Apple iPad and the price elasticity equation

I met the upper boundaries of my Apple iPad price range over the weekend via a simple conversation at Best Buy. Price matters to the masses and it may take time for Apple to convince people to take the iPad plunge.
Written by Larry Dignan, Contributor

I met the upper boundaries of my Apple iPad price range over the weekend via a simple conversation at Best Buy. The chat went like this:

  • Me: Any 16GB iPads left.
  • Best Buy rep: No they went fast. All we have are the 64GB iPads. They are $699. Want one?
  • Me: No thanks. I'll wait.

After that discussion, I revisited the thought. Would the 32GB version at $599 do the trick? Perhaps, but probably not. Frankly, I wound up being a little more squeamish than I thought about plunking down $499 for a device I only played with for a few minutes before getting in line.

Add in the fact that Apple sold 300,000 units of the iPad out of the gate---in line with most Wall Street expectations, but well shy of Piper Jaffray's lofty target---and the price elasticity equation is worth pondering.

Also: iPad Special Report

At $699, I need to know---without buying it the iPad of course---whether the device is a laptop replacement or not. The consensus answer: It might be a laptop killer---or not. A price tag of $699 is a lot of dough to spend just to find out.

At $499, the Best Buy iPad watchers had their decisions made when they walked in the door. However, that line---to buy and the demo unit---evaporated quickly. Simply put, the iPad is a long-term sell. You need to play with the demo unit, ponder, go home, come back and then make a plunge. Why?

Opportunity cost. When spending $500 or more opportunity cost is always an issue. At that price, the iPad competes not just with electronics, e-readers and laptops. The iPad competes with everything at that price.

To wit:

  • $500 can be given to charity;
  • Your alma-mater;
  • Your kid's college fund;
  • A decent chunk of your mortgage;
  • The rainy day fund;
  • Roughly four or five nice dinners for two;
  • And allocated to any other purchase.

You won't hear much about price elasticity from the first wave of iPad buyers. They will buy the iTurd if Steve Jobs creates it. Apple, however, is targeting the masses. And the masses think in terms of opportunity costs.

Oppenheimer Yair Reiner said in a research note:

We believe first day iPad sales (300K+ units) are a measure of brand loyalty among Apple devotees, who would buy virtually anything bearing that magical fruity logo. For others, it will take time to recognize a compelling use case for the device, which will be a function of the apps that become available.

As for the playbook, Apple already has one. The plan goes like this:

  • Sell the first wave of devices to the big Apple fans;
  • Use that group to sell enough units to bring down costs and refine the product;
  • Add apps continuously;
  • Lower prices (or give you more value for the money);
  • Market the device heavily.

If that playbook sounds familiar that's because Apple did the same thing with the iPhone. The iPhone was a hit, but the price drop to $99 is what really stoked volume.

At $399, the iPad is hard to resist. At $299, Apple will move many more units. You get the idea. The only wild card here is whether Apple wants the iPad to encroach on the iPod touch. If Apple gets over that little issue, the iPad will be a runaway.

For now, price matters.

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