What is Apple’s business model? In this video, I describe how Apple makes money by working through all 9 components of Apple’s business model canvas.
Apple creates consumer electronic products that have amazing design and usability and bundles them with software products to lock consumers in. Because they are so attractive they deliver great status and productivity to users leading to a premium price.
Customer Segments in the Apple Business Model
Apple’s business model targets mass-market consumers. That is hundreds of millions of consumers. They may be middle class and fairly affluent. It may be marketed as a premium product but it is a mass-market electronic good.
There are smaller customer segments that it focuses on for non-handheld products. Designers and entrepreneurs both use and love Mac products but in 2019 this is a relatively small proportion of Apple’s revenue.
In the tables below Apple’s customer segments are broken down across a number of different measures, geographic, demographic, behavioural and psychographic
Apple’s Customer Segmentation – Geographic
| Segmentation | Devices | Services | OS | Accessories |
| Region | US and international | US and international | US and international | US and international |
| Density | Urban | Urban | Urban | Urban |
Apple’s Customer Segmentation – Demographic
| Segmentation | Devices | Services | OS | Accessories |
| Age | 20 – 45 | 18 – 30 | 20 – 35 | 20 – 45 |
| Gender | Males & Females | Males & Females | Males & Females | Males & Females |
| Life-cycle stage | Bachelor Stage | Bachelor Stage | Bachelor Stage | Bachelor Stage |
| Newly Married Couples | Newly Married Couples | Newly Married Couples | Newly Married Couples | |
| Full Nest I | Full Nest I | |||
| Full Nest II | Full Nest II | |||
| Income | High earners | High earners | High earners | High earners |
| Occupation | Professionals, managers and executives | Students, Professionals, managers | Professionals, managers and executives | Professionals, managers |
Apple’s Customer Segmentation – Behavioural
| Segmentation | Devices | Services | OS | Accessories |
| Degree of loyalty | ‘Hard core loyals’ | ‘Hard core loyals’ | ‘Hard core loyals’ | ‘Hard core loyals’ |
| ‘Switchers’ | ‘Switchers’ | ‘Switchers’ | ‘Switchers’ | |
| Benefits sought | Sense of achievement and belonging | Speed of service | Efficiency | Recreation |
| Self-expression | Efficiency | Speed of service | Self-expression | |
| Speed of service, advanced features and capabilities | ||||
| Personality | Determined & ambitious | Determined & ambitious | Determined & ambitious | Determined & ambitious |
| User status | Non-users, potential users | Users Non-users, potential users | Users Non-users, potential users | Non-users, potential users |
Apple’s Customer Segmentation – Psychographic
| Segmentation | Devices | Services | OS | Accessories |
| Social class | Middle and upper classes | Middle and upper classes | Middle and upper classes | Upper class |
| Lifestyle | Resigned Aspirer Succeeder | Aspirer Succeeder Explorer | Aspirer Succeeder Explorer | Aspirer Explorer |
Value Proposition
The Apple Value Proposition revolves around three core concepts.
- Think Different
- Tech That Works
- Your Privacy is Safe with Us
Think Different
“Think different” sets Apple apart. In the years since the original advert, shown below, it has developed into a philosophy that spawned the design style
The value proposition is that Apple is for the people who Think Differently, who see the world differently, who change it. Creatives, Entrepreneurs and Hipsters.
Their Apple devices are a way of letting them make their statement about who they are and what they are doing. The design, which many people say is important, is an outward and visible sign of the value proposition. Not the value proposition itself
Tech that Works
Living in a Microsoft environment before I got my first iPhone I remember how difficult it was to get things to work. It took me a day once to install a printer for an insurance company. I spent hours trying to get music onto my Creative music player. Technology promised lots of gains, but you had to put the hours in to get the technology to work to get those gains.
What Apple brought, brings, to the table, is technology that is seamless and integrated. Play around with Google for a while and you quickly discover that their products aren’t really integrated. Google Plus is dead but I still had to go somewhere that looked a lot like Google Plus to change my YouTube channel name today. Microsoft Windows has a UI that is half sleek and modern, and then suddenly jumps you back 20 years due to legacy coding issues.
The Apple business model is in large part the experience of using Apple products. Google’s is to consume advertising – which is why the experience isn’t nearly so good.
This is a major differentiation between it and it’s Android competitors. Apple controls the software, the hardware and the content. This means that it is able to finely tune the experience that users have.
In contrast, Samsung and other users of Android OS have to face the fact that they control the hardware, have some control over the version of Android that they use and have little control over the apps on the Play Store. This results in a far less joined up, or easy, experience for users.
Because Apple is the only company able to offer this it is major support for the premium that it is able to charge.
Your Privacy is Safe with Us
Apple sells Software and Hardware. It doesn’t sell advertising or make a market in data. It also builds all of its products into a single consistent eco-system or walled garden.
Once you are in you are safe. You stay safe. Apple doesn’t take your data. Apple makes sure that no one else takes your data unless you explicitly give them permission to do so.
This creates a core value proposition that separates them from Google. Google’s whole business model is based on taking your data and selling it to other people.
