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:
- 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.
- 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.
- 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.