In an effort to "stay out of the jewelry market," Apple has slashed the price of the Apple Watch (sports model) to $299. Wait, before you laugh at Apple for having a K-Mart blue light special, you may want to look a little bit closer.
The Apple watch is actually leading the smartwatch market and this post-launch price slash is typical Apple strategy. Keep reading to find out how Apple is making higher profits by lowering their prices.
Razor and blade pricing strategy
You've been there before. You buy a new razor at the drug store without thinking twice about it. A few weeks later you go back to the same store to buy blades and BAAM!
The blades are 3x as expensive as the razor.
It doesn't make sense, right? Why are they doing this?
Well, it's the same reason why Brita filters cost more than the pitchers and why ink can sometimes be more expensive than the actual printer. This razor and blade pricing model is exactly what Apple is modeling to increase sales.
Silicon Valley Economics 101
Imagine that you're selling printers. The amount of printing that each individual customer will do will vary drastically. An individual may print less than 50 pages per month, while a business may print hundreds or even thousands of pages per day.
If you're selling printers, you want to broaden your customer base so you keep your prices low on the front end, and make your money on the back end.
This is exactly what Apple is doing.
See, they have decreased the price of the watch but the price of the watch bands have remained the same. Apple makes a killing off of accessories.
These accessories have a much higher profit margin than the devices themselves as well.
Have you ever noticed how Apple's phone cases, chargers, other cables and connectors are so expensive? Apple is no stranger to this model. The original iPhone had a price cut of $200 only a few months after it launched.
Apple lowers prices on devices to get more customers in the door, then makes it all up (and then some) on accessories and other existing customer purchases.
What's Next: $39 Apple Watch, $399 band
Mobile devices will continue to decrease in price while accessories go up and up. The accessories will be marketed in such a way that without them, the device becomes obsolete. Just as with printers and ink, we're going to see cheaper and cheaper devices that can't be used unless you buy the must-have (literally) accessories.
What do you think Apple will do next to drive sales? Do you think this is a sneaky tactic, or good business sense?
Let us know in the comments below.
Image credit: businessinsider.com, hiconsumption.com, wired.com