Apple\'s Success Leaves Little Room for Improvement.

Apple's success leaves little room for improvement. However, there are few areas where improvements can be made. Pricing strategy is one of them. There are two common tactics that Apple is reticent to make use of. One is discounts -- aside from Black Friday most of Apple's core products are seldom discounted. One example is the MacBook Air. When launched, it was a best in class machine with a best in class price. Premium pricing is logical when the company has a monopoly, which was the case for the second iteration of the MacBook Air for around a year. Now, however, new competitors are entering the market including Toshiba, Asus, Samsung and Sony. It is recommended therefore that Apple makes more use of competitive pricing, including discounts.

The argument can be made that Apple offers a highly-differentiated product at a premium price point, and in many cases this is true. But when competition enters the market, the company's degree of differentiation is reduced. This should have a downward effect on the firm's pricing power. The market is in a state of monopolistic competition, which means that firms do not necessarily need to adapt to each other's pricing moves if their products are sufficiently differentiated. Apple does have proprietary design and software that delivers some differentiation. However, the new pricing strategy of offering more frequent discounts on their products is derived from the concept of penetration pricing.

With some products, Apple's market share is still very low, and this is the case for computers. Thus, Apple still needs to win over customers who would otherwise buy a competing computer. While this was easy regardless of the price when a product like the Air is superior to all other competitors, when the competition catches us, consumers must weigh the utility of the different products. Price is a significant factor in utility, but if price is matched with the closest competitors then Apple must take that into consideration and should lower its prices -- even if sporadically -- in order to compete better and build out market share.

This recommendation is rooted in a number of managerial economics concepts. Pricing strategy is dependent on the bargaining power that the company has over buyers. Buyer bargaining power is affected by a wide range of factors, including the availability of substitutes, supplier concentration and buyer information. Buyers today have ample access to information to compare specs of different computers and even to receive anecdotal evidence about the switch to an Apple operating system. Thus, buyer information is high and this increases buyer bargaining power. Additionally, Apple's bargaining power will start high when it has a virtual monopoly in a product segment but as other firms enter the market that bargaining power will wane -- the smartphone industry is an example of this. Thus, in situations where Apple begins to lose its monopoly it should engage in more discounting in order to remain price competitive and win customers.

The second pricing recommendation for Apple is to engage in bundling of products and services. The company does very little of this at present, yet bundling is one of its most important market development strategies. Apple's products are well-integrated, more so than just about any other family of consumer electronics devices. As a result, it is easy to bring consumers into the family by leveraging the popularity of a single device. For most of the 2000s this was the iPod and then it became the iPhone. Consumers who purchased these devices were compelled to use iTunes and from there the integration with other Apple products began. Thus, bundling is essential to bringing non-Apple consumers into the fold, and it begins with a single hit product. We know that Apple is successful at developing hits, some of which are quite innovative and enjoy monopoly status for a period of time, bringing in customers who would otherwise be uninterested.

Bundling is putting multiple complementary products together in one pricing package. It is worth noting that complementary products are a factor in the bargaining power of buyers. For the seller, the bundle increases pricing power because a well-constructed bundle offers greater utility to the consumer. For the consumer, the bundle offers value and this increases the likelihood of purchase. In addition to the immediate market share gains that Apple would receive from this, the company will also benefit down the road as more people are brought into the Apple family of products.

A third recommendation relates to demand. Apple is expert at creating demand for its products. The iPad is perhaps the best example of this, the company taking an old technology and re-launching it to tremendous success, re-starting the entire category. However, the demand conditions for Apple products from consumers are different from the demand conditions from business customers. The latter is a weak point in Apple's business model, relating to the company's high level of secrecy in product development; when competitors work with business on new product development Apple refuses to do so.

The third recommendation therefore is for Apple to focus on shifting its response to demand conditions in the business community. Many Apple products, while expensive, are still of good value because they are high-end in their construction and components. This should be a demand driver for businesses. Thus, if Apple were to meet businesses halfway with respect to new product development, the demand conditions would improve. Apple would be able to enjoy even greater economies of scale in production, which would actually help it meet the first recommendation of being able to offer lower prices every once in a while.

Understanding demand conditions is an essential part of successful business. Apple's understanding of consumer demand conditions has made it the success it is today. If Apple wants to truly challenge for industry-leading market share, however, it needs to adapt to the demand conditions of business users, as that is a significant market share driver. The company has demonstrated that it has the ability to create demand out of thin air (iPad) and it has demonstrated the ability to create demand during a stretch the past few years of suppressed aggregate demand in the economy. Therefore, the company has the ability to generate demand in the business community.

The major drawback to this third recommendation is that it is risky. Opening up the development process to major corporate customers would surely undermine the monopoly rents that Apple earns when it launches new products. These are critical to driving profits and winning consumer market share. However, the market share that the company is not tapping into with its current non-strategy to cultivate business demand is much more significant, and there are few monopoly rents to be earned in its basic Mac business at this point anyway.