iPad

The iPad's other big advantage: Retailers only get 3% off

We know Apple's retail stores and its supply chain management have allowed it to give the iPad a price that competitors find tough to match. There's another factor: Retailers only get a 3% discount.

When I wrote my article, The one big reason why iPad rivals can't compete on price, and explained that Apple's retail stores were a major factor in the iPad's price tag and ultimately its success, I got one thing wrong. This one thing certainly doesn't nullify the truth of the matter. In fact, it's actually another factor that tips the scales in the iPad's favor.

Photo credit: Jason Hiner

The issue is the iPad's wholesale price -- in other words, the price that Apple sells the iPad to its retail partners such as Amazon, Best Buy, Target, Wal-Mart, and a few others. My point in the article was that Apple can afford to price the iPad lower than its main competitors because "The company can swallow the bitter pill of hardly making any money from iPad sales through its retail partners because it can feast off the fat profits it makes when customers buy directly through its retail outlets and the Web store. However, companies like Motorola, HP, and Samsung have to make all of their profit by selling their tablets wholesale to retailer partners."

Wrong. It turns out, Apple still makes a ton of money on the iPads it sells to retailers, who are vying with each other to see the iPad for very little profit.

Since first publishing my article, I've received a lot of messages from people working in the technology retail sector and have received information from multiple independent sources that Apple sells the various iPad models to its retail partners at a scant 3% discount off of the sticker price.

I asked Apple and several of its retailer partners if they could confirm this or if they would like to comment on it. Apple had no response.

Best Buy PR manager Paula Baldwin said, "As matter of policy we do not comment on the details of any financial arrangements with our vendor partners."

Verizon PR rep Michelle Gilbert said, "The relationships and agreements we have with our partners are confidential. As such, I cannot confirm or comment on the messages."

However, I'm confident in the 3% figure since it has come several independent sources in the tech retail industry in both the US and the UK.

Of course, there's more to the story. Why would retailers agree to make almost no money off of iPad sales? The technology retail professionals I talked to -- who did not want to be named because they are either under NDA with Apple or feared negative repercussions -- said that retailers are willing to take low margins on the iPad in order to increase store traffic and then get iPad customers to pad their orders with accessories and warranties, which are both high-margin money-makers for the retailers.

What about comparable tablets? Are companies like Motorola and Samsung able to sell their tablets to retailers for 97% of the retail price tag like Apple does? It's possible, but not likely unless it's a highly-desirable product or a retailer with a special relationship.

So, what is the wholesale number for these iPad competitors? While it's probably not as low as 3%, it's certainly not the traditional 50% wholesale price. One of the tech retail contacts I spoke with said that those kinds of margins disappeared in the early 1990s when the consumer tech boom started taking off. For tablet competitors, the number is likely between 5%-15% discount off the retail price, based on reports from multiple sources.

The bottom line is that the other tablet makers have to sell their products to retailers at a bigger discount  than Apple sells the iPad to its retail partners. All in all, this gives Apple yet another advantage in pricing the iPad lower than its competitors.

This adds up to three main factors that help Apple keep the iPad price so low:

  1. Apple stores - Apple makes a large chunk of its iPad sales directly to its customers through the Apple retail stores and the online Apple store, which enables the company to keep even more of the profits. While running retail stores are expensive, Apple runs one of the most profitable retail businesses in the US and these direct sales give Apple the ability to directly follow up with customers to entice them with future upgrades.
  2. Supply chain - As others have explained, Apple has a major supply chain management advantage. That means that it controls the components that go into its product (and the price it pays for them) better than its rivals do. Apple makes the software, designs the chips, and buys flash memory and LCD displays in huge quantities (in combination with iPhones and iPods). That significantly whittles down the raw cost of each iPad.
  3. The 3% factor - Apple sells the iPad to retail partners at a minimal 3% discount (which is likely much lower than competitors). Because of the strength of Apple's brand and the customer demand of the iPad, retailers are willing to take very little profit on iPad sales in order to drive store traffic and make money on add-on purchases like accessories and extended warranties.

Again, this information doesn't diminish the original point that Apple running its own stores has been a major factor in the success of the iPad. In fact, when Apple unveiled the iPad 2 on March 2, Apple CEO Steve Jobs endorsed the idea. He said:

"One of the things that enabled us to roll out this technology so fast was our Apple retail stores. They were built for moments like this. They were built to take new technology and roll it out and educate customers about it and be there when they have questions and issues. We have hundreds of Apple stores now, as you know. This is one of our newest ones in Chicago [pointing to a slide]. And, without these stores I don't think we would have been as successful either."

