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Apple Links Higher Sales with Higher Prices

by: Carl Howe May 07, 2008 | about stocks: AAPL    
Carl Howe

Carl Howe

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Today's Note From Anywhere is inspired mostly by the Green Monster sign outside our office noting the opening of the world's largest Apple Store here in Boston next week.

Elementary economics says that you build volume by cutting prices on products. But Apple's (AAPL) latest 10-Q filing, where it provided details of its latest record-breaking sales quarter, has a nice counterexample to that so-called wisdom. You have to dig a bit to find it, but look for page 23 of the 10-Q, which has a table titled "Net Sales". But if you don't want to look at the original, here are the lines that are of interest:

So let's walk through this line by line. Between 2007 and 2008, desktop Mac revenues increased 48% while portable Mac revenues increased 58%. At the same time, desktop units sold increased 37%, while portable unit sales went up 61%. And the average net sale per Mac? Despite the fact that Apple was selling many more desktops and notebooks, the average net dollar amount sold per Mac increased 2%. Said another way, despite the fact that consumers paid 2% more per unit, consumers bought nearly 50% more Macs year over year.

Now the sharp-witted readers will note that this increase in average selling price can be explained nicely by the fact that Apple sold more notebooks than desktops. Since notebook computers have slightly higher selling prices, that change in product mix almost entirely accounts for the increase. But even so, average selling prices for desktops went up year over year, not down. And if you look at the original 10-Q filing, you'll note that average net sales for iPods went up as well, almost certainly driven by iPod touch sales.

So what's the takeaway here? It's that innovation and marketing -- creating unique products that customers want -- trump price elasticity with consumers. The elementary economic wisdom that you increase volume by cutting prices assumes that you are selling a commodity. Apple isn't selling commodities; it is selling differentiated products that only it makes. And that means that Apple's economic model is one that is anything but elementary.

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This article has 26 comments:

  •  
    May 07 10:54 AM
    2% increase per unit can be attributed by a relative increase in sales of higher price models. Without knowing average selling price per model, you cannot conclude that Apple has been raising prices.
    Reply
  •  
    May 07 10:58 AM
    This is what we heard during dot com days Mr.Apple Pumper. Pumpers were saying at that time "Conventional wisdom does not apply. Enonomic model is different"- blah, blah BS! We all know what happened finally. But I am sure you would make money before things go south.
    Reply
  •  
    May 07 11:02 AM
    "Apple isn't selling commodities; it is selling differentiated products that only it makes." They are selling products that actually WORK. Fancy that.
    Reply
  •  
    May 07 11:29 AM
    Late last year when I switched from PC and purchased Apple (iMac, MacBook Pro, Airport Extreme) despite an initial determination to buy frugally and unlike when I bought PC, I found myself irresistibly drawn to high-end options from the build-your-own screen. My original target $ figure went out the window (pun not intended).
    Reply
  •  
    May 07 11:48 AM
    Would you look at price point when you come to buy a BMW / Mercedes?
    Reply
  •  
    May 07 11:48 AM
    Should you sell Apple as it approaches 200? Even long terms investors can take advantage of the momentum movements of Apple's stock. Add your thoughts at:

    20smoney.com/2008/05/0.../
    Reply
  •  
    May 07 12:17 PM
    On the other hand, I felt it was time to try a Mac, but when it came down to purchase time, I could not deny my frugal core and bought another PC. Geez, Vista really does stink, but I could not follow through and spend more for something I really didn't know . I may have been happier now, but I couldn't pull the trigger to spent more for the unknown. Maybe next time...
    Reply
  •  
    May 07 12:49 PM
    I think that the release of Vista has helped Apple. I recently bought a Dell with Vista and practically every other day I log onto apple.com lamenting about how I could have spent the few extra bucks and gotten a machine that would have made me happy. I just recently switched over to Safari for Windows after using IE for the last 15 years and there's a huge improvement in performance. I was literally hitting the Network Reset two or three times daily with IE in Vista, since I switched over to Safari I've hit it twice in the last few months. Apple just makes a better product and I think people are seeing that which is why they are willing to pay more for that luxury.
    Reply
  •  
    May 07 01:34 PM
    Just like the stupid "fanboys" been saying for year!
    (snicker, snicker)
    Reply
  •  
    May 07 01:48 PM
    Thank you, jmmx, for your illiterate thoughts. Now go back to your XBox game play and leave us adults alone.
    Reply
  •  
    May 07 01:59 PM
    Sane_Man - you're an idiot! The big difference between Apple, and the bubble of the 90's, is that Apple actually builds great/superior products people want, AND THEY MAKE MONEY doing it. In fact, they make great margins. Go back to school.
    Reply
  •  
    May 07 02:15 PM
    I don't know if this is relevant,but over 15 yrs in the pawn shop business I've only taken in on pawn maybe 3 apples and many hundreds of other brands..
    Reply
  •  
    May 07 02:36 PM
    Carl, miss your regular comments, thanks. "Make products that customers want." This is key and Jobs says this all the time, if any competitors would care to listen. That's why they made 100 prototypes of Macbook Air before coming to market, etc etc. Name any other company that agonizes over their product development like Apple.
    Reply
  •  
    May 07 03:41 PM
    I do not see anything wrong with this article all looks good for the longs of AAPL.But if you do not want to pay more for your Apple stuff visit: seeksomething.com
    Reply
  •  
    May 07 04:52 PM
    at last a blogger that gets it! we pay for good stuff. you can't give me junk for any price. you cant compare apple to commodity box factories…period. WE love Apple !
    Reply
  •  
    May 07 06:39 PM
    Average selling price plays into the revenue game, but it also points to the fact that AAPL satisfies a growing list of customers, while MSFT aggravates them.

