Advantage Apple: Retailers only get a 3% discount on iPad

Advantage Apple: Retailers only get a 3% discount on iPad

Summary: We know Apple's retail stores and its supply chain management have allowed it to give the iPad a price that competitors find tough to match. There's another factor: Retailers only get a 3% discount.

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TOPICS: iPad, Apple, Mobility
37

When I wrote my article, The one big reason why iPad rivals can't compete on price, and explained that Apple's retail stores were a major factor in the iPad's price tag and ultimately its success, I got one thing wrong. This one thing certainly doesn't nullify the truth of the matter. In fact, it's actually another factor that tips the scales in the iPad's favor.

Photo credit: Jason Hiner

The issue is the iPad's wholesale price -- in other words, the price that Apple sells the iPad to its retail partners such as Amazon, Best Buy, Target, Wal-Mart, and a few others. My point in the article was that Apple can afford to price the iPad lower than its main competitors because:

"the company can swallow the bitter pill of hardly making any money from iPad sales through its retail partners because it can feast off the fat profits it makes when customers buy directly through its retail outlets and the Web store. However, companies like Motorola, HP, and Samsung have to make all of their profit by selling their tablets wholesale to retailer partners."

Wrong. It turns out, Apple still makes a ton of money on the iPads it sells to retailers, who are vying with each other to see the iPad for very little profit.

Since first publishing my article, I've received a lot of messages from people working in the technology retail sector and have received information from multiple independent sources that Apple sells the various iPad models to its retail partners at a scant 3% discount off of the sticker price.

I asked Apple and several of its retailer partners if they could confirm this or if they would like to comment on it. Apple had no response.

Best Buy PR manager Paula Baldwin said, "As matter of policy we do not comment on the details of any financial arrangements with our vendor partners."

Verizon PR rep Michelle Gilbert said, "The relationships and agreements we have with our partners are confidential. As such, I cannot confirm or comment on the messages."

However, I'm confident in the 3% figure since it has come from unconnected sources in the tech retail industry in both the US and the UK.

Of course, there's more to the story. Why would retailers agree to make almost no money off of iPad sales? The technology retail professionals I talked to -- who did not want to be named because they are either under NDA with Apple or feared negative repercussions -- said that retailers are willing to take low margins on the iPad in order to increase store traffic. These retailers then get iPad customers to beef up their orders with accessories and warranties, which are both high-margin money-makers for the retailers.

What about comparable tablets? Are companies like Motorola and Samsung able to sell their tablets to retailers for 97% of the retail price tag like Apple does? It's possible, but not likely unless it's a highly-desirable product or a retailer with a special relationship.

So, what is the wholesale number for these iPad competitors? While it's probably not as low as 3%, it's certainly not the traditional 50% wholesale price. One of the tech retail contacts I spoke with said that those kinds of margins disappeared in the early 1990s when the consumer tech boom started taking off. For tablet competitors, the number is likely between 5%-15% discount off the retail price, based on reports from multiple sources.

The bottom line is that the other tablet makers have to sell their products to retailers at a bigger discount  than Apple sells the iPad to its retail partners. All in all, this gives Apple yet another advantage in pricing the iPad lower than its competitors.

This adds up to three main factors that help Apple keep the iPad price so low:

  1. Apple stores - Apple makes a large chunk of its iPad sales directly to its customers through the Apple retail stores and the online Apple store, which enables the company to keep even more of the profits. While running retail stores are expensive, Apple runs one of the most profitable retail businesses in the US and these direct sales give Apple the ability to directly follow up with customers to entice them with future upgrades.
  2. Supply chain - As others have explained, Apple has a major supply chain management advantage. That means that it controls the components that go into its product (and the price it pays for them) better than its rivals do. Apple makes the software, designs the chips, and buys flash memory and LCD displays in huge quantities (in combination with iPhones and iPods). That significantly whittles down the raw cost of each iPad.
  3. The 3% factor - Apple sells the iPad to retail partners at a minimal 3% discount (which is likely much lower than competitors). Because of the strength of Apple's brand and the customer demand of the iPad, retailers are willing to take very little profit on iPad sales in order to drive store traffic and make money on add-on purchases like accessories and extended warranties.

Again, this information doesn't diminish the original point that Apple running its own stores has been a major factor in the success of the iPad. In fact, when Apple unveiled the iPad 2 on March 2, Apple CEO Steve Jobs endorsed the idea. He said:

"One of the things that enabled us to roll out this technology so fast was our Apple retail stores. They were built for moments like this. They were built to take new technology and roll it out and educate customers about it and be there when they have questions and issues. We have hundreds of Apple stores now, as you know. This is one of our newest ones in Chicago [pointing to a slide]. And, without these stores I don't think we would have been as successful either."

This was originally published on TechRepublic.

