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Discerning Apple's international product positioning through the big Mac index

Thanks to all those who contributed to the big Mac index there is a substantial amount of pricing data available in one location.

The analysis that I hoped to perform on the data was to see if Apple was pricing specific products differently in international markets. It was prompted by some apparently anomalous pricing of the iPhone 4S in Brazil.

To summarize, the idea is to calculate the “expected” price of an Apple product by taking the untaxed US price and adding duties and tariffs and taxes to determine what that product “should” cost in another country. Then taking the difference between this “expected” price and the actual price to determine if Apple is using pricing to signal in a particular market.

The analysis basically eliminates the effect of government on price and leaves currency and actual pricing signals from Apple as variables.

The analysis is not simple because there are many obscure tax rules. Some products are taxed differently in the same country. I have not completed the country-level analysis but have been able to see some averages over the countries reported (total of 45 reports.)

The following chart shows the average deviation from “Expected” as a percent:

Here are some potential interpretations of this data:

  • The more a product deviates from expectation (e.g. the Apple TV) the more it’s likely to be targeted to the US or potentially has advantages of scale in the US
  • The less of a deviation (nearer to zero, e.g. iPads) the more the international market is interesting to Apple. They are essentially signaling that those products are targeted at wide distribution.

If we take this train of thought it takes us to these conclusions:

  1. The Apple TV is being “subsidized” in the US. The price is so low there probably because it is benefiting from content sales. This is a compelling argument and it might suggest a strategy for Apple TV closer to that of Amazon’s Kindle than to any of the telecom or computing products Apple sells. This may have significant implications in the pricing of any future “TV” product from Apple.
  2. The iPhone 3GS seems to be a US-targeted product. Anecdotal  evidence shows that the product is not particularly strong selling in international markets. Apple is seemingly not trying to stoke demand with discounting.
  3. The iPhone as a brand is not tuned to compete on price globally. Indeed, the iPhone 4S is the most “overpriced” product and seems to be premium priced vs. iPhone 4. The iPod touch is also something of a prima donna when it comes to pricing.
  4. In contrast to the iPhone, the iPad is being positioned through pricing for broad global distribution. This is undoubtedly due to their unlocked nature but there might be some other penetration tactics at play here.
  5. Macs in general are not priced aggressively internationally. However the Air does seem to be positioned for volume growth (while the mini is not.)

Admittedly, these are quite aggressive conclusions given the limited data. What gives me some confidence in these conclusions is additional circumstantial data. The demand for some products is clearly higher outside the US than others. I believe and this data seems to support the notion that the overall strategy for the iPhone, iPad, Mac and iPod is being tuned for the international markets with some precision.

  • http://plky.thrax.cz Thrax

    I wish there was a way how to count in warranty. It could have significant influence especially on the European pricing.

    • Marcos El Malo

      Along this line of thought, we don’t know the costs of customer service overall, on a per country basis, or separating hardware (repair and replacement) from software. Perhaps that information is out there or can be discerned, but it is one more variable to consider. I suspect there are regional differences for these costs.

  • http://twitter.com/elsaul Eli

    You can look at this another way.  Apple is going to apply a minimal mark-up for international sales, either due to supply chains or warranties just because they can.  If this minimum is ~$25, then this will be 25% of the (least expensive) Apple TV, or 5% of the iPad 2 16 Gb.  This still only accounts for ~half of the 3GS mark-up.  But overall, it’s not surprising that the least expensive item will have the largest mark-up in percentage terms even if it’s not unreasonable in absolute dollar terms.

    • Erick

      This is an interesting point.  It’s also worth pointing out that the Apple TV was last updated in September 2010, when the US dollar was noticeably stronger than it was in Summer 2011 when most of the Mac line got refreshed.  It takes a fairly wide discrepancy for Apple to adjust foreign prices due to currency fluctuations in the middle of a product cycle (for instance in Canada the iPad 1 cost C$550 and was never adjusted until the iPad 2 came out at C$520), so quite often launch timing is encoded into these prices.

