The iRefurb channel

Unless you just crawled out a cold-war era nuke bunker, you already know that Apple managed to pull off, arguably, one of the most successful product launches in recent memory. Yes, I'm talking about that highly desirable iPhone. I happen to think of the iPhone in its current form as merely a statement of what's possible rather than a fully baked product. But, that's a topic for another post.

I'm sure a lot of marketers out there would love to replicate the iPhone phenomenon for their current employers minus, of course, the stubborn hacker community and their esoteric terminology. PWNed!?! Need I say more? Ok, back to the topic of this post. Focus, people! Let's assume you are the primary marketer tasked to help Steve "walks on water" Jobs achieve his audacious goal of selling 10 million iPhones in CY 2008. What do you do? Well, clearly, you'd have your work cut out for you. The very popularity of a product like iPhone makes it monumentally hard to price discriminate. And, why engage in price discrimination, you ask? Well, why else but to get your greedy little hands on that meaty elastic demand portion of the curve. Did you really think you could meet Steve's lofty goal by simply continuing to sell to early adopters. News flash! They all have their iPhones already. Perhaps, a few would buy the 3G version whenever it's out but you can't count on them to take up the 10 million units you are tasked to push out. Now that we have established the need for price discrimination to effect a substantial increase in unit sales, how would you do it, especially, when word gets around these days in a New York nano-second? Before you answer that question, let's just reflect back on Apple's price-drop fiasco last year and the very angry response from Apple fanboys, a.k.a. early adopters. Is there really no way out? Well, actually, since you ask, there is a way out and Apple has already figured out the secret formula and is exploiting it to the hilt without much market seepage, methinks.

Savvy Apple users amongst us already know that Apple sells refurbished merchandise including iPhones through its online store. I'd like to call these refurbished iPhones, iRefurbs. Why? It's what everyone seems to be doing these days. Stick an "i" in front of any word and suddenly the word is übercool.

What may not be widely known is that iRefurbs are actually brand new merchandise. Except they come in the nondescript white box you see below; full price gets you the ever so attractive black retail packaging pictured next to it.

The pretty black box, essentially, accounts for the whopping $50 difference based on the current price of an 8GB iRefurb. For you pricing gurus, that's a $50 difference between the positive differentiation values for the two EVE^® profile market segments. It's pure genius when you consider the infinitesimal cost difference. While this may sound like an insignificant detail, the white box is perhaps Apple's only "credible" defense against a claim of violation of the good ole Robinson-Patman Act. Apple actually uses an entirely different part number to keep track of its iRefurb sales. And, premium credit cards typically don't provide extended warranty coverage on iRefurbs as a matter of policy. While this is all interesting information, our marketer really wants to know how to avoid the dreaded market seepage that inevitably leads to price erosion. Certainly, an eventuality, I'd imagine, unacceptable to both Apple and Wall Street, even if 10 million units were to actually exchange hands in 2008. The key, then, would be to throttle supply through the iRefurb channel intelligently and make purchasing just a tad "difficult" in order to keep any market seepage down to the bare minimum. Apple achieves this by making iRefurbs available at seemingly random times and quantities.

The lesson here for our intrepid marketer is to recognize the immense value of the iRefurb channel and to exploit it in creative ways alongside the more traditional channels. Lest one thinks that Apple alone is playing this game, it's worth mentioning Amazon has setup a dedicated subsidiary, WarehouseDeals, for exactly this purpose. Amazon manages customer returns and slow moving products including movies in the now defunct HD DVD format through its very own "iRefurb" channel. I predict more companies will aggressively adopt this marketing technique, expectedly, with varying levels of success, unless they truly understand the underlying potential to create the perfect price discrimination storm. Long live the iRefurb channel!