Apple is the leader in so many segments of the technology
world. With the surge in online shopping
and mobile payments for merchandise and services, companies such as PayPal have
been able to lead the way in profiting off the fees that accompany those billions
of transactions. Not to be left out of
the action, Apple Pay was launched last year to compete with PayPal and others,
but has been met with lackluster interest and users have been slow to come on
board.
So as one would expect, Apple is
responding with a business strategy that the company hopes to greatly increase
the overall adoption of Apple Pay, by tapping into the unprofitable business of
person-to-person payment services that are increasingly being used by consumers
to reimburse friends for dinner and movie tickets with the click of an
app. While these transactions are not
generally profitable because they charge little or no transaction fees, there
is still money to be made and the leaders in that market, PayPal and Venmo
confirm that those users are some of their most engaged customers, spending
more money with them overall. So to get
a piece of the action, Apple not only plans to offer person-to-person transactions,
but to do it for FREE. Although Apple
will lose money on each transaction, by adding the ability for owners of newer
iPhone models to send each other money could double the usage of Apple Pay by
those users in as little as 18 to 24 months, and could “short-circuit the
existing players,” according to Richard Crone, Chief Executive Officer at Crone
Consulting.
Apple’s business strategy is a great example of the use of
penetration pricing to penetrate the surging market of online payments and the
related transaction fees, and gain a critical mass of customers for Apple Pay. Once Apple has gained those customers by
offering the service for free, it is banking on those same customers using
Apple Pay in stores, which is a real moneymaker as they charge bank fees each
time customers tap their phones to pay. It’s a smart strategy to lure customers away
from the competitors, and after their first year of lackluster results with
Apple Pay, it’s certainly a strategy that they estimate will be well worth the
costs.
Kharif, Olga (2015) Why Apple Wants to Get Into the
Unprofitable World of Payments Between Friends, Bloomberg Business, December 1, 2015.