How Apple Sets Prices

An article in Bloomberg BusinessWeek breaks down Apple’s pricing strategy and identifies its key components. “Next time you’re sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: ‘Nope. What Steve Jobs sells is pricing,'” writes Ben Kunz. “Pricing? You bet. Jobs is a master of using pricing decoys, reference prices, bundling and obscurity to make you think his shiny aluminum toys are a good deal.” [%comments]


The article/assumptions are flawed. The prices of iPhones are subsidized while iPods are not. With subsidies, it is not Apple's call but includes AT&T's input as well.

For all I know, at a higher/expensive 'plan'... AT&T would give you the iPhone for free!


the article referenced says that bringing out a 7" iPad later this year is a "decoy" to make the original iPad look better.

I don't get it. The iPad is selling faster than they can make them. Why is there a need to sell a decoy product to make the full size iPad look more attractive?


I'm amazed at the comparison they are making. Do they have total idiots writing the articles over there?

AT&T subsidizes the price of the iPhone when people buy it.

If you buy it without the AT&T contract, the iPhone costs somewhere around $500.

Not to mention that you when you buy an iPhone, you are also buying a little over $2,000 worth of cell phone service too.

How did they write an entire article without realizing this?

Ken Edwards

This article has a couple points that are off the mark.

To start, saying the iPhone costs $199 in comparison to an iPod touch is totally disregarding the fact that the iPhone is only $199 when you commit to a multi-year, multi-thousand dollar contract. The true price of the iPhone 4 is $659.00 Canadian ($643 US today), so it is really not a case of the iPhone costling less and doing more, it's over 3 times the price of the iPod.

And to say the AppleTV has no competitors on the market seems to be a big slap in the face to Roku who's had a set top box for streaming movies from Netflix and Amazon for a while now.

I suppose there's no better way to draw readers to an article about Price Decoys and Reference Prices then to slap Apple, iPod, and iPhone across the top.

Mike B

I never thought Apple was anything but overpriced. You'd have to be some sort of artist with poor math skills to think otherwise. Oh wait....


Frankly, I think their price comparisons are bogus - the up-front cost of an iPhone may be lower than for an iPod touch, but then you're stuck with a 2-year contract with mandatory data tariff etc. So the comparison needs to be between the cost of the iPod and the present value of the total contract cost plus up-front cost of the iPhone.


Kunz does a good job of analyzing pricing strategies but he downplays the basic kernel of truth about Apple, they're a great technology company that consistently delivers breakthrough products. Why shouldn't they pair that with pricing strategies that may extend their first mover advantage?

As for being "fooled" into buying an iPad (which I haven't) to replace technologies we've had for 30 years, it's not a substitute for those things. Rather, it's one of a few new products that represent the convergence of content from those many platforms into one platform. Content convergence will accelerate dramatcally in the next few years and I expect we'll see Applie staying in front of that for some time.


Product bundling to disguise the specific price of each product included isn't a new pricing technique. Why is this attributed to Steve Jobs?

Apple invented touchscreen technology? I recall seeing touchscreens on bank ATM's many years ago, before the release of the iPhone.

The article compares the cost of an iTouch versus the cost of an iPhone, and its conclusion is that the iTouch is more expensive. However, the article purposely ignores the cost of the cell phone carrier in its comparison. Very convenient.

Your next Freakonomics article should be about journalists, "bloggers" (whatever that is), etc., that make poorly conceived business analyses and articles.

Drill-Baby-Drill Drill Team

Apple obeys the rules of market psychology. $99 dollars or 99 cents is a bigger driver of overcoming buyer's reluctance than a Billion Dollar ad campaign.

You buy a an iPhone for $199....but that is NOT the price. You are locked in for a 2 year contract with a $100 per month subscription service. But you cannot come forth and say, the cost will be $2400.oo plus tax.

Technically Apple can give away Chinese made iPhones for free, as long as you have a credit card, sign up for an automatic payment plan and lock in for several years.

So move out of the Product business, and move into the Service industry.

Apple also cultivates an image, much like Jackie Kennedy Onasis, Marilyn Monroe or James Dean. But they distilled it, bottled it, put a price tag on it, so you can own it and carry it in your pocket.

What comes after White Minimalism........
After the Beatles White Album they delved into the fantastic over the top, color, over decorated and psychadelic imagination of the Yellow Submarine.



And also, I think it's marginal pricing that's more important than the "decoy" thing when it comes to choosing which iPod to buy.

iPhone and iPod are distinct product categories. If you want a phone, you'll buy the iPhone. If you don't, you'll buy the iPod, as a dedicated music player or gaming device or a toy for your spoilt children.

I don't think the decision is really between the iPod and the iPhone, then, because that's already been made. So, when looking at the prices, you see that you get an iPod with very little storage for $229. But for an extra $70, you can double your storage! And for another $100, you can double it again!

