March 5, 2015

Price Watch

Five years ago, Apple’s last new product category, the iPad, was unveiled. In just a few days, the company’s next new product category, the Apple Watch, will make its debut. So I’m going to do something I haven’t here since 2010: I’m going to make some informed (if almost certainly wrong) speculation about one of the biggest remaining unknowns: In this case, pricing.

Pricing is an often-overlooked part of design, something we tend to think of as purely the domain of business, to be taken care of by MBAs rather than product designers. But pricing is just as interwoven with design constraints and user psychology as any other design choice, and I’m nearly certain Jonathan Ive’s team played a part in the process.

Mind the gap

The one thing we do know about the lineup’s pricing is its floor: Apple Watch Sport is $349. We have wild speculation for the ceiling: five, ten, even twenty thousand dollar price points have been proposed for the top-end, solid-gold Apple Watch Edition. That’s uncharted territory, but what’s most interesting in terms of price design is the mid-range, un-suffixed Apple Watch.

Consensus seems to be that the steel-clad Apple Watch will start at nearly twice the price of the aluminum Sport. While this is hardly unreasonable to expect for a semi-luxury item, it would leave a huge hole in Apple’s usual pricing structure: Ever since the introduction of the iPhone, Apple has priced all its mobile devices in $100 increments, and it’s become a proven strategy for the company. Edition notwithstanding, I can’t really see them abandoning it for the Watch.

Finding the right variable

Apple’s upsells for mobile products have included storage space, screen size, and in the case of previous years’ models, hardware revision, all priced with the same $100 increments. But the Apple Watch has none of these easily-tiered variables.

As for screen size, it’s highly unlikely the four-millimeter step from the 38mm to the 42mm version will be enough to carry a $100 premium (for aluminum and steel, at least); even $50 seems like a stretch. All Apple needs to cover the cost of are the additional metal (a few cents to a dollar?) and a few more pixels of OLED ($12?), for which a $30 bump seems just about right to maintain the product’s margin. And the $30 increment is a familiar one, used with iPads for which the $100 increment alone wasn’t sufficient to maintain the margin on cellular radios.

So that’s a $30 increment, but still no $100. How about color? Even though John Gruber has suggested a possible return of the 2006 MacBook’s “black tax,” Apple has been selling black versions of its hardware for the same price as all other colors since the iPhone 3G in 2008.

Stepping up

The magic of the repeated $100 increment is the negotiability it engenders in the buyer’s mind. Whatever you’re considering buying, the next step up is never more than $100 away – it’s right there, tempting you. It’s for this reason that Apple more or less has to have something at a $449 price point, and with no premium bands in sight for Sport, only a modest premium likely for screen size, and equal color pricing, that leaves the entry-level steel version to cover the gap.

From there, however, I think Apple has plenty of flexibility to maintain its $100 increment strategy with premium bands, each tier falling into the groups outlined by Gruber in his piece.

The market versus the margin

There’s no doubt that premium watch buyers are used to spending more than this for a quality steel watch. Perhaps Apple could charge higher prices to signal competition with quality mechanical watches, but I think they will lowball simply because they can. A steel-housed smartwatch doesn’t cost twice as much to build as an aluminum-housed one, and I don’t think Apple will price it as such.

I could be entirely wrong about this, but historically, Apple doesn’t really seem to care about charging a lot as much as they care about charging enough to maintain good margins. Remember Steve Jobs’ deft anchoring of the iPad at $999 before announcing it would be half that? However the Apple Watch ends up being priced, I think it’s going to be based more on the margins Apple can make than on how high the market might be willing to go.