Increasing the Average Profit Margin for Apple Inc - Assignment Example

Marketing Increasing the average profit margin for Apple Inc. Increasing profit without adjusting price Though price is an important determinant in the revenue generation of any product or service, non price factors highly influence the profit margin without affecting the customer sentiment. Though Apple Inc caters to a niche customer segment, still with the growing competition from brands like Samsung, Google, Lenovo which have forayed in the market niche of Apple are eating its share. Apple Inc is in the business to manufacture and sell electronic products like, laptop computers, desktop computers, mobile phones, tablets, mp3 players and smart TV. The tech industry is characterised by intense competition and is price elastic. A slight increase in price will result in driving its customers to competitors’ brands. Its niche market is getting saturated and should try and target newer market segments in emerging economies. The emerging markets are very sensitive to price and Apple Inc should try and reduce its direct and indirect costs to increase the profit margin. Since price is an important determinant of the product quality, thus reducing will also result in negative customer perception. It should try to achieve better economies of scale, strategic partnerships, vertical integration of business process, ancillary services etc (Rogers, 2001). Economies of scale Apple Inc should aim at increasing its economies of scale to enjoy better profit margin. This will allow it to enjoy higher profitability without adjusting the price of its products. It can enjoy better scale of operations by buying in bulk from its vendors. It imports value added component that is imported from countries across the world. It imports from countries like China, Taiwan, Singapore, France, Germany, Japan, etc. Economies of scale is achieved either through internal or external scale of operations. Apple can increase its orders to enjoy better rates from its suppliers. This will reduce its shipping costs as bulk transportation will allow it to receive discounts from its logistics partner. At the operational level this will lead to increased scale of operations which will reduce per unit cost of production resulting in an overall decrease in the total cost. For enjoying better economies Apple Inc should forecast the market demand of its products. There should be significant demand of its products that will incentivise it to order in bulk (Kotler, and Keller, 2012). Vendors and logistics partners of Apple Inc might offer trade discounts, long term supply contracts, etc. Its current list of vendors is provided in the table below: Figure 1: Vendor list of Apple Inc. CRM and STP strategies Better customer relationship strategies will help Apple to create long term sustainable relationship. This will result in increased frequency of purchase that will help it to reduce it’s per unit operational cost leading to better profit margins. CRM will also help the company to spread its brand awareness through word of mouth promotion leading to increased revenue. Proper segmentation, targeting and positioning strategies will allow Apple Inc to generate increased revenue. It can segment the total market on various parameters like geographic, demographic, psychographic and behavioural. Through geographic segmentation it can target the region where it would want to launch its product, demographic factors include age, income, social class of its target group, psychographic and behavioural factors include the lifestyle, uses, usage, etc patterns of its target customer segment. Critically analysing the above segmentation factors will allow it to target the relevant segment with proper marketing strategies that will lead to its brand success. It offers numerous products like Mac book, Iphone, Ipad, Ipod touch, Ipod Nano and Ipod shuffle. Targeting each brand to different customer class will allow Apple to cover a wider market space that will offer both operational and financial leverage (Porter, 2008). Strategic Alliance Strategic alliances with vendors, competitors – direct and indirect, telecom companies, app makers, logistics, etc would allow greater leverage to Apple Inc to increase its business scope and operation. Expanding its business scale will allow it to reduce it’s per unit manufacturing and customer cost which will improve its profit line. Partnering with vendors will allow it low per unit procurement costs. Alliance with its direct and indirect competitors will to greater market coverage that will mutually benefit both i.e. Apple Inc and the partnering company. It can partner with tech Giants like Microsoft, IBM, Lenovo, etc to build its software platform and apps. This will allow better revenue streams for Apple. It will be able to offer integrated apps that will help to exceed its customer expectations which will provide an incentive for expanding its scale of operations. It can integrate its supply chain i.e. partnering with its logistic company. This will help it to reduce the per unit transportation cost. If it enters into a long term contract with its logistics company for its bulk orders, it will allow it to reduce its direct costs which will help it to achieve better gross profit margin. The strategic partners are also benefitted from increased trade on a year round basis that will allow them to offer better price to Apple which will increase its average profit (Lasserre, 2012). Building manufacture owned dealer network A manufacture owned dealer distribution system will benefit the company by offering greater flexibility and autonomy in setting the price margin and other trading terms and conditions. Often owing to high dealer margins reduce the earning potential of companies. Apple can distribute its products in the emerging economies through its own outlets than franchising it. Franchisers will add a margin to the products that will force Apple to invariably adjust its price to ensure better profit margin. Building its own dealer network either through full integration or strategic alliance will reduce the added margin that will prevent it from adjusting its price line. Though there will be initial outlay for developing an own dealer network, it will help reduce per unit cost of its product in the long run. Own dealer network will also benefit Apple Inc with better payment terms, credit period, etc. Third party dealer network also result in degrading the brand value of the parent company. They often sell