What it is: At one time, Apple products were so expensive they were dubbed the “Apple Tax.” But that’s not always accurate.
Critics used to claim that Apple products were so expensive it amounted to an “Apple Tax.” because of the high price of Apple products, critics touted alternatives as superior based on the lower price of rival products. While lower prices made rival products more attractive, they didn’t always make those same rival products superior in performance or quality.
Yet because Apple products were often priced so high, rival products could comfortably compete by going after market share and making up profits in volume. However, those days may be ending soon.
Apple’s AirPods are priced at $159, which actually undercuts similar products offered by other companies. If AirPods are cheaper than rival products, why would anyone buy a rival product unless the features or quality was better? However, if rival products are neither cheaper nor better in any meaningful way, why would anyone still buy a rival product?
Apple appears to be targeting both the high-end market and the low-end market to drive rivals into a corner. By selling both new versions of products alongside older versions, Apple can target the high-end market with the newest products while also targeting the budget-conscious market with older, yet completely serviceable products. Apple did this first with the iPhone by selling older models and even a budget model such as the iPhone SE.
Apple is doing this with the Apple Watch, selling the original Apple Watch model for $269 while still selling the newer Apple Watch model for $349. If you want the features of an Apple Watch but don’t want to pay more, you can simply buy the older Apple Watch model. Conversely if you want to pay more and not get all the features of an Apple Watch, you can buy a rival wearable product.
In the old days, rivals competed on price, but how can they compete on price any more when they are now the more expensive option? By removing the price barrier to their products, Apple now makes it easy for everyone to choose an Apple product instead of a rival product. Now the only reason people will have for choosing a rival product is if they illogically hate Apple but still want features similar to an Apple product.
Apple already captures the majority of the smartphone profits so by offering lower cost iPhone models, Apple can effectively capture more market share while driving the profits of rivals into the ground. How can rivals compete? They can try offering superior products, but that takes money for research. They can try lowering their prices, but that reduces razor-thin profits even more.
By backing rivals into a corner, Apple is increasingly making it difficult for them to make a profit and grab market share. The less money they make and the fewer customers they get, the less likely they’ll be able to continue competing with Apple.
Apple won’t capture market share at the expense of profits. They’ll capture market share by capturing profits form the high-end and low-end of the market simultaneously. Meanwhile, rivals can’t capture the high-end market and can barely make a profit on the low-end market, leaving them almost no way to make a profit at all.
Rivals aren’t going to disappear but Apple is increasingly making it harder for them to exist. If you want a rival product, make sure it’s not more expensive and offers fewer features. Otherwise, there’s no reason to buy a rival product and that’s exactly what Apple wants people to think.