      I think this factor combined with the previous comment mitigate the significance of the gap between Apple TV and the rest of Apple’s product line.  It will be interesting to see if these effects can be factored out to get at the heart of the data, for instance by taking advantage of the multiple models within each product line (and build-to-order component pricing for Macs) to separate rounding effects from true mark-up.

    • jawbroken

      A version of the graph with absolute deviation rather than percentage might shed some light on this.

  • Anonymous

    There are so many factors included in price including distribution, telco costs, stocking, inventory control, warranty, … that the observed variations are hard to correlate with simple strategy models. My bet is Apple is very attuned to all cost elements and prices accordingly. Macdonalds has a lot more control due to,time in the market with its distribution, Apple is really a newbie in comparison.

    In time, this will converge more aligned with a Big Mac model.

  • Anonymous

    As concerns the Apple TV, your conclusion really fits my personal experience. We upgraded our Apple TV about a year ago, and, after a few initial issues, have been extremely pleased with the $99 product. Of course, we immediately subscribed to Netflix via our Apple TV, which has proven to be a huge bargain. But we also watch iTunes streaming movies on a regular basis and shell out the $4-$5 quite happily. Even figuring conservatively, that’s about 25 movies a year, or well over $100 in rental fees. Then there’s the now-and-then purchase of a TV series such as “The Hour”, so I’d say our yearly contribution comes close to $200/year. Now, having recently purchased a new 55″ Sony, we obviously won’t be in the market for a big screen TV for a while. But I see nothing that keeps Apple from using its JIT manufacturing prowess to lower the price of an Apple-branded set to rock bottom, and then use the sale or rental of content to “subsidize” the price and still make a profit. Indeed, it may be just this realization that Steve Jobs was speaking of.

  • Canucker

    The overall utility of AppleTV has been quite dependent on availability of content but that makes Horaces analysis puzzling. In markets with less content available, the price of the device is higher. Partly, this is due to subsidizing income from content sales, partly from competitive forces. But things are changing. AirPlay is a killer app for iOS and will drive AppleTV sales as people realize that this significantly increases content availability. There are many apps now that provide video from TV companies (mostly free, some with subscription like BBC iPlayerGLOBAL). Apple is presumably also counting on back-door monetarization (if you have an AppleTV, why not use it also for paid content occasionally?). But it perhaps AppleTV will become much like the AirPort Express and TimeMachine – in essence, an adaptor or add-on to allow you to integrate your content.

    Jobs called the AppleTV a hobby. Perhaps he meant that Apple has yet to work out how best to position the device. It’s been evolving rapidly but has been previously held back by the content providers (who throttled supply through the iTunesStore). From here at least (North America), there are many leaks springing up in the dyke.

  • http://wmilliken.livejournal.com/ Walter Milliken

    One of the things I suspected might show up when the data collection was started is a quantization effect due to Apple’s liking for the “xx9″ price points. This would tend to make lower-priced products have a proportionally-larger price deviation (this effect should also be exacerbated by local currency granularity).

    Indeed, three of the largest deviations are seen in the lowest-priced Apple products: the TV, the iPod Touch, and the iPhone 3GS. On the other hand, this doesn’t explain why the intermediate-priced iPads have lower variations than the more expensive computers, or why the iPhone 4S variations are so large.

    I would also expect that Apple would choose somewhat higher local prices in countries with more volatile currencies, as a risk-mitigation strategy in place of more frequent repricing.

    • Marcos El Malo

      I don’t have a link handy, but I remember Cook stating that there was some margin flexibility on the iPads, which might explain the lower divergence from U.S. prices.

      Combine this with Apple’s strategy to make the iPad the dominant (or at least a major) consumer computing platform long term.

