of the phone, iphone 4 had been highly anticipated with record breaking sales.
The people were advised to keep checking online on the availability of the phone. Now that there are really no product substitutes for the phone the customers have to wait for the supply of the phones to arrive. However, if there were substitutes in the market, the company would lose customers as people sought other products due to frustration. In late June 2010, AT&T in the U.S turned away customers as the demand for the iphone 4 also exceeded the supply. In fact the mobile operator was not new orders on the first day of pre-orders due to the demand bulk they were facing. Furthermore the day for the pre-order shipment was postponed from June 24th to July 14th 2010.
The low supply of the phone was also experienced in other countries in Europe. The operational inefficiencies in Apple’s supply management will cause a dent in Apple’s brand perception by the consumers. Competitors have been aggressively advertising viable alternatives to the market. Nokia Company has been advertising its N8 with real video conferencing, an exchangeable battery, a memory card with a memory of 32GB and among other features. The Samsung Electronics has announced it has strategic plans to double its market share with its smart phone Galaxy S phone. A third competitor is the HTC Corp with its smart phone the 4G Evo. Apple still has high customer loyalty among its consumers so they have not been easily swayed by the competitors however much they tried.
Conclusion
My hypothesis was proven correct. The iphone sales continue to be high due to the lack of real substitute products in the market. Secondly there is unwavering customer loyalty despite technical problems with the phone, bottlenecks in supply and the high prices of the iphone.
Although the price of the product is not a high determinant of the demand, a reduction in the price leads to higher sales. Through the research I have carried out I have learnt that the devotion from the customers will not last for long if the company does not take care of its operations well. Competitors are slowly improving their technologies to offer valid alternatives or even better products.
Works Cited:
Fletcher, Owen. IPhone Demand Outstrips Supply in China.2010. Retrieved from:
http://online.wsj.com/article/SB10001424052748704760704575515534170591458.html
Yoffie, David. Apple Inc., 2008. Retrieved from:
http://www.wiso.unihamburg.de/fileadmin/sozialoekonomie/bwl/publicmanagement/Blog/Apple_Case_Inc._2008.pdf
