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CaseStudy 1
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Apple iPhone: Life in the Technology Lane
Before Apple introduced the iPhone, it was hard for most people to imagine that they’d ever pay as much as $599 for a cell phone. But on June 29, 2007, Apple customers stood in line for hours to do just that, eager to be among the first to get their hands on the sleek new device dubbed “the God machine.” Newsweek columnist Steven Levy described how the proud new owners were “lofting their newly acquired iPhones in the air like they’d won the Stanley Cup.” Within the first three days alone, Apple sold 270,000 iPhones at premium prices ($499 for a 4GB model, $599 for 8GB), and CEO Steve Jobs was predicting that they’d cross the 10-million mark by the end of 2008.
Industry analyst Lev Grossman says that Jobs, who had already revolutionized the portable music player market with the iPod, turned his attention to mobile phones because he believed they were “broken.” And Jobs likes things that are broken, Grossman says. “It means he can make something that isn’t and sell it to you for a premium price.” And members of the “Apple Nation” have proven that they are willing to pay.
In a company of 20,000 employees, Apple has only one committee, and its job is to establish prices. In September of 2007, Jobs announced the decision to slash the price of the iPhone, even though it had only been 68 days since its launch. Company research had shown that it was priced too high for holiday shoppers. “If we don’t take that chance, we wait a whole other year,” Jobs explained. “We’re willing to make less money to get more iPhones out there.” The same iPhone that had sold for $599 would now cost $399. At the same press conference in San Francisco, Jobs introduced the new iPod nano, the iPod classic, and the iPod touch. The only thing that made headlines, however, was the unexpected iPhone price cut and stories of the consumer outrage that followed.
Elaine Soloway, a longtime Mac user, said, “Apple really infuriated their fans, the people who urge other people to buy Apple products. We are ambassadors for them.” Like Soloway, thousands of iPhone early adopters expressed their disappointment.
“This is life in the technology lane,” Jobs said in an attempt to defend the company’s decision to drop the price so soon. “There is always something better and less expensive on the horizon.” Some call it the curse of the early adopter. But usually they get bragging rights for more than two months before the masses can afford to buy the same product they paid a premium for. In an attempt to appease his angry customers, Jobs announced that those who paid the original price would now be eligible for a $100 refund in the form of store credit.
The store credit pleased some but wasn’t enough for others. One customer, who bought his iPhone only weeks before the price drop, said the $100 was merely a pay-off for being a sucker. “Steve Jobs actually put a price tag on my suckerdom—$200—and now he’s trying to drain off some of that embarrassment.”
The price cut didn’t just disappoint Apple’s core customers. Investors were concerned, as well, suspecting that the iPhone wasn’t selling as well as expected. Apple shares immediately fell $1.75 to $135.01 after the announcement. Industry analysts suggest that the price change could indicate that Apple, which has long been immune to the pricing wars among other personal computer companies, may have found the cell phone business more competitive than anticipated. Whatever the reasons, Jobs acknowledged, “We need to do a better job of taking care of our early iPhone customers as we aggressively go after new ones with a lower price.”
The Cult of Mac shows no sign of waning in the aftermath of the company’s rare misstep, however. Customers love their iPhones, they say, and remain devoted to Apple as the arbiter of cutting-edge technology that is intuitively and beautifully designed. Sure, admits one loyal customer, “It sucks. But if they had told me then they were going to drop the price in a few months, I still would have bought it. I was obsessed.”
1. Apple CEO Steve Jobs alluded to the price a customer may have to pay to own an iPhone when he said that the steep and sudden price change was simply part of “life in the technology lane.” What did he mean? Beyond the simple exchange of money, what else might the price of such a product include?
2. Discuss the role that product demand played in pricing the iPhone. How did this demand influence Apple’s decision to price it high in the beginning and then lower it two months later?
3. Discuss how the availability of substitutes affects elasticity of demand for Apple products such as the iPhone.
4. How do you think the relationship of price to quality affects how customers perceive Apple products?
Case
Study 2
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Wal-Mart: How Low Can Drug Prices Go?
