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6 Lessons From Apple on Pricing Simplicity

Just days after the New York Times (NYT) announced its paywall, John Gruber at Daring Fireball had an interesting take: the Times failed to make its pricing simple enough to be effective.

Gruber compared the Times to that master of pricing, Apple (AAPL). Fair enough -- but while Apple's pricing approach looks simple on on the surface, that actually masks some daunting complexity. The company uses six basic techniques to give an impression of simplicity, and other companies can use those practices to improve their own pricing strategies.

Apple's pricing lessons

  1. Offer a clear set of basic choices.
  2. Test and adjust pricing to maximize profitability; don't rely on complicated options to raise margins.
  3. Make the perceived benefit to the consumer obvious in the price. No perceived benefit, no higher price, even if you think there's a benefit people should be paying for.
  4. As much as possible, turn higher-cost selections into "options" available once a customer has already chosen a product.
  5. When product options are unavoidably complex, treat them as a special case.
  6. When possible, push related complexity onto the business partners that create it.
Now let's see how those work in practice.

Simple pays
Simplicity in price is actually related to simplicity in choice. In some cultures, like the U.S., people seem to want well-defined choices. A 2000 study by Sheena Iyengar of Columbia and Mark Lepper of Stanford showed that greater choice can lead to lower sales. When presented with an array of gourmet jams, people were ten times more likely to make a purchase when presented with a set of 6 choices rather than 24 or 30.

Simplicity gives Apple two benefits. It is a powerful tool in selling to consumers and helps maintain a premium positioning because consumers can't order stripped-down models that become the basic commodity versions. In actuality, though, Apple's simplicity is a carefully crafted image. Here's Gruber impression of Apple pricing:

Their consumer products tend to follow a simple good/better/best pricing hierarchy, where the only difference is storage capacity. iPods, iPads, and iPhones all follow this model. When they deviate from this, the reasons are relatively easy to understand. For example, a regular Wi-Fi iPad costs $499/599/699 for 16/32/64 GB of storage. If you want an iPad with built-in 3G, it costs $130 extra for the iPad itself, and offers a simple no-contract two-tier pricing plan: $15/month for 250 MB data, $25 for 2 GB. Easy to sign up for, easy to cancel, no hidden fees, and several warnings before you hit your data limits.
In reality, it's much more complex. There are four types of iPods and two versions of the iPhone. The iPad comes in Wi-Fi only or Wi-Fi and 3G cellular, with a choice of two carriers for the latter. Then the consumer gets into color choice (well, at least if it's not an iPhone 4, for which the white shell never did appear), accessories, and engraving.

Apple's brilliance lies in emphasizing the choice of product for the good, better, or best scenario. Because it is a master of adjusting prices to maximize profitability, the company doesn't depend on extra charges for options to improve margins on lower-priced products. Only after a consumer has already decided on a given product does the company offer additional choices.

Hidden complexity
When the choices don't increase product costs, the perception is price simplicity. In more complex products -- Macs, for instance -- the final price gets more tangled. A MacBook Pro, for example, has three different possible screen sizes and two processor speeds. Simple enough.

But after that, a customer has additional choices in processor, memory, and hard drive size. Apple represents those options as ways to "customize" a Mac, which helps keep the illusion of pricing simplicity by treating the choice as a special case that won't interest most people.

Even in the consumer electronics arena -- iPod, iPhone, iPad -- there is complexity because consumers want wireless service or content or apps. Prices can vary quite a bit, but Apple leaves third parties, whether carriers or content producers, to set those prices, associating the complexity with someone else.

In contrast, the online pricing of the Times is complicated and blatantly designed to extract more money from customers :

  1. It offers a 4-week term rather than a monthly one
  2. It offers no annual pricing (so you don't see that monthly pricing doesn't exist)
  3. iPad subscription costs extra, even though it's still content coming from the Web
  4. It allows some degree of free use, either directly or through search engines and social media
Apple's pricing lessons
The Times focus on maximizing profits (pay every 4-weeks means 13 payments instead of 12 in a year) leaves a bad taste in the mouth. And yet, it could have just as easily created a simple yearly cost and then offered monthly payments at a slight premium. That at least would be a pay model that most people had experienced.

Or the NYT could have used at least some of Apple's principles outlined above. Not all of these will work for every company. But at least some will, and you doubly benefit from having less complicated inventories, clearer marketing, and more direct and effective sales processes.

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Image: morgueFile user alvimann, site standard license.
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