Apple's Questionable Lion Pricing Strategy

by Patrick Lefler

Apple's Questionable Lion Pricing StrategyBesides Steve Jobs’ well-publicized announcement of Apple’s new cloud and music storage service on Monday’s opening day of Apple’s Worldwide Developers Conference, Apple also announced that their new operating system, Mac OS X 10.7 Lion would be priced for download at $29. What’s interesting about this is that is represents an almost 80% price cut from their previous OS version (Cheetah – priced at $129). The obvious question to ask is why has Apple chosen to price what Steve Jobs called “the world’s most advanced operating system” at such a discount to previous versions? Even if you factor in that this $29 price is for the downloaded version only (distribution and packaging costs eliminated), it’s still a bit of a head-scratcher for me.

Some have speculated that this represents a continuing strategy where Apple is focusing more and more on selling hardware and as a result, willing to under-price their software in order to help drive demand for hardware. I’m not sure I agree with this–especially given the fact that their software represents equally high value for their customers. Others have suggested that this represents a new distribution strategy where the software is now priced appropriately based on lower cost (to Apple) downloads. Again, I disagree – for premium brands (and Apple clearly fits in that category), internal (distribution) costs should have no bearing on the price that customers will pay for the new Lion operation system.

On the other hand, the new pricing strategy does introduce two significant risks to their business model. First, the new $29 price tag represents pretty much a ceiling for all future operating system releases. It will be extremely hard for Apple to raise prices for new OS versions going forward – especially in an industry where there is such a strong bias towards lower prices over time. Even Apple is not immune to this – just look at the downward pricing trend for both iPod and iPhone products in the years following introduction.

The second risk is even more threatening to Apple’s long-term business model. The decision to discount their new operating system by almost 80% from the previous version can only hurt the perceived (high) value of Apple. It’s this perceived value that has allowed Apple to price their products and services at a significant premium to the marketplace. Remember, Apple’s operating system has always been considered superior in many aspects to its one main competitor–Microsoft Windows. Customers have always been willing to pay a premium for new versions of the Mac OS. And one of the reasons for this is that (higher) price has helped to have driven higher perceived value. I have a hard time believing that this phenomenon (of high prices driving increased value) will continue to be the case given the new $29 price.

I’m curious what my readers think. I encourage your comments–especially for those who disagree with my premise. Apple has always been a brand that has fiercely protected their pricing strategy. Again, this one’s a head-scratcher for me – I just don’t get it.

Here’s the takeaway: Pricing is strategic. And for premium brands such as Apple, changes in price can lead to significant changes in things besides just top-line revenue.

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Patrick LeflerPatrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.

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  1. Put in Apple’s Post-PC World narrative, it might make some sense.
    – Reinforce the demotion of the PC. The Cloud is the hub
    – Monetize across the entire platform ecosystem, hardware/OSes/apps/content/services
    – Create a huge problem for Microsoft by eroding the PC OS pricing
    – Start to erode the Google’s Free advantage. I think OS X upgrade pricing is on it’s way to free like iOS upgrades.
    – Make the OS upgrade an impulse buy from the app store

  2. I think they may realize that a large percentage of folks don’t upgrade their operating system as the new versions come out. That is my experience in talking to other Mac owners. A huge discount helps keep more people current by increasing willingness to upgrade. It could be a huge volume play for them in that sense.

    I’d also venture to say that their cost of development may have decreased over the years given their large barrel of cash in the bank. They have the ability to setup more efficient systems than what other companies are capable of doing.

  3. With the apple app store coming to the desktop they will make a lot of money there. The more people can make use of it the better for apple. Bit ot will be interesting to see what they will do next time.

  4. Mac OS X Cheetah (10.0) was a major release. The most recent release, Snow Leopard (10.6) cost $29 as well.

    This release (10.7), priced at $29 is exactly what I expected and want.

  5. As Seth says, Mac OSX 10.7 (Lion) look like a minor update and not a major release.

    In addition, the most people update their Mac OS, the most will use the App Store (fully integrated) and allow Apple to earn 30% of commissions on the sells of these Apps that are more expensive than on the iPhone/iPad platform.

  6. Leopard {10.5} was a full price update Snow Leopard was $30. Now lion is also $30.

    The difference is that now you have to download from the Appstore with no hard backup and, as far as I can see, no easy way to get one. Lion is also a 4GB download and has to be done with each machine. Although I have DSL, it will take me about 70 minutes to download on one machine and I have three. I am totally not going to spend three and a half hours downloading and another several hours installing an OS which mainly transfers IOS features,that I detest, onto my computers. I spent a couple of hours on Apple’s Lion site Looking at the 250 new things in Lion. I figured I would use no more than five and then only because there seems no way to turn two of them off.

    Frankly, I’m not sure that Lion is more than an overgrown pussycat and not worth $30.

  7. Oh, please, Apple, make your OS upgrade more expensive — I’m not spending enough! (Just to be clear, I’m not serious.) We already pay a premium for Apple hardware. I’m grateful for sensible pricing. I can just upgrade and not have to delay because of the hit to my bank account.

  8. Sam Basta has called this right in my opinion.

    This isn’t something to be concerned about or even query.

  9. It’s very simple: Apple wants EVERYONE to upgrade, NOW.

    Why?

    It’s like the iPhone. Every subsequent iOS update makes your “old” phone slower and slower. And starts to make you aware of features you could have if only you upgraded to the next device.

    $29 is the ceiling, because future releases will likely be free.

  10. Exactly. Apple doesn’t charge for iOS updates either. It encourages people to stay current within Apple’s ecosystem and experience the latest improvmements the OS has to offer.

  11. In my view 10.7 is the release that brings together a lot of Apple things. It’s far more than a minor upgrade, and as I thing back to the current release of SL people complained that there was not much new. But the under-the-hood changes Apple did in 10.6 is now in play for a large part.

    10.7 is the platform that will, together with iOS 5, bring a lot of stuff together. Less dependent to iTunes your iOS devices almost lives with out the cable when you want to to stuff. Even software updates is about to be on a device basis and not have a demand for iTunes. iCloud across both OS X and iOS is a pretty compelling service platform to end users who have paid a premium for the HW/SW in the devices. I think you should consider the pricing of 10.7 as part of creating a new revenue stream for Apple. I mean, when launched the revenue streams from iCloud/MobileMe will for sure increase because there is no way anyone with more than 2 devices can live with 5Gb to be used for device backup, photos and documents. And keep in mind that the cost we have to pay for extra storage in iClod is a re-occouring event that will trigger steady over the year. The backup of your iTunes purchases , distribution of iOS app’s to all your devices etc are things that will be compelling for consumers.

    And it does not hurt that Microsoft will have a run for their money with Windows 7 and 8 on the consumer market also putting pressure on them elsewhere.

    A bit more interesting than the pricing on 10.7, is the way Apple are going to do pricing on iCloud. 5Gb pr. AppleID does not make sense. It’s just fine if you have one or two iCloud devices, but when you have 2 iMac’s, two MBP’s, iPhones and iPads 5Gb is not really that compelling – even if it’s free. More fair would be a pricing tag that would reflect the consumers with many devices with a good starting point when entering iCloud.

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