What does Apple sell?

Not iPhones and iPods, but "pricing" (via Freakonomics)! So says a Businessweek article that examined Apple's strategy of using "pricing decoys, reference prices, bundling and obscurity" to increase the attractiveness of its products.

The iPod Touch media player has been revamped at three price points - $229, $299, and $399 - all costing more than the iPhone (iPhone 4 with more features comes at a much lower price of $199), which does everything the Touch can plus make phone calls. The $399 and $299 price models serve as decoys, to be used as reference points, to increase the attractiveness of the cheaper version.

Another application of a high reference point is the strategy of launching products at an artificially high price (to capture the initial burst of consumers with higher willingness to pay) and then rapidly lowering that price - iPhone cost $599 when it first hit the streets, while today at $199 it appears like a steal.

Clearly distinguishing itself from the rest of the market makes it difficult to establish an external price reference point for any Apple product, at least in the immediate aftermath of its launch, and thereby makes it possible to push through the price premiums. Obscurity of the product therefore makes it easier for customers to embrace Apple's prcing.

Finally, an Apple product is never an one-off buy, but is followed by a series of downstream expenditures - data and voice phone contracts, song purchases, video rentals, and advertising clicks. These services are bundled into the original purchases with a back-loaded payment structure.

More illustrations of price referencing (all from Freakonomics). First, decoys



Reference point pricing...



... and more reference point pricing



And the increasingly popular pay-what-you-wish!



Update 1 (19/9/2010)

Tim Harford has this nice summary of different pricing strategies that exploit various cognitive biases - endowment effect, anchoring, social approval, bundle freebies etc. He points to infomercials - "The TimCo smokemaster doesn’t retail for £200; it doesn’t retail for £100; it doesn’t retail for £50... (anchoring to a price of £200)... if our lines are busy, please try later” (social approval)... the smokemaster is not available in regular stores (loss aversion)... but wait! When you buy the TimCo smokemaster you get the TimCo soup knife absolutely free (complex pricing and use of 'free')". He also points to drip pricing which combines many of these effects,

"Customers agree to pay a price only to discover that there is a charge for delivery; another charge for paying by credit card, and another for insurance. Drip pricing taps into the endowment effect, because customers feel that they have already made the decision to purchase; it creates loss aversion because customers commit time and effort to the search before being hit with extra charges; and it is a form of complex pricing which makes it hard to compare offers."