When Wal-Mart rolled out its new prescription-drug plan in 2006, lowering the prices on 331 commonly prescribed medications to a flat $4, Frank Ganci’s doctor told him to check it out. He has no health insurance and his prescriptions were costing him $110 a month at his local pharmacy, so switching to Wal-Mart meant that he could get the same three medications for $12. Now he says he’s a loyal Wal-Mart customer: “If they don’t make up the money on prescriptions, they’re going to make it up on my clothes and food purchases.”
Industry analysts speculate that Wal-Mart is counting on customers like Ganci to spend the money they saved at the pharmacy on other products in the store. Wal-Mart insists that it can earn a profit on the $4 prescriptions alone, however, since more expensive medications are not discounted. “It can only be in our program if it is profitable,” says Bill Simon, a Wal-Mart CEO.
It’s true that pharmacies can buy some types of generics from manufacturers for less than $4. For example, a month’s supply of fluoxetine, the generic version of Prozac, can be obtained for 75 cents. But store overhead and pharmacists’ salaries bring the true cost closer to $15. It would be difficult for smaller pharmacies to match the $4 price point, which has some of Wal-Mart’s competitors complaining that it violates predatory pricing laws. “You can’t just sell something below your cost to drive out the small guy,” says Rick Sain, co-owner of a drugstore in Tennessee. “You have to at least set a fair price. That’s what all the states that have fair trade laws in place are looking into because you cannot dispense a prescription for $4. They are saying you can.”
Wal-Mart later increased the price of certain generic drugs from $4 to $9 in order to bring the company into compliance with all “low-cost laws,” according to a company statement. John Rector of the National Community Pharmacists Association says, “We don’t know for certain whether it can make a profit on the $4 drugs so they don’t violate these laws. But we strongly doubt it, and the fact is [raising some prices] gives us insight into what its business practices are.”
Stores like Target and Kmart quickly lowered their own prices to match Wal-Mart’s, but Walgreens and CVS both announced that their prices would remain the same. Tony Civello, CEO of Kerr Drug, insists, “We will not treat your prescription like T-shirts and blue jeans. Wal-Mart may choose to use some limited prescription drugs as a loss leader. But our patients’ health care is not a loss leader. We will not compromise that.”
Bill Vaughan, a policy analyst for Consumers Union, argues that the price slashing is actually step in the right direction. “It’s the beginning of better competition in a sector where it’s literally pennies per pill,” he said. When a generic drug is introduced, pharmacies can charge as much as they like for it. One study found that markups were often as high as 4,000 percent. Few people compare drug prices from one pharmacy to the next, so pharmacies are able to mark up prices substantially.
Wal-Mart’s prescription program seems to be raising consumer awareness as it demonstrates how low the prices of the drugs can go. The discounts are especially welcome among uninsured Americans and seniors living on fixed incomes. Legislators have listened to constituents who rely on the $4 plan and efforts are under way in states like Colorado and Minnesota to either repeal predatory-pricing laws or exempt prescription drugs from them.
The prescriptions in Wal-Mart’s $4 program now make up more than 35 percent of all prescriptions they fill, and the company boasts that the program has saved consumers more than $340 million in drug costs already. Wal-Mart executive H. Lee Scott is enthusiastic about its future, saying, “The $4 prescription program is absolutely one of the coolest things that we have done in a long time.”
1. Do you believe Wal-Mart is engaging in predatory pricing with its $4 generic drug program? Why or why not?
2. Do you think that predatory pricing laws should be amended to exclude prescription drugs? Explain.
3. If you owned a pharmacy next door to a Wal-Mart store, what strategies could you try in order to compete? Would you match their prices if possible, or would you find other ways to add value? What could a small pharmacy like yours offer customers that Wal-Mart’s might not?
Case
Study 3
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Petco.com: Turning Negative Reviews into Positive Sales
On Petco.com you can buy a soft-sided travel carrier for your cat for only $19.99. You might think twice, though, after seeing that customers gave it only two “paws” out of five overall for pet satisfaction, appearance, and quality. The reviews reveal more serious reasons to hesitate before adding the product to your cart. A customer with the screen name “Disgruntled Bunny” reports: “The mesh on the sides was such poor quality that my cat was able to rip it to shreds and escape in a matter of seconds!” Another customer recommends buying a carrier with stronger sides, adding, “It costs more but is safer for your pet, so it’s worth it.”