  • Anonymous

    What intrigues me is the description of Apple TV as a ‘hobby’. It has been a hobby for a very long time. Apple killed the Xserve and Xserve RAID without any discernible compunction. Presumably, these were not regarded as hobbies. They may not have sold in big volumes, but the returns would have been good. So, even though SJ described the ATV as a hobby, I think Apple have much bigger plans for this little box or something that will grow out of it. A long term plan that gets around the ‘go to market strategy’?

  • Rob Scott

    The cost price of iPhone 4S is exactly the same as that of iPhone 4. If there is discrepancy in cost it is due to other variables, ROE, IMU, etc.

    • Marcos El Malo

      Are you sure about this. The 4S uses newer components and has differences in the case design to accommodate the newer components.

    • Tatil

      Do you mean the respective cost when they were first released or the cost to manufacture them now? 

    • Canucker

      The price of the iPhone 4S presumably also incorporates some element of recovery of development and operating costs for services such as Siri. Moreover, the cost of the iPhone4 has dropped in real terms since its own introduction as components (some common to the 4S) have been reduced in price. 

  • http://brianshall.com Brian S Hall

    Hard to believe Apple TV is being “subsidized”. That’s not the typical Apple business model and you can get equivalent-to-superior devices (e.g. Roku) for much less. 

    • Canucker

      The $99 AppleTV has an A4 processor, 8Gb of RAM and 802.11n wireless along with HDMI, AC power and other bits inc. a remote. The $199 8Gb iPod Touch has these in a much smaller package, a couple of other doodads (gyrometer, etc), earbuds, a battery and a 3.5″ retina display with touch control. The prices seem in line to me (given the cost of the retina display/touch screen interface).

  • http://twitter.com/simonboulle Simon Boulle

    Very interesting. All of your observations make sense Horace, in that the iPhone does seem to be a “premium” product whereas the iPad is priced more aggressively. It ties in with what is happening in South Africa, and seems to be that way in other countries too.

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  • http://jdmuys.myopenid.com/ Jean-Denis Muys

    I tend to be very suspicious of such an analysis, especially as considered as a single data point in time. Going against this analysis are the following observations:

    - Cost of operations is likely to be higher on foreign markets as compared to the US, if only because of economies of scale.
    - Apple corporate is likely to mandate from its subsidiaries some minimum gross margin.
    - Apple never, ever, changes a product price in a local market, whatever wildly the exchange rate may vary.
    - Apple cannot overprice their products too much for grey market concerns.

    So I believe there are upward pricing pressure acting upon Apple subsidiaries: conservative  pricing to match corporate requirements, as well as pure profit maximizing. But there is also downward pricing pressure due to grey market avoidance, good will, and local competition.

    Overall it seems reasonable to me that the current price situation is the result of an equilibrium between these antagonistic pressures.

    For Horace’s analysis to be convincing would require more evidence.

    • Canucker

      Agreed except for over-pricing pressure. Grey markets do exist – especially when products are not released simultaneously or have very limited availability.  People are willing to pay way over actual price. There must be some exchange hedging built in as well. Another “issue” is the inability to repatriate profits without exacting US taxes.

      I think other snapshots in time are likely to bear out the analysis though. 

  • http://twitter.com/BouPierre Pierre Bourgeois

    One reason why the Apple TV may be more expensive outside the US is oddly that it has less content available to it. For example, mlb.com, nhl.com and Netflixs may not be available in all places. 

    The other point to consider is that Apple is a US company and its functional currency is the US dollar. As such, it wants to limit its exposure to foreign currency exposure and may therefore build in a premium for countries whose currency is quite volatile. 

    • Marcos El Malo

      Apple is also looking at a steep tax cost for “repatriating” foreign profits.

      • Anonymous

        Which is why so much of the cash just sits offshore, wherever it was earned.  

