Apple (NASDAQ: AAPL) launched its first smart speaker back in early 2018. The device received mixed reviews -- it was praised for its excellent sound quality but it arguably didn't deliver on the "smart" part of "smart speaker." On top of that, this wasn't an offering intended to compete on price -- it was priced at a premium to other popular smart-speaker offerings.
Apple's brand strength allowed it to sell as many of these devices as it did. A while back, analysts with Strategy Analytics claimed that HomePod captured a significant amount of overall industry revenue share (16%), as well as share of the $200-plus smart-speaker market (70%) in the second quarter of 2018. However, I don't think this product ultimately panned out as many customers and, seemingly, Apple itself had hoped for.
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Apple tried to stimulate demand for the HomePod by giving Apple Music users a $50 discount on the device in the U.K. On April 4, 2019, Apple formally (and quietly) cut pricing of the HomePod by $50. Here's what this means.
Maximizing revenue, profits
Setting product pricing is a tricky balancing act. If a company prices a product too low, it might maximize the number of units it sells, but that might not maximize either revenue or gross profit. If a company prices a product too high, then per-device revenue and gross margin could be quite high, but the company might be leaving a significant number of unit shipments on the table, yet again failing to maximize revenue and gross profit.
At the original $349 price point, HomePod was one expensive smart speaker. That, coupled with the fact that it wasn't exactly a home run in terms of features and functionality, probably limited its appeal.
As mentioned above, Apple sold a fair number of HomePod devices and it wouldn't be surprising if we were to learn that the bulk of the buyers of the device over the last year were hardcore Apple product enthusiasts. More than a year after the original launch, however, there are a number of factors to consider:
- The number of hardcore Apple enthusiasts who might be interested in HomePod but haven't yet bought one has likely decreased significantly.
- Apple's HomePod production costs have likely come down as it has gained experience assembling the devices. In other words, manufacturing yield rate has likely improved, and as the manufacturing costs of the components inside come further down their own respective cost curves have improved.
- Apple hasn't updated the product in over a year.
The first and third factors have probably led to a significant reduction in HomePod sales at the initial launch price, while the second factor should give Apple some flexibility to cut pricing while enjoying the kind of per-device gross margin that it saw with the initial device sales.
With all of this in mind, it's little wonder that the company just cut HomePod prices. The lower price point should make the device more attractive to a broader set of customers and the incremental unit volume should, hopefully, lead to greater overall revenue and gross profit dollars than if the company continued selling the device at the $349 price point.
Apple is undoubtedly hard at work on future generations of HomePod. I expect Apple to roll what it learned from both the successes and failures of the first-generation HomePod into those upcoming products.
Perhaps once Apple introduces a new generation of HomePod, it'll be able to start selling those devices at higher prices. And as long as those devices are compelling enough, Apple might be able to sell more such devices at the higher price points than it was able to with the first-generation HomePod.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.