The subtle genius behind Apple’s Edition pricing strategy

An interesting piece by MarkDMill on the strong cultural reaction in China to luxury watches:

The story goes back to August 30th, 2012, when an accident in Yan’an killed 36 people. A Work Safety official was photographed smiling while at the scene. Outraged, internet users searched online about this individual and uncovered pictures of him wearing eleven different luxury wristwatches.

Pictures of him, with his watches, went viral and earned him the nickname “Brother Wristwatch.” Internet users surmised that his salary was not sufficient to purchase these luxury watches and thus must have been obtained through corrupt means. He was arrested on charges of bribery and sentenced to 14 years in prison.

This goes against the practice of luxury gift giving:

Giving of luxury gifts–particularly watches–has long been a means of establishing one’s relationship and currying favor in China, but the anti-corruption drive has hit this market hard. In 2013, Swiss watch exports were down a shocking 26%, even though they had grown every year for the previous ten years. Gift-giving dropped 25% in 2013 and another 5% in 2014. The entire luxury goods market, which had grown at a rate of 43% as recently as 2011, dropped to 18% growth in 2013 and contracted in 2014 for the first since 2000. I have witnessed firsthand how private businesses have ended large parties and bonuses out of fear of appearing to be corrupt. The effect of the corruption crackdown has been dramatic, and it is still underway.

So what does this have to do with Apple Watch pricing? First, the Apple Watch will likely be a big gift in China this year. Given the current pricing model, the Apple Watch Edition will occupy one tier and all other models will occupy a more accessible tier. The Edition will be part of the high end luxury tier, the rest of the models, watches for the rest of us.

This is the political and social environment in which the gold Apple Watch Edition enters China. Luxury watches are worn in China as a display of one’s wealth, but right now displaying wealth on one’s wrist is dangerous and, legitimately or not, is taken as a sign of corruption. The gold Apple Watch will sell, but I would wager an Apple Watch Edition that it won’t be seen on the wrists of government officials or successful business people with political connections (which is most successful business people)–or, if it is seen, that person will quickly be sanctioned or even sacked.

This, then, is why Apple’s positioning of Apple Watch is so brilliant: by releasing Apple Watch Edition at the luxury price of RMB 74,800 ($12,062), the “normal” Apple Watch seems downright frugal at RMB 4,188 ($675). Even the most expensive Apple Watch (RMB 8,288; $1336) looks cheap in comparison to the most expensive Apple Watch Edition (RMB 112,800; $18,190). By pricing one collection so high, Apple has managed to make Apple Watch seem downright moderate–even though it costs 15-30% of the average Chinese annual salary!

Given the importance of the Chinese market to Apple, I can only imagine that this was part of the planning for Apple’s pricing strategy.