RE: Gruber on iPod Pricing

Another comprehensive analysis by Gruber, this time on financial analyst speculation iPod Pricing.

The disagreement is quite interesting, let’s take a look. Firstly, I think the economics used adds up neatly to a pseudo-mathematical summary:

Revenue = Price x Volume
Cost = (Variable Cost x Volume) + Fixed Cost
Profit = Revenue - Cost

Value != Cost + Margin

With me so far? We have seen that revenue maximisation is a function of price and volume and that value is not equivalent to your costs plus a margin. Instead, it’s the price the market will tolerate.

The area where Dan Nystedt and John Gruber disagree appears to be on the degree of price elasticity in the market. Dan believes that the lowering of prices could stimulate new demand:

The second-generation iPod Shuffle, for example, could have been priced closer to US$49 to stimulate demand from users, since the cost of materials going into it amounts to only $30, the analysts said.

Whereas Gruber states:

But I offer another explanation: that Apple can only manufacture these new iPods so quickly, and that they expect to sell them as fast as they can make them, or nearly so, from now until Christmas at these prices.

So Gruber takes the position of either a) believing that the price is already low enough to stimulate sufficient demand to satisfy the available supply or b) that the market isn’t as price sensitive (or elastic) as Dan thinks.

Since Apple’s closest competitors use similar pricing it would appear to demonstrate an industry perception that, currently, there isn’t much latent demand that could be stimulated by more agressive pricing.

Digital Audio Players are not a commodity. Yet.


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