When the Apple Watch was released back in 2015, I was certain that Apple was serious about dominating this category and wouldn’t be content to simply dabble in it like their hobby product, the Apple TV. That’s because it looked to me like Apple had made a stark departure from their usual practice of only offering high-margin products. In this case they were willing to price the Apple Watch at near breakeven.
Now, no one outside of Apple is privy to Apple’s true gross margins. So in my 2015 analysis, I made my own margin models based on how the introduction of the Apple Watch impacted the overall financial statements that year.
Market penetration pricing can be a dangerous game to play because it is much more difficult to raise prices later than it is to lower prices. Apple deviated from their typical practice of starting high and lowering prices as volume and margins improve. Because of where I see the future of tech is going—mainly to wearables—I’ve stated before that the Apple Watch may be the most important product that Apple offers. And judging by the way that Apple is treated the pricing, they have the same perspective.
But starting last year, Apple Watch turned the corner on market penetration and began a serious margin improvement program. They began phase 2 with the release of the Series 3, improving margins in areas that didn’t involve raising prices. For example, when I received my Series 3 Apple Watch, I noticed right away that the heavy plastic storage case was gone. I weighed my Series 3 package, and it came in at about 1.8 pounds compared to approximately 2.4 pounds for the original Apple Watch. Nice.
I used to do a lot of package analysis for the Cabela’s Corporation when it came time to negotiate our annual rates with UPS and Fedex. One thing I quickly learned was that it was always a big step up in price going from the 0-2 pound category up to 2-4 pounds. So, Apple gained a twofer here. Besides avoiding the cost of providing all those bulky storage cases, Apple also managed to reap a huge freight savings with the lighter Series 3 packaging. Those cost reductions are in addition to the usual economies of scale gained with higher volume. This increase will lead to the Apple Watch receiving much smaller overhead allocations per unit than in 2015.
The Series 4 carries these cost efficiencies a step further with the introduction of separately packaged watches and bands for the aluminum watch. Apple Watches can now be packaged immediately at the end of the assembly line. The type of band in the order is irrelevant. The labor or capital required to “assemble” the watch and band is now gone.
And now with the Series 4, Apple has raised prices and fully completed the transition from the break-even 2015 Apple Watch. I’m guessing that the Series 4 Apple Watch can now join its brethren in the product portfolio as a high-margin product that doesn’t bring down the corporate average.
The Apple Watch has been a huge success on all fronts. It’s gone mainstream with the public, and Apple is finally making a decent profit on it. Every year I look forward to updating my Apple Watch more than I do my iPhone because the performance improvements are relatively much larger.
Market penetration pricing can be a dangerous game to play because it is much more difficult to raise prices later than it is to lower prices. Apple deviated from their typical practice of starting high and lowering prices as volume and margins improve. Because of where I see the future of tech is going—mainly to wearables—I’ve stated before that the Apple Watch may be the most important product that Apple offers. And judging by the way that Apple is treated the pricing, they have the same perspective.
But starting last year, Apple Watch turned the corner on market penetration and began a serious margin improvement program. They began phase 2 with the release of the Series 3, improving margins in areas that didn’t involve raising prices. For example, when I received my Series 3 Apple Watch, I noticed right away that the heavy plastic storage case was gone. I weighed my Series 3 package, and it came in at about 1.8 pounds compared to approximately 2.4 pounds for the original Apple Watch. Nice.
I used to do a lot of package analysis for the Cabela’s Corporation when it came time to negotiate our annual rates with UPS and Fedex. One thing I quickly learned was that it was always a big step up in price going from the 0-2 pound category up to 2-4 pounds. So, Apple gained a twofer here. Besides avoiding the cost of providing all those bulky storage cases, Apple also managed to reap a huge freight savings with the lighter Series 3 packaging. Those cost reductions are in addition to the usual economies of scale gained with higher volume. This increase will lead to the Apple Watch receiving much smaller overhead allocations per unit than in 2015.
The Series 4 carries these cost efficiencies a step further with the introduction of separately packaged watches and bands for the aluminum watch. Apple Watches can now be packaged immediately at the end of the assembly line. The type of band in the order is irrelevant. The labor or capital required to “assemble” the watch and band is now gone.
And now with the Series 4, Apple has raised prices and fully completed the transition from the break-even 2015 Apple Watch. I’m guessing that the Series 4 Apple Watch can now join its brethren in the product portfolio as a high-margin product that doesn’t bring down the corporate average.
The Apple Watch has been a huge success on all fronts. It’s gone mainstream with the public, and Apple is finally making a decent profit on it. Every year I look forward to updating my Apple Watch more than I do my iPhone because the performance improvements are relatively much larger.
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