People queue to buy the new Apple iPhone 5 before the launch, at the Apple Store in Covent Garden in London September 21, 2012.
(REUTERS/Luke MacGregor; Originally appeared in Financial Post SWOT)
We’ve come to expect the line-ups that form outside retail outlets whenever tech giant Apple announces the company is releasing its ‘next generation’. Those queues are becoming almost iconic; synonymous with the brand. Even Apple’s competitors are taking notice and at times poking fun. Sometimes it’s hard to remember that the multi-billion dollar empire is more the exception than the rule.
Quick acceptance or rejection of a new product is most common for everyday consumer goods. For technology-laden products or services, it’s quite the opposite – the process can be very slow. Apple aside, a substantial portion of the target population typically takes a ‘wait-and-see’ attitude when considering a new gadget for adoption. Market acceptance needs to first reach a certain level before the rest can be enticed to “cross the chasm”.
Speed of adoption can have a significant impact on the pricing strategy surrounding a new product launch. In a recent pricing and value research study we conducted, we asked consumers if they would try a new product. We looked at each consumer’s commitment to the new offering and how soon they would likely jump that chasm and make the switch. We then estimated market adoption at various price points during the launch year and following three years.
Because market adoption occurs in phases, it is important to determine the percentage of customers your product or service will reach within those phases. If companies have a better idea when its target market penetration would be attained, they can develop the confidence to set higher launch prices. Aside from yielding higher margins, higher price points help companies reinforce the message that their new offering provides superior quality, more innovative features, better ease of use — the list can go on and on — compared to existing products in the marketplace.
This is especially important during the first few years of the product introduction when the majority of costs related to set-up and sales logistics are incurred. Having a better understanding of the adoption curve means companies can more efficiently apply scarce resources.
Launching at a higher price also minimizes the risk that competitors, with products of lesser value, will react to the new product launch by reducing the price of their own offering. This decreases the possibility of setting-off a price war that ultimately reduces the economic value of the category.
Lastly, profiling early adopters of any new product has value. This is particularly true if these consumers are the industry’s likely influencers, facilitating the new product’s acceptance with the rest of its target market.
If you’re Apple, your industry’s influencers might very well be those shoppers who have queued for 33-hours to be among the first in the world to buy, say, the new iPhone 5. Accurately estimating just how many consumers are actually willing to wait in line, and how much they are willing to pay, is all part of understanding how quickly the company’s newest gadgets will be accepted by the marketplace. Apple’s ability to consistently report high margins over the past decade suggest shoppers are consuming what the company is producing – and across multiple price points too. Although we may not be able to definitively understand Apple’s inner workings, in an industry where consumers typically are hesitant, they do make an interesting exception.
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve world-class pricing competency. Paul occasionally publishes a pricing column in the FP Executive. He also writes for the Pricing Solutions Club. Article written in partnership with Angie Barrozo, Senior Consultant of Pricing Solutions