Segmenting based on storage — or why 32GB costs $100

Apple's updated iPod touch lineup separates 16GB, 32GB, and 64GB capacity models by $50 price increments. That's new for Apple in the iOS device lineup. Previously for the iPod touch, and still for the iPhone and iPad, capacity models are separated by $100 price increments. There are some other factors, like iPhone 5c vs. iPhone 5s pricing, or iPad Air vs. Retina iPad mini pricing, or iPad Wi-Fi vs. iPad cellular pricing. However, for the most part, Apple chooses to segment devices by capacity. So, is that a good thing or a bad thing?

First and most importantly — it has nothing to do with storage capacity. If you focus on storage capacity alone, and get stuck on component cost for NAND Flash vs. iOS device pricing models, you'll totally and completely miss the point.

Apple's current strategy demands three (or more) models of each iPhone and capacity is simply how they've chosen to differentiate them. Conceivably it could be something — anything — else. Capacity just suits their margins and our buying patterns.

Let's back up for a second. There's an old cliche about most products being segmented into lower-, mid-, and high-end. Many consumers understand products in that way as well. Lower prices get us in the door, and make products more accessible to those who truly can't afford more. Median pricing is what, as the name suggests, most people end up buying. Premium pricing exist for people who either aren't concerned about money or who need a premium feature enough that they're willing to pay for it regardless.

Appliances, cars, food, almost everything has examples of staged pricing, including consumer electronics and Apple.

"Starting at $199" is psychologically important. It's not the model that makes Apple or any manufacturer the most margin, nor is it the model that offers any consumer the most features, but it lowers stress and gets the buying process begun. From there, both the up-sell and the bargain hunting begin. The higher the model, typically the better the margin. The deeper the discount, typically the better the deal. Apple does few sales. Black Friday is typically it. Resellers often, especially these days, do far, far more. The margins built into the prices, the ones that increase from low to high end, build in a buffer for sales as well.

It's tempting to think those who buy the highest end subsidize those who buy the lowest end, or that capacity-based segmentation subsidizes all the rest of the technology that's consistent throughout the platform. Possibly that it subsidizes the operating system and software like iLife, iWork, etc., all of which are now given away "for free". (Apple currently chooses not to monetize customer attention or data to subsidize those things, or the hardware.)

Perhaps a better way to look at it is that Apple, as a vertically integrated provider, has the luxury of thinking in terms of the overall device, including hardware, software, and services. The goal for a company like Apple is, when you combine all models together, to get to an Average Sale Price (ASP) around their targeted margin. Some pay more, some pay less, some pay in the middle, and depending on how the product mix works out, Apple either hits or misses that target.

Capacity — how many gigabytes of data storage an iPhone, iPad, or iPod has — is just an easy way for Apple to market low, middle, and high end versions of their iOS devices. It's easy because everyone understands 64 is bigger than 32 is bigger than 16. More money for more capacity is easy for Apple to do and for us to buy. Check out refrigerators, television sets, cars, pasta — almost any consumer product, however. You'll quickly see similar patterns.

Sure, Apple could segment based on screen size instead, and theoretically charge $50/$100 more for every additional inch in diameter. They could segment based on processor speed, and theoretically down clock the low end and ratchet it up $50/$100 for every upwards bump. (Personal computers have segmented based on processor speed for years.) Apple could segment based on build quality, and theoretically use cheap plastic for the low end, good plastic for the mid-range, and metal for the high-end. They could segment based on any number of things, including camera optics, co-processor dependent features, color (Black MacBook anyone?), RAM, and more.

No, 16 or 32 or even 64GB of extra NAND Flash storage almost certainly doesn't cost $50/$100 at Apple scale. The small, medium, and large iOS devices cost plus or minus that much. The low end is simply there for people for whom price is one of the most important features, and the premium for those for whom money is a lesser object.

Note, because internet: Please don't confuse me offering my understanding of how this stuff works for justification or even agreement. However, build quality, processor speed, feature sets, etc. are not things I want Apple segmenting on within the same product line. (They already do the last two between product lines.) Offering just one model of each device at the median price point would certainly be simpler but would likely hurt sales.

Years and years of storage based segmentation has shown Apple that $100 increments based on storage capacity is a model the market can and will bear. Scratch that — the market will reward with astronomical amounts of money. That doesn't make it right or wrong, sane or insane, comforting or maddening. It just makes it what it is. And Apple likely won't change it unless and until we all agree on something better.

If you have any ideas on what that something might be, let me know!