Apple Inc. (NASDAQ:APPL) is a price champion. It provides products that, while really being commodities, command higher margins and higher prices than any other computer maker. Apple never sells on "low price" and never discounts. Instead, Apple relentlessly works with its marketing and messaging to increase the perception of value of its customers, and in sales, to capture that higher perceived of value. With higher perception of value comes higher prices and higher margins.
Yesterday, however, Apple announced an unspecified product transition for the next quarter, indicating that its average margin will drop as low as 30%. Compare this with 33% in last quarter. As a result, shares dropped around 10%, shaving $14b of its market cap, but are now recovering slowly.
Then consider Dell (NASDAQ:DELL), who focuses all its marketing on the "low price, value for money" value. Dell operates at a 5.4% margin.
The consequence of these vastly different strategies is that Dell has revenues 2 1/2 times that of Apple, yet, the company has a market cap roughly one third of Apple’s! ($47b for Dell vs $134b for Apple).
Nearly every business faces these same choices. The company can be a value brand (Dell) or be a premium brand (Apple). The premium brand always has a higher valuation, but it take a concerted corporate effort to get there; to know and leverage customers value perceptions, to know how to build value in marketing as well as design, development and sales, to make the effort to learn their customers’ willingness to pay, and to optimize prices accordingly. Apple is doing a spectacular job of this - even after the coming slight margin decline.
Think about it - even if you are in a different industry you must choose your mindset and execute it relentlessly. Do you have the Apple or Dell mindset? What will it mean for your shareholders?
With warm summer regards,
Per Sjofors
Founder, Managing Partner
Atenga Inc
www.atenga.com
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