    Not to say that AAPL will overtake MSFT in computer applications, but that as the products become more ubiquitous, they will gain more fans.
    Reply
  •  
    May 07 10:14 PM
    im a day trader they are introducing thier i-phone around the entire world.... watch for stock to fly over 200$ a share....apple is quality ....its expensive but thier products are respected.. i think you can say they are taking market -share away from other computer and telephone companys ....why because they offer thier customers a genuine experience ... i remenber when i switched over from windows to safari .....they told me you would learn to use the i mac desk top....now i own a mac pro laptop and brought my brother a mac pro-laptop cause thier stock has preformed so well ....apple is a part of my life ...and it has been a great investment i thank steve jobs for a wonderful experience with APPLE INC the apple stores and all thier products
    Reply
  •  
    May 08 12:06 AM
    frugal I am typing this on my nine year old iMac DV. It's running Tiger, the predecessor to Leopard, which represents six OS upgrades over the years not counting incremental updates. (it shipped with OS 9.1, upgraded to 9.2, and all the OS X updates from beta through 10.4.11). All the user accounts I established in OS 9 are still intact. I've never had a problem upgrading the OS. Could you do that with a PC? How many PCs have you bought over that same period of time?

    Macs aren't more expensive. It's a myth. Configured feature for feature, they cost exactly the same as PCs. Factor in premature obsolescence of PC hardware and the ten year cost of a Mac is probably half that of a PC.
    Reply
  •  
    May 08 08:29 AM
    does anyone see $300.00 a share from this point in time --i see more
    Reply
  •  
    May 08 09:59 AM
    i look for your comments, Carl. Thank you for this great article. And to the person who thinks Apple will vanish... not with all that money on hand, high customer satisfaction, and the best products.
    Reply
  •  
    May 08 10:18 AM
    AAPL has to correct and consolidate first www.investorslive.com/...
    Reply
  •  
    May 08 10:21 AM
    tom1234 "does anyone see $300.00" ?

    only in your dreams this year.

    I am happy with small gains and small profits.
    Reply
  •  
    May 08 10:24 AM
    tom1234 "does anyone see $300.00" ?

    only in your dreams this year.

    I am happy with small gains and small profits.
    Reply
  •  
    May 08 11:30 AM
    tom1234,

    i see 300, 400, 500... But give it through Xmas, 2010. Why? Well, here's aapl's strategic advantages which are unmatched today and unmatchable over the next 3 to 5 years:

    220 > 260 hugely successful retail centers

    Leopard OS clawing Vista or XP

    iPhone/touch/SDK/iApps... dominating SmartPhones like the iPod/iTunes dominates .mp3 players

    iPhone/touch/SDK/iApps... dominating pocket PCs (MID)

    Music in Apple's pocket

    Movies/TV in Apple's pocket and living room

    Google as a strategic partner

    MacBooks winning college and public school eyeballs

    Macs entering SOHO and big enterprise mkts

    Developers are abandoning Windows to work within xCode (free, elegant, easy)

    Whatever the next new gadget phenomenon is, it'll probably be invented in Cupertino.

    The iPhone, itself, will match today's earnings level of $5 by 2011.
    Reply
  •  
    May 10 12:46 AM
    That's what we need, more moronic AAPL idiots who know nothing about technology and their comments.

    Thanks to the author.
    Reply
  •  
    May 10 09:33 AM
    "That's what we need, more moronic AAPL idiots who know nothing about technology"

    Blah-blah - your credentials please
    Reply
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