  • Nick Hayday

    I think the lack of International 3GS sales (for the UK anyway) is probably down to the fact that you can get the 4 or 4S free with contracts, that are still cheaper than US plans I’ve seen quoted. For example, Vodafone offers a free 4S on a plan that costs GBP46 per month.

  • Paul

    Horace, I would be a little wary of using crowd-sourced pricing data to do analysis without double-checking it. For example it looks like the Argentina prices are for different products than the US prices: “Also, prices included are of the most expensive of kind. E.g., there were a couple of MB Pro’s offered; I included the price of the one with best specs.” See G22 from the spreadsheet. There may be other similar anomalies in the data, not to mention issues with currency fluctuations.

  • Tom Frazier

    I just had a look at the source data and feel there are a number of discrepencies that make it difficult (read: nearly impossible) to draw conclusions in regards to Apple’s global pricing strategies.  Have you considered adding the following:

    1 – Currency FX & product price at date of release.  This would be far more indicative of their strategy because it allows you to really benchmark it against a US release price.  With the current fixed rate FX scheme implemented, you will really skew the data.  For example the USD to AUD fluxuation over the past 24 months has been as low as .8 and as high as 1.1.

    2 – The population of each country will play a large part in their pricing strategy.  Larger markets will be more competitive therefore more focus on the pricing strategy.  Smaller markets will almost always be set to a higher price to recoup the opex costs associated with the sale.  A population index would allow you to adjust price variability by country more evenly.

    3 – You need to implement a formulaic approach to measuring government related taxes.  The current methodology is quite haphazard.  Furthermore, many countries have both a tax and an import duty but I didn’t see duty listed against many countries that are known to have it (UK & Australia for example).

    4 – The ‘actual’ calculation used in the spreadsheet doesn’t take into account those taxes and duty variables.  Rows 30-43 are simply taking the fixed FX rate where they should have a formula similar to ‘ (release_price – (release_price * tax + release_price * duty) ) * currency_fx )

    As it stands there is a lot of good information in there that needs quite a bit of work before any meaningful relationship in regards to price deviations, pricing strategies, expected prices, important product categories, etc can be determined.  I’m happy to help if you need an extra pair of spreadsheet hands.

    Also a few basic controls around data entry would be good.  Make a form that allows people to submit values that can then be entered.  As it stands now there are some security issues with the implementation.

    Tom

    • http://www.asymco.com Horace Dediu

      Excellent ideas. Looking forward to your edits. My contribution to the spreadsheet is prices for the US and Finland so I can’t claim any credit.

    • Anonymous

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  • gerry.croce

    OT: Horace, you appreciate the effective use of charts, here’s one on the arteriosclerosis of the U.S. rail system.
    http://gregor.us/

  • Wayne Renken

    Horace,
    If we looked at the remaining smartphone market in the US that has not yet upgraded from feature phones, what could we learn about how they are different from existing smartphone users? If we viewed them through the ” technology adoption life cycle ” lense (As in Geoffrey Moors book Crossing The Chasm), are they more intimidated by technology? Are they interested in having fewer job done? Are they more price sensitive? What is the character of these late adopters.
    How much of current smartphone revenues are upgrades vs. new adopters?
    Does this give us insights about iPhone versus Android adoption?

    • http://www.asymco.com Horace Dediu

      I believe smartphones offer solutions to many universal jobs. Meaning that they are useful to almost everybody. Being in communication with people and sources of data is useful to everyone. Smartphones do this so much better than voice oriented phones that it’s a “no brainer” to get one if you have the means. The problem is that the way the smartphone exists today as a bundle of device, software and service, is still beyond the means of many. I believe the challenge is simply of reducing the overall price. The last 50% of the US can be thought of as equal in ability to purchase as the last 80% of the developing world. That market awaits service and I believe the biggest innovation in the 2012 and beyond will be how to address this market. Google believes that having free software helps but having free software does not make phones much cheaper not does it make networks much cheaper. The solution to the “affordability” problem will be an integrated solution.