Friday, May 28, 2010

Apple can't control the iPad price

A friend who works at Best Buy told me that his manager had to enforce a strange policy against a customer this week, and things got pretty heated.

By order from the Apple company, no one is allowed to buy more than two of the new iPad tablets. Apparently the supply is smaller than the demand. The 16 gigabyte version sells in the store for $500, and they are going on eBay with a markup of at least $150.

A customer has been placing phone orders at different Best Buys in New England and picking them up. My friend told me the iPad can only be purchased with a credit card - no cash sales - to track customers and somehow this guy had already purchased 18 iPads by the time he got to the local store.

The customer insisted he had ordered a product, which is now in the store, and he has the right to buy it. The manager told him there will be no sale and threatened to call security.

Please pause to consider the absurdity of the situation - security being called to prevent a customer from making a purchase.

Why would anyone create such a weird policy?

I think what the Steve Jobs and his Apple company wants is fairness for customers. The theory goes, by limiting sales while the supply of iPad tablets is low, more of the public will be able to buy iPads at the retail price.

So the obvious question is, why don't they just raise the retail price of a new iPad?

The demand is high, and the supply is low, so the value of an iPad is high right now. The iPads are being scarfed right up as soon as they get on the shelf. When those hungry people have their iPads and the demand lowers, the retail price could go down. So if it's such a simple solution, why aren't they doing it?

The culprit is the stupidity of early adopters.

In 2007 Apple had a similar situation with the iPhone, where the price fell from $600 to $400 after a few months. There was a big cry-in from the early adopters, to the annoyance of both Bill Maher and Tyler Cowen

Cowen reproduced a standard iPhone complaint:

“I just felt so used as a consumer,” he said. “They hyped up the iPhone for six months and built up our expectations, and then they grabbed our extra $200 and ran.”
To which Maher said:

"Early adopters always pay a premium... If you didn't have to be the first on your block to get the latest gizmo, you'd now have an extra $200 to spend on your imaginary girlfriend."
Apple caved to the pressure of blog posts, user comments and negative product reviews from irate, irrational customers. They gave $100 in store credit to the early adopters and apologized.

So to avoid a similar outcry, Apple has decided to keep a fictitious price in place during the early adopter phase.

What do I mean by a fictitious price? Unfortunatly for Steve Jobs and his company, they do not have the ability to tell the public what an iPad is worth. They can set a retail price, but they can never decide a value.

No company has that ability, once the demand for the product is in place and the supply in determined. It really is as simply as supply and demand determine what something costs. Because the retail price is lower than the price the public is willing to pay, all kinds of bad things are happening.

The two iPad limit is not doing a flawless job of keeping scalpers from buying the tablet. However, customers who have legitimate reasons to buy several iPads are feeling the sting of the policy. A student who was acting as a middleman for friends in Europe who can't buy the iPad yet experienced an Orwellian scene while trying to buy a sixth iPad. A California hospital wanted 100 iPads for medical uses, but the order was canceled as well. The policy failed them.

People are able to get the iPad on eBay, but the markup is several hundred dollars. It appears that the policy of not using higher prices is failing those customers, as some are paying more than Apple would ever charge. They are paying the true value, not the artificial retail price. The policy failed them.

So what about the people that buy them at retail price. Aren't they being helped by the policy?

Well yes - but only the lucky ones. Retail customers had to pay additional costs by waiting in lines overnight or essentially winning a lottery by showing up to order at the right time. Some are guilty of cronyism because they only knew when to make a purchase because a friend told them when the iPads are in stock. While they pay the artificial retail cost, they are also putting in a lot of labor to actually make the purchase. Luck is also a big factor in who gets to buy. The policy failed them.

The only way Apple can change the value of the iPad is by reducing demand and increasing the supply. Clearly they are working hard at increasing the supply, and reducing demand - such as removing features from the device - is a terrible solution.

What they have done is attempt to set a "price ceiling" by keeping down the retail price. When there is a gap between the retail price and the value of a product, secondary markets will always emerge. Sales on eBay are unavoidable.

I can't blame Apple for putting such a flawed policy in place, I can only blame my fellow bloggers and Internet denizens who forced their hand with their public display of ignorance after the iPhone was released.


  1. The low price probably has less to do with market forces, and more to do with the Apple brand. Apple wants people in the middle class to be able to afford its products. It wants to be a company that middle America can relate with and not some high-end consumer electronics brand. Apple has a great thing going for its company... they have a cult following. Why sell-out your consumer-base just for a couple hundred extra dollars per unit? If they do that then the typical Apple user (poor college students and debt ridden young professionals) will find their business with a competitor, such as Android, Sony, RIM, Amazon, etc.

  2. I didn't spend too much time on this aspect. The problem I was concerned with was never Apple's profits. I was concerned with who gets the iPads with this system.

    Keeping prices artificially low does not help put iPads in the hands of the people you outlined - it just moves them to rich eBayers and people who are able to get them at the store at the right time.

    The people who mentioned will be able to get them in the near future. I don't think the "products for the middle class" goal was alive during the age of $600 iPhones. Apple was perfectly willing to use higher prices to discourage long line and secondary markets before, but it was the collective shouts of bitter, spoiled nerds that pushed Apple into using such an odd system.