About

Jason Hiner is Editor in Chief of TechRepublic and Long Form Editor of ZDNet. He writes about the people, products, and ideas changing how we live and work in the 21st century. He's co-author of the upcoming book, Follow the Geeks (bit.ly/ftgeeks).

16 comments
htperkins
htperkins

I just checked our cost on the iPad 2, 599.99 retail price. It's roughly 7% below retail. I haven't researched other models, but I'd assume it is similar if not a slightly larger margin on more pricy versions

sseifert
sseifert

This is the same arguement I've heard when everyone was on the Microsoft love/hate theme - if it really bothers you that much that Apple is doing so well - you invent the next better iPad/iPhone/iWhatever. Until you can do that, all you can really do is appreicate the fact that they seem to have done something right to turn a profit

Gis Bun
Gis Bun

Remember that Apple also takes a cut in the data plans sold [well they do for the iPhone - so why not the iPad?]. Apple is already making a huge profit on the actual cost of the iPad [excluding R&D, martketing, shipping, packaging, etc.]. I read somewhere that for every iPad sold, about $200 is pure profit for Apple.

mybatteryishot
mybatteryishot

Jason Hiner is your typical Apple fan or stock owner?... blind to the other manufacturers key advantages. How can you write this whole article after you were wrong in the first place? Your credibility on this is poor. The Xoom should have been reviewed by someone less biased. Apple has it's advantages in some areas and Android does in others. Why is it one or the other? Android will hold the largest percentage of devices while Apple will continue hold its share by providing easy to use products backed by a great support system.

seanferd
seanferd

Maybe something you are doing is causing this confusion, but I'm not seeing it. :^0

ed.hore
ed.hore

For gawds sake people... I have an iPhone that has only had the sim put in it to do updates. I like my iPhone for music and Apps, but I have a Samsung Galaxy S as my phone, I like the apps there too. You hit the nail on the head, and Max you are missing the point, it isn't why iPad is better, it is just another differentiator. By the way, I tried the iPad, I went Android Tablet cause it boots Android and Windows 7.

jasonhiner
jasonhiner

I got a pretty good chuckle out of the irony there, too.

MLFManager
MLFManager

This is not the first time that a reader has accused you of being an Apple fan, and based on every article you have written, including the one you reference to dispute the claim, it is clearly true. I think it would be much simpler if you finally admitted it and stop trying to appear as if you are an unbiased journalist, because clearly you are not.

Slayer_
Slayer_

The next article will be how they all still suck and are all still over priced for what you get.

seanferd
seanferd

Up next: Jason Hiner, Microsoft shill. Were taking votes on how Jason will be biased next month. Make your preference known now!

jasonhiner
jasonhiner

I don't make blanket statements or recommendations. The technology product that's the best fit for you depends on what you're using it for. I drive this home again and again. There are a lot of people who I'd never recommend to get an Apple product, for example, companies who've already invested heavily in Microsoft or BlackBerry infrastructure on the backend. As I mentioned in my article on the iPad 2 yesterday (http://www.techrepublic.com/blog/hiner/apple-ipad-2-who-should-buy-and-who-should-pass/7896), I wouldn't recommend the iPad 2 for heavy book readers or for people who are committed to open standards and use tech from a bunch of different vendors. I don't think of it as one product over another or one vendor over another. I think of it in terms of the products that make sense for the right people -- and, in my case, I think mostly of IT professionals and business users and the products that will make the most sense for them. The market always supports a diversity of products because people have different needs. That's a good thing, and that's why I regularly cover all of the big three right now -- Microsoft, Apple, and Google.

MLFManager
MLFManager

I think if you had a dime for every time you were accused of being an Apple hater, you wouldn't have 2 dimes to rub together. Surely you must admit that you look at the world of technology through Apple shaped glasses. Having said that, if you truly believe that you are unbiased, the your challenge is: to find an article that you have written in the last year that compares an Apple product to ANY OTHER technology platform where you didn't recommend the Apple product over all other technologies.

jasonhiner
jasonhiner

If I had a dime for every time a reader called me a fan of whatever technology I'm writing about that week... On the other hand, if I had a dime for every time I get called an Apple hater or Microsoft hater or Google hater... You get the point. I just call them like I see them. None of these companies or technologies are perfect and it's my job to help keep them honest and to advocate on behalf of the people and companies that have to use these products in the real world.

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