Topics: iPad, Apple, Mobility

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37 comments
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  • 3% is ridiculous nonsensical rumour; it is 10% actually

    While even 10% is really low for retail chains usually, it is still no 3%.<br><br>Why I know it is 10%? There were leaks in Europe of order/invoice papers with purchase prices for iPads.

    And because 3% is nonsensical indeed: people do not go to these retail chain stores specifically to see Apple products. If they want to, they go to Apple stores.
    DDERSSS
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @denisrs Links please! I am one of those who would be visiting BestBuy only because of iPad. There are few reasons why I am planning to go to BestBuy and not Apple store - <br>1) Nearest Apple store is quite far.<br>2) In one of those loyalty points website, I got an option to burn my points on BestBuy gift cards. Its a pity that they had iTunes gift cards, but no Apple Store gift cards. <br>3) Lesser lines!<br><br>As pointed out in the article, I would not be just buying the iPad2... I would definitely buy some accessories and protection plans [especially since this would mostly be handled by my 2 year old]

      Oh! forgot to mention. Before this, I have visited BestBuy only twice - Once to get a HDMI adaptor for my Mac Mini and second with a friend to pick up an order he had placed online
      browser.
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @denisrs [b]people do not go to these retail chain stores specifically to see Apple products. If they want to, they go to Apple stores.[/b]

      They go to an Apple Store IF there is one close enough - chances are that a BestBuy or another Apple Authorized reseller is a lot close than an Apple Store to most people.
      athynz
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @athynz Not only is it more likely that the Best Buy is closer but even if they are the same distance it will be more convenient, at least compared to the Apple Stores I have been to. The Apple stores I have been to are in malls and even if the Best Buy is a bit further I would go there just to avoid going to the mall.
        non-biased
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @denisrs

      3% is really a common retail percentage for flagship items. When I worked for HomeDepot fresh out of college, I quickly learned that the IMU (Initial Markup ...Something) was 3% for 1 gallon paint (regardless of manufacturer). It was even less for the 5 gallon buckets. It was important to sell a "project" to a customer, i.e. to not let them go home without buying high IMU items like brushes (around 70%), plastic buckets, tarps, plastic sheets, brush cleaners, painters hats, etc. That's where the store made money. The same is true for most electronics - the market is so saturated with competitors, all of whom manufacture in factories right next to each other in quasi 3rd world nations (like China & India), that the profit margins are very very small. At the retail level this translates to small markups, which are then offset by add-on sales ($80 HDMI cables, anyone?). The math that is being blogged about up there in that article is simply a pile of junk. The idea that Apple, a relatively minor electronics player (yeah, you heard that right - they are relatively minor) which doesn't own *any* factories is telling factories what components to use because they purchase their components directly and then send them to factories.... what a pile of nonsense!! Next they're gonna tell you that IPODs and IPADs and IPHONEs don't have batch numbers and lot numbers 'cause magically Apple managed to buy the exact set of components they needed in advance for all their products, and that the manufacturers of those components somehow managed to make 100% identical batches throughout the product run - just for Apple but noone else in the market?!
      O, but I know. They're made in the USA?!
      All other things being equal, Apple products are 100% designed and manufactured in foreign countries where the average wage is much lower than here in the US. Maybe that's where the "profit margin" that everyone keeps talking about comes from. It's not a profit margin in the strict mathematical sense, but it does translate into a product that has top tier components (exception: phone antennas) and a competitive price, while competitors who are just now entering the tablet markets (Xoom, I'm looking at you) end up having to squeeze the same return on investment out of their retooled manufacturing lines (read: EXPENSIVE) with fewer expected sales (I guess apple has a patent on .... white plastic?) by having higher prices at the retail level - all the while still only having that same 3% margin.
      rock06r
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @rock06r You might know about the paint department at Home Depot but you don't seem to know anything about electronics manufacturing. Sure, Apple doesn't own any actual factories but what does that have to do with anything? My company doesn't on any factories as well and relies on CMs (contract manufacturers) for all our builds yet we kit everything. There is a markup for having a CM do a turnkey build versus supplying them the kit for the build. Apple might allow their CMs to hand the passives which they use in extremely high volume throughout the builds for all their customers but even at small 10K quantities these tend to run $0.004 or less, image what they are in the millions. Apple can cut costs by having a few people staffing a purchasing department for the higher end components. If they left it to the different CMs they use they also wouldn't get as high of a volume discount onces it's spread around a couple of CMs.

        Also, do you honestly think every step from design to manufacturing is handled overseas? Do you have that little knowledge of what you are posting about? The CMs may very well give some manufacturability feedback to Apple's engineers but they aren't designing the products for them.
        non-biased
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      i think all of post just about apple
      www.awwgame.com
      lariosshow
  • Microsoft has retail stores.