multiple brands unless there is exclusivity in distribution. This result in dealers pushing the brand in which they have higher margin, thus Apple might suffer from lower revenue which will reduce its average profit. Brand awareness is reduced owing to such dealer partnerships, thus building own dealer networks will eliminate such inhibitions in the distribution network (West, Ford and Ibrahim, 2015). Increasing purchase frequency Price adjustment should be the last option that should be used by companies when other strategies to increase the profit margin have failed. Purchase frequency implies to increasing the number of purchases. Effective marketing communication and promotional strategies will stimulate the demand of Apple products that will result in repeat purchase. Augmented and better services related to the selling of products like zero service cost, low annual maintenance cost, discount on app purchase, free accessories, etc will lure customers for buying Apple Inc’s product and also increase buying frequency. Apple Inc believes in continuous innovation which can be leveraged to increase the rate of purchase. The company will benefit from such high purchase frequency through low unit cost of production. High rate of purchase will incentivise Apple Inc to produce more of its products. This will lead to greater operational efficiency that will reduce the unit cost of manufacturing, resulting in increased average profit margin. This will allow it to distribute its direct and indirect costs over its large volume of production leading to lower levels of cost. Thus using marketing strategies to increase the purchase frequency than adjusting the price is a better measure of improving revenue streams as this will lead to its brand loyalty (Fill, 2006). Financing product purchase Apple Inc should try and focus more on increasing its customer base. It operates in a niche market that caters to only the affluent customer segment. This strategy will not allow it to enjoy high profit margins, owing to its low sales volume. If the cost per unit of production has to come down it has to increase its scale of operations i.e. increase its volume of business. This can only be achieved by stimulating demand in the alternative customer segments in the home and foreign markets. Providing financing options to stimulate the demand in the lower market segments will benefit Apple Inc by providing wider market access. Low or zero financing cost will attract those customer segments who previously could not afford to buy Apple products or who would consider buying it after a certain time. Financing strategy will immediately result in increased sales for its products that will result in high business volume in the short run. It can also add a certain interest margin to its finance or might charge a nominal account that will further boost its earning leading to increased average profit margin (Wintzer, 2007). Strategise marketing efforts Marketing and promotion costs can significantly reduce the profit margin of Apple Inc. As it caters to the tech industry, it has to engage in host of marketing activities like promotion and communication. These comprise large part of its total cost structure. It should thus plan out differentiated strategy for its line of products vis-a-vis mac book, iphone, ipad, ipod etc. All the products have different cost structures and thus have different profit margins. It should focus more on advertising and promotion of products in which it has higher profit margin and less stress on those lines which have low contributions to its profit. Focussing more on marketing communication and promotion of products which have lower profit margins will further reduce the profitability and thus result in affecting the overall profit of the company. Profit margin is not only the key indicators that will help strategise Apple Inc’s marketing activities, but market demand is also another critical factor that influences the promotion and advertising decisions. Brands which have high demand or show good prospects need to be promoted more despite its low profit margin as the high demand situation will allow Apple to expand its scale of operations which will reduce the cost of production (Perreault and MaCarthy, 2003). Increasing accessory sales Apple Inc can also improve its revenue stream that will increase its average profit margin by increasing its accessory sales. It offers host of accessories for its main products like cases and covers, earphones, chargers, trackpads, keyboards, server accessories, presenters, memory, speakers, display and graphics, software, insurance, etc. Offering such value added and products and services will help it improve the sales of its lead products. It can offer such accessories for low cost or as complimentary with the purchase of its core product. This will not only augment the turnover from its core product will also add additional revenue from the sales of the added products i.e. accessories. It can strategically target its accessory sales. Apple Inc can offer discounts on its accessories to customers who will purchase their core product through its finance scheme. This will create new revenue streams, as low cost product financing will boost the sales of its core products, sale of accessories and also financing charges. It can partner with new dealers to promote its accessories that will not only allow it to grow its brand, but will also benefit by small revenue streams (Proctor, 2000). Using the psychological pricing technique Though adjusting product price may drive away sales, at times using various pricing techniques that target the consumer psychology may not affect the market share at all; rather it might help to achieve more revenue. Apple Inc can strategise its pricing by inducing customers to buy the product at a particular rate, beyond which they will have to pay high price for the product which was available for a lower price. It can introduce time bound pricing, prestige pricing, etc for its different customer segments. It can target the affluent customers with their high end products and the other segments with various prices for a limited period. These customer segments are price sensitive compared to the affluent customers, who perceive price to be an indicator of quality. Offering odd interest rates for its credit facilities and accessories will also attract customers that will result in immediate revenue growth leading to higher profitability. It can target the consumer psychology by offering low price up