Apple's Watch Strategy Embraces the 80-20 Rule
We are starting to get early reads on how Apple Watch pre-order mix is trending and there are a number of surprises. It is obvious why Apple will not disclose Apple Watch revenue data. By knowing which Watch collections are selling and at what price, it would be easier for competitors to reach conclusions on customer preferences. Using early pre-orders reports and a few long-standing theories, the Apple Watch will likely be loosely guided by the premise behind the 80-20 rule, where approximately 80% of Apple Watch profits will come from 20% of Apple Watch customers. In essence, the Apple Watch and Edition collections will likely account for a small portion of sales, yet play a much bigger role in terms of Apple Watch profit. The implications are significant when contemplating how management will treat the Apple Watch line in subsequent years.
Sport is the Most Popular Collection by a Wide Margin
The two most popular Watch models have been space gray aluminum with black sport band and silver aluminum with white sport band. Using U.S. pre-order data from Slice, and extrapolating across the world, these two models could represent close to 70% of Apple Watch pre-orders. There will be millions of wrists with a black or white sports band in the coming months. The sheer popularity of these two models suggest there may be something more at play, possibly related to customers not wanting to spend more than $400 and these particular options representing the most popular color choices.
Majority of People Are Not Valuing Stainless Steel and Sapphire Screen for $200
Most consumers are not valuing the stainless steel case and sapphire crystal screen at an additional $200. The easiest way to see this is compare the black and white sport band models in the Sport and Watch collections, with the only difference being the watch face (sapphire vs. Ion-X glass) and watch case (stainless steel vs. aluminum). When given the choice between a $399 Apple Watch Sport - black band and $599 Apple Watch - black band, pre-order data would suggest customers are overwhelmingly choosing the Sport by a magnitude of 5-10x.
This isn't to suggest that sapphire and stainless steel aren't worth the extra $200, but rather consumers are not reaching that conclusion. Apple Watch try-on appointments may give consumers the best opportunity to make a more informed decision between the two collections, resulting in a slight shift in sales trends.
One theory is that many consumers pre-ordered the Sport for the first version and plan on upgrading to a better watch in 2016 or 2017. This may be true, but the impact may be overshadowed by new Apple Watch buyers deciding to go with the Sport. In essence, the sales mix will likely remain the same, regardless of first-generation owners upgrading their watches over time.
Demand for Expensive Watch Bands is Niche
Even though much attention has been given to the higher-quality watch bands, it would appear that the majority of people are opting for the sports bands. At least judging by pre-order data from Slice, there is tepid demand for higher-end watch bands made of metal and leather. The Milanese Loop would appear to be the best selling watch band out of the non-Sport options, which may give Apple confidence that consumers will value band innovation that moves away from traditional watch bands. The leather band options will likely remain quite niche. My Apple Watch observations would back these claims as I actually thought the sport bands were more comfortable and bold than some of the leather bands.
Financial Impact from Watch Bands
The conventional wisdom is that Watch bands will play a crucial role in Watch financials. I think it will be a bit more complicated.
- One can make a strong case that customers will update their Apple Watches every 2-3 years. In this scenario, the Apple Watch will experience an update cycle that mirrors the iPhone more than iPad. Since each purchase will come with a new band, consumers may not see the need to spend money buying another watch band. Watch average selling price (ASP) and revenue will be driven more by case upgrades ($399+), not additional bands.
- With most people opting for the Sport over Watch, I have difficulty envisioning the majority of customers buying expensive additional watch bands. Instead, there may be demand for cheap, but fun, third-party bands ($29-$49). While such bands may have attractive margins, from a dollar perspective, Watch cases will still account for a majority of the Watch category's profit.
- I suspect 10-20% of Apple Watch owners may be willing to buy an additional high-quality watch band. This is the part of the market where watch bands may become an attractive revenue and margin proposition. Apple will likely want to compete in this lucrative segment of the market, which may include traditional luxury brands.
The 80/20 Rule
The Apple Watch is being sold as the most personal device with 25 distinct styles, yet four options (all with black or white sports bands) comprised a clear majority of pre-orders in the U.S. on the first day according to Slice. On the surface, that would suggest the other models aren't important and Apple should just concentrate on the sports bands. However, in reality, the exact opposite is true. When looking at profits, I suspect the 20% of customers opting for the Watch and Edition collections will likely represent 70-80% of Apple Watch profits. A few equations will help demonstrate what is happening:
- Revenue: One $17,000 Apple Watch Edition = 42 $400 Apple Watch Sport
- Profit: One $17,000 Apple Watch Edition = 75 $400 Apple Watch Sports
Karl Lagerfeld's custom Apple Watch with gold link bracelet. Source: Instagram
The implications from this are far-reaching. Apple will likely dedicate significant attention and resources to updating higher-end Apple Watch models and bands. Rumors had indicated a platinum option priced higher than the current gold Edition models. Karl Lagerfeld's custom Apple Watch with gold link bracelet will likely be available one day for more than $50,000. Marc Newson's schooling and experience with jewelry design will likely play a major role in this effort. In essence, Apple would be catering to the 20% of the iOS customer base that values exclusive personalization, which will boost revenues and margin.
Longer-Term Watch Implications
As long as the Watch is considered an iPhone accessory, I'm not convinced the majority of people are willing to spend more than $500 for one, which will position the Sport collection as the most popular option by a good margin. Meanwhile, the Watch and Edition collections will continue to represent approximately 20-25% of sales, but account for a clear majority of profits, and this ratio may even become more pronounced as Apple introduces additional high-quality bands with higher margins.
Apple is now a premium mass market luxury brand. The Apple Watch Sport is positioned for mass market consumption, reflected by the lowest entry-level price of any new Apple product category. Meanwhile, the Watch, and especially the Edition, are produced with luxury in mind, catering to the 20% of Apple consumers that have been craving personalization. Apple's Watch strategy will cater to both types of consumers, balancing well-crafted, yet practical mass-market items where price matters, and extravagant opulence where price doesn't factor into the purchasing decision. Welcome to the wearable market.
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