    It should give them a big advantage. Oh, wait, never mind.
    Mac Hosehead
    • :-)

      @Mac Hosehead
      Love it, MHH!
      Userama
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @Mac Hosehead

      10,000,000 Kinects so far.... and still selling at over 80,000 per day (down from a high of over 130,000 per day). That's kinda like the story of the Camaro vs. the Mustang. When GM wasn't making Camaros the 'Stangers always blogged away at how great their car was, etc. And then GM started making the 'maro in June of '09. Since then, the Mustang has outsold the Camaro... I think 2 months ... out of the last 18+ months.
      I know that itunes and those mall stores are visible and get a lot of attention, but the numbers simply don't lie. MS is outselling apple. Just not in the markets that MS isn't in. MS, for example, is NOT in the phone business. They're in the phone operating system business. They're in the server business (apple just pulled out of that one, they only have Mac Mini server "toy" for sale at this point). They're in the office suite software business (dominatin' since 1996...). And the last upgrade cycle which kicked off since Windows 7 came to market is breaking every sales record they had.
      Really, one of the major areas that apple is still beating MS is vaporware - you know that CEO of theirs showing up and showing off products. He does a better job than anyone at MS ever did (Bill Gates included) - he's a better showman. Stocks go up etc, but their overall sales are just not in line with their market cap. MS on the other hand - almost undervalued. It's the same old stupid Wallstreet bubble - the same stupid thing we see in hollywood. No matter how "bad" the news is about someone (coked out and beating up his girlfriends, threatening ex coworkers and publically ending friendships and such) it's still "NEWS" and their value goes up. I'll agree that Apple has some big sellers - but hey, do you know how many IPHONES they have to sell for every copy of MS Server 2008 that MS sells? And what their profit margin is for that sale vs. Microsofts? How about .... say 20% (with all their "add-on sales" from the itunes store) vs...... 120%? That's probably not even close.... I bet MS does even better than that - I've seen their "charity" pricing on their software.
      rock06r
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @rock06r Well the Kinect is a very different product, so it's hardly a "like for like" comparison. If I buy a Kinect, what impact will that have on any iPad purchase (or vice versa)? None at all.

        I hear anecdotally that there have been really high return rates for Kinect in Europe. The cause? We Europeans have smaller houses than the land rich US, and people find the Kinect doesn't work for them due to space requirements. I don't know if this is true, or if it has been taken into account in those sales figures.

        Anyone else know?
        jeremychappell
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @jeremychappell,<br>"Well the Kinect is a very different product, so it's hardly a "like for like" comparison."<br>Altought both products are different, the target was the same, the consumer market, and Kinect won. That's the reason the sales were registered as a Guinness World Record. Here is a line from the article,<br><br>"According to the site, Kinect has the fastest 60 day launch sales of any consumer electronics device in history, outstripping the iPhone and iPad by selling an average of 133,333 units per day, totalling 8 million units in its first 60 days, from Nov. 4, 2010 to Jan. 3, 2011. "<br><br><a href="http://news.yahoo.com/s/digitaltrends/20110309/tc_digitaltrends/xboxkinectsalesreach10millionearnsguinnessworldrecord" target="_blank" rel="nofollow">http://news.yahoo.com/s/digitaltrends/20110309/tc_digitaltrends/xboxkinectsalesreach10millionearnsguinnessworldrecord</a>
        Let's see if the iPad 2 can break the Kinect record, because from the first day sales, the numbers are good.<br><br>"I hear anecdotally that there have been really high return rates for Kinect in Europe. "<br>First time I heard about it. Any links to support it?
        dvm
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @rock06r We can compare apples (no pun intended) and oranges all day long but what's the point. Kinetic has sold great and congratulations to MS for the success. MS and Apple are not direct competitors in every market each is in and where they are, each have their successes but of course you have to cherry pick to make your point sound credible.

        [i]Really, one of the major areas that apple is still beating MS is vaporware...[/i]
        Did you really just post that? Are you honestly that clueless or is it just a matter of your blind hatred for Apple not allowing you to be honest? I really don't like to call people names or go on personal attacks like that but you sir are begging to be called an idiot.
        non-biased
    • Brilliant!

      @Mac Hosehead

      For a minute there I thought this was a Mike Cox posting... :-)
      dave95.
  • And people said Apple wasn't magnanimous!

    a retailer can do tons with that lofty 3%!!!
    Will Farrell
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @Will Farrell LOL! Bad, bad attempt at trolling... especially when the article explains about the 3%.
      athynz
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @athynz

        Huh?
        ShamooToo
    • It's not the idevice...

      @Will Farrell

      It's the "accessories" that make the money. Go to Best Buy and check it out. Be sure to have smelling salts handy when you see how much they want for a simple USB cord. It's no mistake the iDevices are in the back, nest to all the high markup accessories.
      oncall
      • RE: Advantage Apple: Retailers only get a 3% discount on iPad

        @oncall

        Bingo! You rock.
        ShamooToo
    • RE: Advantage Apple: Retailers only get a 3% discount on iPad

      @Will Farrell

      Indeed. Again, you are wise in your simplicity. Yes, a compliment.
      ShamooToo