Originally posted by Programmer
edit: I forgot to mention the reason I said all of this. If Apple can build a machine (say a 2.3 GHz DP) in limited numbers that will address a particular market (say film compositing) and deliver a massive performance improvement over the competition (say 10x), then you can bet that they'll charge what the market will bear. Over time they will drop the price to "reasonable" levels.
This hits the nail right on the head. All the arguments about what Apple "ought" to be selling their products for boil down to this: What are people willing to pay?
If I produce a widget that people are willing to pay $50 for, then that is what I charge for it. If it costs me $60 to make, then I have no business.If it only costs me $1 to make, then bully for me. I could sell more at $40, but would I sell enough
more to make more net?
Just for argument, let's say my widget costs me $20 to make. If I could sell 10% more at $40, it's a losing proposition. I gross $5000 selling 100 for $50, but only $4400 by selling 110 for $40. My net at $50 is $3000, while at $40 it is only $2200. I gain some economies of scale at higher volumes, but my cost of production would have to drop 35% (below $13 per unit) to make the same amount of money at the $40 price point as at the $50 price. Alternatively, if my research showed that I could sell 50% more at $40, then the lower price is the more profitable (I'll leave the calculation to you).
Apple has done all this math. They have good estimates as to how many units of each product they can sell at a variety of different price points. They know how their cost of manufaturing will vary with number of units produced. They know what the ideal price points are to maximize their profits. Apple has been content to price their products to maximize net profits for many years - which is why they're still making money, despite their "high-priced" products.
Building market share is a different matter. You "buy" market share with current profits - making less net temporarily with the hope of gaining more net later. More accurately, you're borrowing current profits and investing them, to be paid back with interest through higher revenue and profits in the future. This is another economic calculation. Is the Return on Investment (ROI) going to be worth it? Could the company make more money by doing something else with their profits? The company might be better off investing current profits in shares of another company, or simply banking it. This seems to be Apple's position at the moment - building market share with their current products simply doesn't have enough ROI. In other words, Apple can't boost their market share enough by cutting the prices of current hardware to make it worth their while. They would have to lower the prices so far that they would end up making nothing per unit (or overall), which would not be compensated for by sufficiently higher profits later. Consequently they're treading water, leaving market share alone and simply maximizing profits. In a down economy where nearly every other computer maker is hemorraging money, they are doing masterfully well.
The 970 offers a way to break the cycle and give Apple a chance to build both profits and market share. In my widget example, the 970 represents a "Widget Deluxe". It is so much cooler than my current widget, that I can sell 100 of them for $75, while they only cost me $25 to make. Instead of selling them for $75, though, I charge $60 and sell 125 of them. Now I'm making more net AND expanding my market share. My investors are delirious. As the Widget Deluxe matures and my cost of production drops, I cut the price accordingly, maintaining profits and still boosting market share.
I teach Chemistry, not Economics, but there's a lot of overlap in the concepts. Keeping a major corporation going is exceedingly complex. I'm confident the economists and accountants at Apple know what they are doing. The 970s ought to come in at higher price points than current hardware simply because they represent much higher performance per dollar. I also see a lot of behind-the-scenes maneuvering to allow the 970 to start driving Apple's market share up rather rapidly, as well. I think the next 12-18 months are going to be rather interesting.