gradation for its product with more storage. For example – it can charge a phone with 16GB storage for an extra $99 compared to its phone with less storage which will cost $120 (Ferrell and Hartline, 2012). Meet the competition or undercutting competition pricing The Apple does not need to set prices for the products that meets the competition or undercuts the competition. Apple products cater to brand image rather than anything. The products symbolize status symbol for the customers and are used by the customers to differentiate themselves from others (Smith, 2011). That is the products are used as a augmenting to the value that the customers have about themselves. The products are never priced in comparison to the competitors and there is no question of cutting the prices or setting the prices according to the competition in the market. The Apple products have a brand value that may be hampered if the company goes for setting price according to the competition or introducing a low cost model. The company cannot afford to lose the value that is associated with its product by introducing a low cost model. The fact remains fact that products like apple are not catered for the mass market but for niche market. So the pricing is actually value based pricing rather than being competition based. The prices of the product are designed based on how the customers’ associates value to the product. The prices of the product are associated with the value perceived rather than being based on competition. Repositioning The main competitor of Apple in the mobile industry is Samsung. Although there exists much difference in between the company in terms of target customer base as the company Samsung targets mass market and Apple’s market domain mainly exists in the niche market. Still it is found that many a model Apple sells is replicated by Samsung and sold at a far low price. Thus Samsung is able to cater to a mass market including customers from high end of the spectrum to the low end. The Apple as a company can be repositioned as company in the market against the higher priced Samsung products or other high end products that are available in the market. The company can attract high end customers by giving the value proposition of the products of the company against similar priced high end products by the competitor company (Fahy and Jobber, 2012). The company can attract the high end customers by stating the added value that the apple products over other similar high end products by the competitor companies. The company can use the added value that an apple product provides to justify its high price and why the company charges high prices and the customers should go on for pricing the high priced products. Justifying higher purchase price The company can justify the higher price to the customers by describing the whole life benefits that the company can get by purchasing the products from apple. The benefits may include free customer service for the products for the lifetime of the product (Schindler, 2011). The company can provide other benefits to the customers which would otherwise come to the customers for a cost (Mills, 2002). The increased price of the products could be justified by the savings of the company on the different cost factors. However to make it effective the company has to first to take into consideration what are the value that the customers seek that comes at a cost and then matching the price of the product with the total cost of the benefits. The value pricing strategy There are times when price increase does not drive away the customers to competitor brands. This is totally dependent on the mindset and the behavioural patterns of the customer segment. Apple Inc should try and increase the expected value of its customers. This will allow it to manipulate the price of its product upward. It can add certain differentiators by introducing better apps, higher memory, and camera specs; touch experience, etc to offer its new product at higher prices. It should try and relate the added benefits of the products with the added features to augment its profitability. Though using the tradeoffs analysis is only possible if its customer segment perceives price to be an indicator of quality. Since Apple caters to a niche market, thus price increase to support the quality of its product will be well perceived by its target audience. Though such strategy does not aim to reduce the unit cost of production, but it focuses on increasing the unit price of the product which will lead to an increase in the average profit of all it product lines (Henry, 2011). Other pricing strategies Bundle pricing of products lead to lower profitability. The overall sales may be driven by the pricing strategy, but the average profit is reduced. Apple can offer separate prices for its product and accessories at discounts rather than offering it as a bundle. This will result in increased combined price. For example if Apple offers a complimentary earphone along with the purchase of its Iphone it would charge $170. Price of the phone being $150 and price of the earphone is $50. Through bundling it’s being able to sell one accessory after forgoing $30 on its earphone. It is assumed in this case that the price adjustment is towards the earphone and not its core product i.e. Iphone. If it would have sold the earphone at a discount of 10% on every purchase of an Iphone, it would have forgone $ 5. Thus it shows how unbundled pricing offers will lead to increase in average profit compared to bundled pricing. Either pricing strategies have pros and cons; the former is aimed at increasing the average profit while the latter is aimed at increasing the overall revenue (Porter, 2008). References Fahy, J. and Jobber, D. (2012). Foundations of Marketing. NY: McGraw-Hill Education. Ferrell, O., C., and Hartline, M. (2012). Marketing Strategy. Ohio: Cengage Learning. Fill, C. (2006). Simply marketing communications. UK: FT Prentice Hall. Henry, A. (2011). Understanding Strategic Management. New York: Oxford University Press. Kotler, P. and Keller, K. (2012). Marketing management global. Harlow, Essex: Pearson Education. Lasserre, P. (2012). Global strategic management. Singapore: Palgrave Macmillan. Mills, G. (2002). Retail Pricing Strategies and Market Power. Victoria: Melbourne Univ. Publishing Perreault, W.D. and MaCarthy, E. J. (2003). Essential of marketing: A global- management approach. Boston: McGraw-Hill. Porter, M. E. (2008). 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