Why would the gross margin be lower on a lower priced product? That makes no sense whatsoever. If you decide as a company that every product you sell would have the same level of margin applied accross the range then this would not be the case.
Of course you would have to build your product cheaper and use cheaper parts but this is to be expected when buying a cheaper model, but you would always make 30% margin if that is what you want. Of course to make the same amount of gross profit as a product costing twice as much you need to sell twice as much.
What you may find is that the actuall profit margin as a whole suffers due to the extra investment in marketing and sales needed to sell lower priced productcs but while the overall profit margin would decrease slighty the dollars amount would be greater.
Why would the gross margin be lower on a lower priced product?
This is the way it is, Dell gets more profits on an Alienware or on the XPS line than on a puny Inspiron, that's why they purchased Alienware in the first place.
If you decide to chase market share by releasing low-end products, you really need to increase unit sales. The competition will get more intense, it will lead to increased pressure on margins. The PC industry is pushed toward commoditization, this is mostly a high-volume, low-profit margin industry. On the other hand Apple is not competing on price alone, their brand is seductive and valuable, differentiated from the Dells of the world, and Apple can maintain a healthy profit.
Dell isn't the greatest example to compare against Apple - Dell targets mainly businesses would don't care about how pretty the box is, as long as it's cheap and/or offers decent tech support for big volume purchases (Dell Premier), or to the consumer that just wants a cheap box to go online with. I can't even build a PC for $300-400 with a monitor, but Dell can.
I don't think Apple cares too much about market share, as long as they can sell iPods and iPhones, and a decent number of Macs. If the Mac market share increases, it's probably just gravy, as they have a high profit on each computer sold. Without the OS, they wouldn't be that much different than a VAIO.
I'm not sold on Apple quality though - you are paying a premium, but I think their warranty support sucks (I've only had an iPod, but wound up getting the APP because it died on me just after the 1 year mark, and I needed a replacement), and I've read about people having problems with discoloration and overheating with the Macbooks. I'm still planning on getting a Macbook, but the thing better be near flawless for the most part.
When you buy something like a BMW, you get outstanding service and support, and the quality of the product is better, and so the higher profit margin is also displayed in other areas, besides just paying extra for the name.
And one more thing. Analysts were originally a bit worried about the Mac mini and the entry-level iPods because the gross margin for these products was expected to be below the company average of about 28 percent at the time. Apple confirmed the fact in the Jan. 2005 conference call. Oppenheimer stated that margins on the eMac (another entry-level product, targeting the edu market) were below average, too. Gross margins tend to be lower on a lower priced product.
Quote:
Originally Posted by Notes of interest from Apple's Q1 2005 conference call
Apple's gross margins on the new iPod shuffle and Mac mini are below Apple's average and equivalent to the eMac. iPod margins were close to 20% for quarter, while iPod shuffle margins will be below 20%.
Comments
Of course you would have to build your product cheaper and use cheaper parts but this is to be expected when buying a cheaper model, but you would always make 30% margin if that is what you want. Of course to make the same amount of gross profit as a product costing twice as much you need to sell twice as much.
What you may find is that the actuall profit margin as a whole suffers due to the extra investment in marketing and sales needed to sell lower priced productcs but while the overall profit margin would decrease slighty the dollars amount would be greater.
Why would the gross margin be lower on a lower priced product?
This is the way it is, Dell gets more profits on an Alienware or on the XPS line than on a puny Inspiron, that's why they purchased Alienware in the first place.
If you decide to chase market share by releasing low-end products, you really need to increase unit sales. The competition will get more intense, it will lead to increased pressure on margins. The PC industry is pushed toward commoditization, this is mostly a high-volume, low-profit margin industry. On the other hand Apple is not competing on price alone, their brand is seductive and valuable, differentiated from the Dells of the world, and Apple can maintain a healthy profit.
I don't think Apple cares too much about market share, as long as they can sell iPods and iPhones, and a decent number of Macs. If the Mac market share increases, it's probably just gravy, as they have a high profit on each computer sold. Without the OS, they wouldn't be that much different than a VAIO.
I'm not sold on Apple quality though - you are paying a premium, but I think their warranty support sucks (I've only had an iPod, but wound up getting the APP because it died on me just after the 1 year mark, and I needed a replacement), and I've read about people having problems with discoloration and overheating with the Macbooks. I'm still planning on getting a Macbook, but the thing better be near flawless for the most part.
When you buy something like a BMW, you get outstanding service and support, and the quality of the product is better, and so the higher profit margin is also displayed in other areas, besides just paying extra for the name.
Apple's gross margins on the new iPod shuffle and Mac mini are below Apple's average and equivalent to the eMac. iPod margins were close to 20% for quarter, while iPod shuffle margins will be below 20%.