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Wednesday, May 7, 2008

Apple links higher prices with higher sales


Today's Note From Anywhere is inspired mostly by the Green Monster sign outside our office noting the opening of the world's largest Apple Store here in Boston next week.

Elementary economics says that you build volume by cutting prices on products. But Apple's latest 10-Q filing, where it provided details of its latest record-breaking sales quarter, has a nice counterexample to that so-called wisdom. You have to dig a bit to find it, but look for page 23 of the 10-Q, which has a table titled "Net Sales". But if you don't want to look at the original, here are the lines that are of interest:

Three months ended 3/31/2008Three months ended 3/31/2007Change
Net Sales By Product
Unit Sales By Product
Net Sales Per Mac Sold

So let's walk through this line by line. Between 2007 and 2008, desktop Mac revenues increased 48% while portable Mac revenues increased 58%. At the same time, desktop units sold increased 37%, while portable unit sales went up 61%. And the average net sale per Mac? Despite the fact that Apple was selling many more desktops and notebooks, the average net dollar amount sold per Mac increased 2%. Said another way, despite the fact that consumers paid 2% more per unit, consumers bought nearly 50% more Macs year over year.

Now the sharp-witted readers will note that this increase in average selling price can be explained nicely by the fact that Apple sold more notebooks than desktops. Since notebook computers have slightly higher selling prices, that change in product mix almost entirely accounts for the increase. But even so, average selling prices for desktops went up year over year, not down. And if you look at the original 10-Q filing, you'll note that average net sales for iPods went up as well, almost certainly driven by iPod touch sales.

So what's the takeaway here? It's that innovation and marketing -- creating unique products that customers want -- trump price elasticity with consumers. The elementary economic wisdom that you increase volume by cutting prices assumes that you are selling a commodity. Apple isn't selling commodities; it is selling differentiated products that only it makes. And that means that Apple's economic model is one that is anything but elementary.


Anders said...

So if I'm understanding you correctly, Apple's approach is to innovate rather than commoditize which turns out to be a very rare strategy in technology. Where Motorola opted to turn its Razor into a $99 commodity, Apple continues to innovate with the entire iPod line. So what can we say about Microsoft's decision to sell "downgrade licenses" where XP sales essentially count as Vista sales? Is this a new strategy Apple should look into? ;)

PK said...

"Average selling price went up"

I don't know what your game is, it smell more like FUD. Try comparing individual item rather than a group with its median price.

You will be surprise to find that the prices are very close to pcs now but then with your average logic you may come up with the average answer again.

Carl Howe said...

Re average selling price, I didn't make up the numbers; they are right out of Apple's 10-Q. And average does make sense in this case, because you can multiply that average times the number of units sold and see the revenue achieved, something you can't do with a median. I don't think the average is deceptive, especially since you can calculate the number yourself.

Regarding the fact that the selling prices are very close to PCs, that's because they are PCs -- in fact, both MacBook Pros and Mac Pros are some of the fastest PCs on the planet according to PC world. As an aside, remember that many people encouraged Apple to switch to Intel processors because they thought it would drive down prices. Since that time, the price of Macs has only gone up because of the higher prices of Intel parts.

Thanks for commenting -- I hope I do a better job of convincing you of the validity of my argument next time.


Dave said...

The info regarding the relative size of the Boston store has since been revised - the Regent Street store is still the largest in the Apple kingdom at approx 28,000 square feet.

beanie said...

Interesting that average selling price for Notebooks went down from $1519.64 to $1494.76 considering MacBook Air was introduced and priced around $1700. According to Apple Store the MB Air is the best seller. Guess people bought more lower priced notebooks to offset MB Air.

iPod average selling price went up from $160.11 to $170.80 year over year, but was down from $180.69 last quarter. Shuffle price was dropped from $79 to $49. Apple probably saw they were on track to report lower iPod unit sales and lowered the Shuffle price to pad the numbers. Even with Shuffles flying off the shelves, iPod unit sales only increased 1%.

Carl Howe said...

Thanks for the correction, Dave, on the Boston Apple Store size. I was personally surprised to hear it is bigger than the Meatpacking district store in NYC, which looks pretty big from the pictures I've seen.

For anyone interested, the differing claims and debates can be found as part of Gizmodo's coverage.

Re the iPod sales, I do think the year-over-year results are the more telling, given that there was no Christmas spending to boost average iPod selling prices. And given that Apple slashed the price of the iPod shuffle, I think the fact that the average iPod selling price actually rose is still very impressive (i.e., it means they were selling a lot more than just shuffles). Oh, and one more thing -- don't forget that Apple sold another 1.7 million iPhones that work just like iPods and aren't counted in those unit numbers (and bring up the average selling price a bunch as well).