Products have long been rated on sites like Amazon.com and those that exist entirely for customer reviews, but Petco was one of the first mainstream retailers to create a forum on its own Web site for criticism. The risk was obvious: Customers could pan products and send buyers running. But Petco reports that business is booming, even with bad reviews like Disgruntled Bunny’s.
New research is proving what Petco already learned: Peer reviews work. Shoppers are turning to everyday people for product advice. The 2007 Edelman Trust Barometer reports that over half of Americans said they trust “a person like me” for information about a company or product. David Brain, CEO of Edelman, urges companies to stop relying on “top-down communications delivered to an elite audience and move to peer-to-peer dialogue.”
Making customer reviews public has an immediate impact on sales and brand loyalty. Data from ForeSee Results in 2007 revealed that 40 percent of online shoppers said peer ratings on Web sites influenced their purchasing decisions. Furthermore, this group was 21 percent more satisfied with its purchases than other buyers and was 18 percent more likely to buy from the same site again.
According to Petco executive John Lazarchic, most users who search for products by customer ratings shop longer, buy more, and return less: “The savings in returns alone pays for all the technology involved in the review and ratings feature.” And if one product gets too many bad reviews, it usually prompts customers to buy higher-rated, more expensive merchandise instead.
Other advantages? Reviews build camaraderie with an online community where shoppers can connect. They can boost a site’s ratings on search sites. And they establish credibility. As long as the reviews aren’t overwhelmingly negative, positive reviews have been shown to outweigh the negatives in shoppers’ minds. For example, a four-paw review on Petco.com would outnumber one-paw ratings by seven to one.
Lazarchic insists that reviews provide valuable feedback. Critical comments are shared within the company and can instigate changes. In fact, they’re finding that the risk is not in receiving too many negative comments on a product, but too few. When no one is responding, it looks like no one is buying it. Or, if they are, they don’t care enough about it to talk about it. Petco had that problem at first. In the beginning, when the company posted a small link for users to click and write a review, the silence was deafening. So they added promotional banners to the site and advertised drawings in which lucky reviewers would receive cash prizes. Within a couple of weeks, they’d gotten 4,500 new comments.
Analysts warn that to maintain credibility, reviews shouldn’t be edited unless necessary. Petco removes the names of rival brands, URLs, and personal information, but less than 10 percent of the reviews they receive are deleted. Now they’re experimenting with the idea of using customer comments as marketing tools in print catalogs, offline ads, e-mail messages, and point-of-purchase displays. In print circulars, for example, Petco highlights its five-paw rated products.
Many of their customers’ e-mail addresses are collected through a loyalty program in Petco stores, which means those shoppers may not have visited the Web site. By including customer comments in e-mail ads, it expands the reach of the review program and boosts sales of products those shoppers may not have considered in the store.
According to a Nielsen BuzzMetrics study, the customers most likely to write reviews on Web sites are empty nesters and “young transitionals” without children. Petco found that on their site, reviewers tend to be women with higher levels of education and income who are passionate about their pets. It is generally someone who wants to be helpful, share her opinion, and feel important. Someone, perhaps, like Disgruntled Bunny, who wants to warn others of the dangers of defective travel carriers before another cat escapes.
1. A customer-centric company builds long-lasting relationships by focusing on what satisfies and retains valuable customers. Discuss how Petco follows this customer-centric philosophy.
2. Go to Petco.com and read some of the customer reviews for various types of products. Do the one- and two-paw ratings tend to outnumber those with four and five paws, or the other way around? Can you find a customer review that Petco could use to market a product in a company circular or e-mail ad?
3. Now that Petco has identified the type of customer most likely to write reviews of their products, discuss the kinds of promotions that might encourage continued loyalty and response online from them in the future. What could they do to appeal to these customers?
4. Many mainstream retailers are still hesitant to post customer reviews on their Web sites. If you were consulting with one of these companies, what arguments would you use to convince management to try them?
