Does Apple price for success?

Ben Kunz at Bloomberg Businessweek has an interesting post on Apple’s pricing practices. Kunz posits that Apple uses psychological pricing tricks such as reference prices and price “decoys” to boost sales of more expensive items. I can’t say I agree with all of his points, but he brings up some interesting things to consider.

Kunz first discusses price decoys, items that don’t really look like very good deals in order to make slightly better items look much better. He suggests that the rumored 7” iPad is such a price decoy, to make a 10”, more featureful version look like a bargain and defend against the impending tidal wave of lower-priced tablets from competitors.

Decoys explain why Apple often sells each gadget in a pricing series, such as the new iPod Touch’s $229, $299, and $399 price points for different storage capacities. You may gladly spend $229 to get a hot media player, thinking it’s a deal vs. the highest-priced version … and not blink that you could instead buy an iPhone 4 at the lower price of $199 with more features. The $399 "decoy" has clouded your judgment. Apple wins the best of both worlds—stoking demand for products that look like bargains and for all the decoys it sells at much higher prices. Yes, some people will spend $399 for a music player with slightly better technology—and Apple makes even fatter margins.

Here Kunz brings up a point he will hammer on a couple more times over the course of the article: that the iPod Touch is more expensive than the more-capable iPhone, therefore Apple must employ eeeevil pricing tricks to sell it. I’ll come back to that in a bit.

A couple of Kunz’s other points have to do with setting a reference price—introducing something at a high price, then discounting it quickly so that it looks like a bargain compared to its original asking price (as Apple did with the originally $599 iPhone). Of course, Apple is not alone in this; Amazon has done something similar with its Kindles, though over a bit longer period of time.

Interestingly, one pricing trick Kunz doesn’t mention is the “leak” that Apple allegedly fed to the Wall Street Journal ahead of launch that iPad pricing was going to be several hundred dollars higher than it turned out to be—so they could pull the “Scotty miracle worker” act of bringing it in starting at just $499. It would definitely have supported Kunz’s other points about Apple’s pricing savvy.

But one of Kunz’s points that didn’t work was his comparison of iPhone and iPod Touch pricing. First, Kunz doesn’t consider the 32-gig iPhone, which costs exactly the same as the 32-gig iPod Touch. More importantly, he doesn’t consider the hugely expensive smartphone contract fees which add a couple of thousand dollars to the iPhone’s couple-of-hundred dollar asking price.

(Well, actually he does acknowledge it later, in a point about hiding price increases by bundling them into things like monthly data fees in a two-year phone contract. He writes, “All of this ‘bundling’ means the price over time is much more than what you think picking up the Apple gadget.” My beef with this is that it’s awfully hard for any consumer who’s paying attention not to notice he’s going to end up paying $80 or more per month for two years to use a $200 phone.)

Even Steve Jobs himself  acknowledged this during the presentation yesterday, when he referred to the iPod Touch as not only an “iPhone without the phone” but also an “iPhone without a two-year contract.” Most people seriously considering an iPhone are going to take the whole cost of it into account—not just the monthly monetary cost, but the loss of decision-making freedom that comes from being bound by a two-year contract. Who seriously wants to indenture themselves to a corporation for that long just for the sake of a phone?

Literally millions more people are buying iPod Touches than the “cheaper” iPhones, making the Touch the most popular iPod ever. Can Apple’s evil pricing mojo really account for that level of discrepancy?

I wonder if Job’s contract snark, coupled with the recent no-contract unlimited-bandwidth options from Virgin Mobile and Clearwire (and even the no-contract pay-as-you-go 3G from the 3G iPad), represent a sign that telco industries are finally starting to notice people just don’t like restrictive contracts. Is the no-contract pay-as-you-go going to be the next telecom fad?