The marginal cost of storage is lower in the highest-price iPod, and that makes it more attractive compared to the $229 model. On the other hand, storage costs Apple very little, so the profit margin on the high-storage device is probably even higher.

Chris Baxter

Apple isn't as smart as they think. I went into their store to buy an iPhone and an ipad. I couldn't because they would not take cash. I was totally disgusted with this policy. I didn't have a debit card because I just returned from Iraq and was I'm the process of getting resettled and had not yet gotten my bank cards.

So, I took a look at Apples competition. I now own a Droid and a Streak. Apple has lost me forever as a customer.


The article is flawed from the start. The iPod Touch is more expensive than the iPhone only if you completely ignore the two year contract that you are required to buy along with it.

He also ignores usability, functionality of a product, reliability, and total cost of ownership.


in 2 years henceforth,

the ny times will institute a similar pricing strategey

1) $2.99 per month for unlimited access
2) stripped down version for free

based on the analysis from the artlcle, consumer choice dictates that option #2 is chose.

thus, what is the optimal pricing strategy for Ny times? Well, probably no free content at all. then, I will have more time and no acccess whatsoever.


The man writing this article is dumb. For example, my family shops mainly at Kohls for clothing. We know this about Kohls pretty much everything is on sale at Kohls, so one would never pay full price there. Then if you get their store credit card they will send you 15-30% deals all the time. It doesn't really make me feel better thinking I some great deal because a shirt was 30% off and then I saved an additional 20% for using their card. I have a brain and know what things are worth and at Kohls 30-50% off MSRP is the true value.

At least with Apple they don't have their products go on sale. Only one time with the first iphone has the prices been dropped. Nothing is more annoying than having to try to time purchases to save money. At best buy a Sony TV might be $799 today, but by Monday the price will go back up to $899. Apple as of late sets a price and that price sticks. The IPod Touch had been $199 and it pretty much stayed there unless Wal-mart had it maybe $10 cheaper. There was no oh now this is $149 and you idiots that bought it for $199 are just dumb.

I have an IPad and at the time I purchased it no other product on the market did things like they way it does them.



As others have noted, the article ignores carrier contracts in pricing. By this guy's logic, if only Appke would sell iPod touches for $1 (with a two year $50/month contract), it would be a great buy.

The article also assumes there is no value in design, usability, or platform network effects. Heck, aluminum's used to wrap fish, so it can't add value!

And the article neglects to mention the failure of the $599 price point for iPhones, the resulting PR debacle, or the refunds paid to the first customers. An intentional strategy that was not.

Reagardless of one's opium of Apple, this is a terribly reasoned article.


It looks like the NY Times website won't let me un-recommend an article.


As some have noted, you can't ignore the cost of a service plan for an iPhone over say an iPod Touch, but you also shouldn't ignore the idea that you can throw your existing phone away and cancel the service. Saying it'll cost an extra $2000+ is misleading.

In my case, the monthly service on my old flip phone was about $46 after taxes. With the iPhone (having similar minutes, but also with a data plan), it's up to $77/month. So it's more like a $400/year premium.


Seems like the author decided on a thesis for the article, then shoehorned the facts into that thesis.

The high-priced $399 iPod touch and low-priced 7" iPad are both labeled as decoys, though no explanation is given as to why this discrepancy exists.

The subsidy that drops the iPhone to $199 is ignored.

Devices, such as those from Roku and others, similar to the new Apple TV are ignored.

The author assumes the reference price for an iPhone is the price of an iPhone from 2007. Wouldn't a touchscreen smartphone from another manufacturer (Moto, HTC, Samsung, etc) be a more reasonable reference? Can it be ignored?

According to the author, Apple obscures reference prices by offering unique products that offer functionality not otherwise available in the marketplace. That doesn't seem like a pricing strategy.

It seems like the two main thrusts of Apple's pricing strategy are a) intelligently-configured marginal prices within the product line and b) creating opportunities for ongoing revenue generated from the purchase of data and content that allow lower initial purchase prices.



One can say Apple is overpriced, sure. But having Windows, Linux, and Apple computers in my home, I can tell you from vast experience which require the most maintenance and which just work.

Some people like the fact that they have to buy anti-virus software and maintain it, because they like doing things that are technical in nature. Some people like the fact that they have to take care of their machines all the time. Some people like the fact that they have to assemble different parts and pieces to make their gear work the way they want.

And some people like things that work well out of the box and continue to function well for years, without maintenance. Such products may cost more up front, but the time savings over the life of the product is priceless. And you can take that to the bank.


I think what the author is trying to say is that your average consumer does not think of the cost over the lifetime of the phone, just the initial $199 cost. In these terms, the iphone does look like the better choice compared to an iPod touch that costs more and cannot make phone calls.