Whatever your views are on the product, whether it is magical or revolutionary, it was quite easy for anyone, anywhere in the world to see that prices (to US customers) started at $499. Fact. Sort of.
Prices were announced just recently for the launch of the iPad in a further nine countries, including some in Europe, and there has subsequently been a fair amount of discussion in the blogosphere about whether non-US customers are being abused, or taken advantage of, that an ‘unfair’ premium might be being charged to non-US customers.
While this is not impossible, there are some differences between the prices, and other matters for consideration, which I set out in this post, that need to be taken account of.
The $499 price tag announced at the iPad launch (see the Apple keynote speech for the iPad launch) is for the 16Gb WiFi only model for sale in USA. Sales started at the beginning of April. At the time the prices were announced for sale to US customers, the date for the international launch was both vague (and subsequently delayed), and no details of pricing (but still the “unbelievable price” quote was being used on Apple’s website in different countries).
So far, in the selected European Eurozone markets in which the iPad will shortly launch, the same model is priced in Germany at €499 *. At a foreign exchange rate of $1.27:€1 (approximate current rate according to OANDA.com) this would suggest a price of $634, so one might see where concern is arising.
The US pricing is before sales taxes (each US state has its own sales tax laws, and so it makes no sense to quote a gross, after sales tax price – that would just confuse most people). In Europe however, retail sales prices are normally quoted, in each country, on a gross basis, including sales tax (why make customers do the math in their heads, when they will only ever pay the gross value?).
Many people are unaware that the two prices are not directly comparable, but nevertheless compare the figures that they see, and complain that they are being diddled. Whose responsibility is it to be aware of this – the customer’s? the vendor’s?
VAT in Europe can sometimes exceed the sales taxes in US states, but that’s not Apple’s problem. It’s a fiscal policy issue that is ultimately (in theory) reflected in the balance of the level of income taxes we each pay, corporate tax policies (which can incentivize and help business, and therefore economic growth benefiting all), and public and private spending on infrastructure and other state funded services, that in theory we each benefit from.
Taking the German price (€499), and removing the Mehrwehrtsteuer/VAT/sales tax of 19%, gives a net, before sales taxes price of approximately €419.
At the exchange rate of $1.27:€1, the iPad base price would be US$533 (admittedly, this might be slightly less than the ‘premium’ that Apple originally intended, as the Euro has just recently weakened against the Dollar – in the last couple of weeks down from approximately 1.35 to approximately 1.27).
Nevertheless, is seems that European customers are paying a premium of approximately $35 (€27), or 7% on the US pre-sales tax price.
Other drivers of differences in pricing in different countries
So, taking account of the sales taxes (ie, removing them from the European pricing of the iPad) does not mean that (at current exchange rates) that the price is the same as for sales in the US. Why not?
One might initially wonder whether Europeans need to pay more to have the goods shipped to Europe. But since most electronic goods are manufactured and assembled in low-cost countries (eg, China), there is little reason why shipping costs should mean that sales in Europe are higher than in the US. If goods are shipped to US, for whatever reason (packaging, final approval, assembly?) one should only ask why – it would seemingly make little economic sense.
In any case, the premium paid by customers in some countries is more than could be justified by shipping costs – it might almost be possible to ship each product separately, by first class, overnight delivery, and one might still question the amount of the premium.
Local laws in some countries insist on vendors offering certain warranty terms on their goods. I’ve read on some blogs that in Europe warranty must be given for two years after purchase (more than Apple’s normal warranty terms, and covered by the footnote to their terms & conditions).
Although many customers may not be aware of the legal entitlement to a longer warranty period than offered by Apple, it might ultimately cost Apple more than the warranty accepted by customers in the US, and therefore justify a higher sales price to achieve similar profitability levels.
Local selling costs?
When Apple sells its products in Europe it needs a local division/organization/agent/distributor, etc. to achieve this – the costs of that organization (meaning salary costs, sales commissions, third-party services, rental costs of high street stores, local and national taxes, etc.) may be priced differently to the same costs to achieve the same output/delivery in the USA (or other market).
Laws around minimum wage, hiring and firing, local and national trade and corporate taxes, etc. can also significantly impact the cost base of an organization. Therefore, to achieve a similar profit margin (and remember, Apple is a business, not a statutory service provider!) the local price would need to account for potentially higher (or lower) local SG&A (Selling, General and Admin) costs.
Fixed cost absorption variations and subsidizing prices in different markets?
The manufacturing costs for the iPad are generally the same, wherever it is sold (except possibly marginal differences for tailoring packaging, distribution costs, etc. to each country/language). Each country will likely have its own selling, general and admin costs (including a mix of variable and fixed costs), depending upon its retail sales and logistics networks, and administrative overheads.
To the extent that different countries have differing levels of iPad sales volumes (or at least initially, projected iPad sales volumes), the pricing of the iPads in each market would need to factor in the absorption of the fixed costs relevant to each region/country.
