The Apple Watch has a major pricing problem

Apple Watch has a major pricing problem

When Apple announced its first iPad in 2010, the Wall Street consensus expected the price to be above $900. The device that gave birth to the modern tablet industry instead debuted at $500, shocking many observers. Yet despite the notably low initial price, Apple’s iPad sales lost their growth momentum in 2013 and by the beginning of 2014, Apple was reporting declining sell-through volumes.

What happened? The flood of $200 Android tablets and phablets sucked the growth out of iPad sales in about three years, largely because Apple refused to offer substantial price cuts to even the most basic iPad. Obviously, Apple prioritized profit margins. It’s also speculated that since many Apple fans splurge on upgrading to a new iPhone every 12 months and/or buy more expensive models loaded with extra memory,

The iPad story demonstrates why it may be a hugely ambitious for Apple to try to position the Apple Watch as a $350 premium product. Considering the display size, that price is massive compared to tablet or phablet prices out there. It’s weirdly out of step with the original iPad pricing philosophy, which was based on offering a lot of value relative to expectations in 2010. And of course, Apple fans are now tied to both iPhone and iPad upgrade costs.

Selling a third device to an Apple household is not the same as selling the first or second. That’s what makes projecting sales volumes for the Apple Watch so fiendishly difficult. Many analysts are now projecting 30 million or even 40 million annual unit sales for 2015.  That seems to be on the steep side with given the pricing approach Apple has taken.

Apple clearly believes it can battle margin erosion by turning the Apple Watch into a fashion brand that seduces consumers through sheer design pizzazz. That is not a new idea — it is what Nokia very clearly attempted to do in 2001 and Motorola in 2005. Apple is now hiring people from fashion houses in much the same way Nokia scooped up executives and board members from L’Oreal and Nike more than a decade ago. We’ll see whether it ends up better for Apple than it did for the one-time pride of Finland.