Apple Might Have Started a New ‘Underpricing’ Strategy

March 17, 2017, 4:29 PM UTC

Apple has long been viewed as a “luxury” device maker with high prices. But now one analyst believes the company is changing its tack.

The tech company has engaged in an “underpricing” strategy with its AirPods wireless earbuds and Apple Watch smartwatch, Above Avalon analyst Neil Cybart said this week. He believes Apple’s AirPods, which are available for $159, are notably more affordable than some of their competitors, including Motorola’s $249 VerveOnes+ headphones. Cybart added that the Apple Watch’s entry-level pricing of $269 is substantially cheaper than alternatives like the Fossil Fenix 5 and Samsung Gear S3, which cost $599 and $350, respectively.

“AirPods and Apple Watch pricing demonstrate how Apple is looking to own not only the premium segment of the wearables market, but rather the entire market,” Cybart wrote on Above Avalon. “As Apple runs deeper into luxury, the company is reducing entry-level pricing. This is a curious development as one assumes the opposite would have occurred—Apple would keep prices high to maintain a certain level of exclusivity or scarcity.”

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Apple’s (AAPL) pricing on most of its hardware products has been a subject of debate for years. Apple itself believes its high-priced items—like the iPhone or its most expensive Mac, the Mac Pro—deliver enough value to justify their price tags. Some analysts and critics, however, say Apple is charging too much. They add that customers are forced to pay an “Apple Tax” to get its products.

The Mac Pro is arguably one of the better examples of that so-called tax. Apple’s Mac Pro is designed for graphic designers and other professionals who want high-end computing power. The cheapest model costs $2,999. However, the Mac Pro hasn’t been updated in years and its components are now outdated compared to newer processors and graphics chips. Additionally, customers who buy the highest-end desktops through other PC vendors could pay hundreds of dollars less for their machine. The Mac Pro, in other words, is underpowered and overpriced, some critics have said.

While Apple’s iPhone doesn’t suffer from the same neglect as the Mac Pro, it’s priced towards the top-end of the smartphone market. The same can be said for many of Apple’s other Macs and mobile devices.

But Cybart believes Apple could assign higher prices to its AirPods and Apple Watch and still attract customers. In fact, he thinks Apple could’ve priced the AirPods at $249 or $299 without trouble. He didn’t say how much Apple Watch should cost, but he did note that the company’s “aggressive pricing” on the smartwatch gets it closer to competing on price with low-cost fitness and activity trackers.

While Cybart has no direct knowledge of Apple’s pricing strategies, he believes the plan inside the company is to bring as many customers into its “ecosystem” as possible, so they start subscribing to its Apple Music streaming service, buy apps, and invest in other Apple devices.

“As it currently stands, the average Apple user owns more than one Apple product,” Cybart wrote. “This trend will only intensify as time goes on when considering Apple Watch and AirPods.”

And perhaps most importantly, Cybart argued, Apple is putting its competitors in a pickle that could make it more difficult for them to keep pace.

“Apple is making luxury much more accessible with the idea that low-priced gadgets can create an experience just as luxurious as that of premium gadgets,” Cybart wrote. “It’s going to be difficult for other consumer tech companies to play in this game.”

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