Depending on the size of the local costs, the efficiency of the local organizations, the extent to which the local costs are allocated (directly, or indirectly) to iPad sales (versus other Apple sales), and the volume of iPad sales, the cost of each iPad unit sold might be different in different countries. Should that cost differential be spread/shared across all of Apple’s iPad sales? Would you be happy to pay a higher price than the one currently quoted, in order to share the burden of higher costs in another, different country? No, I didn’t think so.
Price elasticity of customers?
Different national markets can have differing cultural and economic tendencies. It is generally well-known that UK consumers were historically comfortable with consumer credit/debt, while German consumers were historically teased by economists for being more thrifty (although in hindsight one has to wonder whether they had it right all along!). Vendors like Apple need to price their goods in a way to tempt customers in different ways in different markets.
Of course, prices aren’t just set on a cost-plus basis (including a desired profit margin), but also with reference to what the market can withstand. This requires a complex demographic assessment of the target market for your product, substitute or competing products (and their prices), assessment of the take/-up throughout the product life-cycle (early adopters, laggards, etc.), etc.
One might think that with GDP per capita being higher in the US than in almost all European nations (except a couple of exceptions, like Luxembourg), that average salaries/wealth might be higher, and therefore ability to pay higher prices in US than Europe. Nevertheless, it also depends on the spread of that wealth across the nations.
Local competition, and ability to sell/purchase across borders?
Apple currently has few direct competitors for its iPad sales (JooJoo, WeTab / formerly WePad, notebook computers, possibly). Nevertheless, the extent to which a company needs to compete will typically force it to reduce its price (until a certain pain, contribution threshold).
This can be different in every market, depending on the extent to which cross-border sales are possible – this is dictated by national laws, import duties and customs, ease of use (eg, do US power adaptors work in Europe, and access (visiting US, friend visiting US, finding a firm willing to deliver internationally, etc.).
Even if you want to buy from a foreign market (to achieve an apparently lower price), it is necessary to factor in the travel costs, distribution costs, hassle-factor, sales taxes and customs & duties (legally you may need to consider them), etc. (the vendor will likely have thought all about this for you, when pricing its product/service in your market!).
Currency under- or overvaluation?
There is a school of thought which says that exchange rates should eventually move to a point where goods in different countries reach an ‘equal’ price (although I question the validity of this theory in light of the other points raised in this blog post). According to the Economist, who maintain a ‘Big Mac Index‘ to test this, and ascertain whether different currencies are under- or overvalued:
Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
If this is true, then (based on the latest index at March 16, when exchange rates were 1.37:$1) the Eurozone was overvalued against the US Dollar by approximately 25-30%. As we saw above, the Euro has since weakened. Therefore, however, if the Euro is expected to weaken further, then maybe Apple was pricing consistent with the rest of the market in each country, or simply preparing itself for further Dollar appreciation (although there are plenty of other tools to also manage the impact of currency developments, beyond putting a buffer in the sales price).
Of course, most of us don’t have access to the pricing decisions that go on inside companies (that is often a key part of their competitive advantage and is highly sensitive information), so we can only speculate as to much of the above.
It is possible that vendors subsidize product sales across their product portfolios, or across countries, or demand greater profit from some customer groups, but this could also be disadvantageous to the company in the longer term, as it could eventually result in inefficiency and/or loss of competitiveness (ideally each product’s costs would be managed to be as low as possible, in the market in which it is sold, to be most competitive with direct competitors, but it is perhaps fair to say that this is becoming blurred by globalization).
Only recently, with the growth of the internet have prices become so transparent across borders (eg, compare prices in USA on Amazon.com, to prices in Germany on Amazon.de, for identical products) – vendors need to quickly realize that consumers are becoming more aware of pricing in different markets, and so vendors should help make their product pricing more transparent, and explain the (apparent) differences.
That said, it is not the vendor’s responsibility to equalize prices in different markets (they are entitled to charge whatever they want / whatever they think they can get away with on a sustainable basis or even in a gold-rush, but acknowledging loss of customer capital). As described above, there are some good reasons why prices might be different in different markets.
And the final choice is with the potential consumers – they can choose not to purchase. However, some products, like the iPad, have somehow generated such expectation, sometimes unachievable, that consumers seem to expect to be able to dictate the terms of their purchase (and even the technical specifications) of the product. Again it comes back to the vendor managing expectations and educating their customer base through transparent communications.
The iPad pricing is at the very least, a good case study, to understand and raise discussion of the matters raised above, in that it is quite unique in the intensity of global attention that it received to its product launch, and its pricing.
*Update 10 May 2009 – I have made minor corrections (typos) to the above and removed an incorrect reference to an additional German tax (based on other blog references, which have subsequently also been corrected, including a reputed email from Steve Jobs, before prices were confirmed by Apple today).
Filed under: Global economic environment | Tagged: Apple, cost-plus pricing, cross-border pricing, currency under- and overvaluation, Economist Big Mac Index, fixed cost absorption, globalisation, globalization, iPad |