Loss leaders or Apples: A contrast in marketing

Posted on by Mike Evans

With the iPad and Amazon’s Kindle Fire we are presented with two absolutely contrary marketing models. The Fire is a loss leader, reputedly costing more to make than it can sell for. The iPad (and it is the same with all Apple products) is manufactured to a high specification, offers a full set of features and is sold at a profit. Which is the better policy in the long run?

Loss leader model

From a consumer point of view, the natural reaction is to want to buy everything as cheaply as possible. Sometimes we do not see the bigger picture. The Fire, like the attractively packaged Gillette razor with two “free” blades, looks like a good thing. But with the Fire, as with the Gillette, you are buying into a closed market place where you will keep on spending just because the original product is so handy.

In the computer world we have a prime example of this method of marketing: the ink-jet printer. These printers sell for less than the cost of manufacture because the makers know that they can continue to sell you ink that costs more than its weight in gold.

Apple model

Apple, on the other hand, is successful because it makes highly desirable quality products which it can sell at at a premium and make lots of profit along the way. Despite the success of the app stores and, to a much lesser extent, the iBook Store, Apple does not depend on this extra income to remain profitable.

The extent to which Apple minimises manufacture, development, packing, distribution and marketing costs is demonstrated clearly in the chart (below) from Horace Dediu of Asymco. With painstaking detail he quantifies the costs that go into the production of the typical iPhone with an average selling price of $630. Just look at that gross margin of $397 and the operating profit of $319.

With figures like these, is it any wonder that Apple, with under 10 percent of the mobile market, accounts for 75 percent of profits in the entire mobile industry?

Look at any segment market where Apple is active, from laptops to MP3 players, and it is a similar story. Apple makes profits, the products are seen as being of high quality and they are highly desirable. And, something that is not always given due weight, Apple products enjoy a healthy second-hand market bolstered by a low rate of depreciation relative to the electronics market as a whole. The overall cost of owning an Apple device, taking into account resale value, is often far less than it would seem when you are getting out your credit card.


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