We can break these down into a number of smaller value propositions which Apple delivers to customers through its hardware and software products
Sense of Achievement
For many, there is a sense of achievement in getting an Apple Phone. When billions have a $50 smartphone being able to afford a phone that can cost over $1,000 is important. This is especially so for those who started off with an Android phone and were able to, through hard work or endeavour, to be able to achieve one. It’s a visible mark of success and is treated as such.
Self Expression
The self-expression component of Apple’s value proposition is an identification of the user with Apple’s brand values. Having an Apple product makes you hip, cool, an entrepreneur, creative, individual, someone who thinks different, successful. Any of the or all of these may apply to particular individuals. Invariably, individuals use Apple products to show to the world that these are important truths about them
Speed of Service
Speed of service is an important value proposition for Apple’s customers. This is not really about how fast your new Apple phone is delivered. It’s about how fast you can set it up and start using it. It’s about how quickly you can learn to use it. It’s about how smoothly the product has an impact on what is important in your life and how it makes you more efficient and effective.
“I waste less time trying to do stuff now that I have an Apple”
Efficiency
The efficiency component is deeply related to Apple’s speed of service value proposition. It’s not about the tech. Apple is notoriously behind many other hardware manufacturers in its tech.
It’s about how the tech interacts with your life. Is there friction between the tech and you? If there is then the technology is not really delivering the value that the hardware claims. This is a big part of ‘design’. It’s about ergonomics and usability. It’s stripping waste, or muda, out of every customer interaction. Those milliseconds and seconds stack up to a far more efficient customer experience
Advanced Features & Capabilities
This is all the cool tech stuff. Retina displays. Multiple Cameras. Fingerprint sensors. They are important but other manufacturers have them – and often better
So despite Apple entering the smartphone and tablet categories first, it is happier to be a fast second. The value proposition is a hygiene factor. Not a critical success factor.
Recreation
Finally recreation. People play lots of games on Apple devices. They watch lots of videos. But the consumers who buy them are predominantly wealth successful business people.
Recreation on Apple devices is a much lower importance value proposition for many of them. For example, I have Netflix on my iPhone, no games and almost every app contributes to me doing my job better.
Apple Products
Apple has four groups of products
- Devices
- Services
- Operating Systems
- Accessories
Devices
- iPhone smartphone
- iPad tablet computer
- Mac personal computer
- iPod portable media player
Services
- App Store
- iTunes
- Apple Music
- Safari
Operating Systems
- Mac OS
- iOS
Accessories
- Airpods – wireless headphones
- Apple Watch – Smartwatch
- AppleTV – digital Media player
- HomePod – smart speaker
Distribution Channels
Apple uses a number of powerful promotional channels in the Apple business model, several of which have now been copied so much that they no longer differentiate Apple. These include the packaging of Apple products and the genius bar layout of apple stores.
These include:
- Apple Stores
- Apple’s websites
- Third Party Stores
- Telecom Companies
Apple Stores make a statement in a way that their competitors do not
Vs
Apple also controls the distribution of its products through its own website
Third-party stores have their brand and image tightly controlled so that they support the Apple brand.
Finally, Apple phones and tablets are sold through telecoms companies – bundled with the SIM and data required to make the most out of the device.
Marketing Channels
Apple generates an immense amount of PR and this is supported by strong brand awareness campaigns ‘shot with iPhone’ is a classic and long-running campaign.
Just as importantly – more so even – is the word of mouth. Because of the importance of self-expression and achievement in Apple’s value proposition users need and want to talk about their ownership of an Apple product.
If no one knows that they own an Apple device then they don’t get as much benefit from it. So they talk and often evangelise.
The final component of Apple’s word of mouth is the importance of groups.
“People like us do things like this”
Seth Godin – Marketing Guru
Creatives, entrepreneurs, hipsters and business people have all adopted Apple products as part of their definition of group membership.
You can’t really be a ‘proper’ designer unless you use an Apple product. This isn’t true, but to members of a group, and especially to aspiring members of a group it can seem so.
Customer Relationships
With over 1.6 billion devices sold Apple is a mass-market consumer company by any definition.
Apple has a number of channels where they manage customer relationships
Genius Bar
Telephone Customer Support
Chat and Online Customer Support
These are all great and are typically much better than competitors. Staff are onshore, rather than offshore, and as can be seen often match the demographics of target customers. Compare this to a lowest cost outsourced customer service department at Verizon.
However what makes the biggest difference in Apple’s customer relationships are:
- Design
- Evangelists
The evangelists have been mentioned in the section on Marketing Channels. They provide a similar service in the customer relationships – advocating for Apple, as unpaid salespeople. They will often also provide a front line level of support for other users.
Design is critical. Because Apple is a product-led company – they focus on building great products and expect success and scale to be based on the product – a great deal of the need for customer support is designed out.
In many ways, customer support, an important part of customer relationships in the business model canvas, is a failure of product design. Consumers contact support when something goes wrong. If you can design out failures…. then you need far less customer support.
Revenue in Apple’s Business Model
Apple’s business model is hugely cash generative. It makes more profits and has a stronger cash flow than Amazon, Google and Facebook combined.
Apple’s $60B of TTM operating income was nearly 50% more than the combined operating income of Alphabet ($24B), Facebook ($15), and Amazon ($3B).
Above Avalon
So what does Apple sell? How does Apple monetise its business model?
Products
- iPhone
- Mac
- iPod
- Apple Watch
- Apple TV
Services
- iTunes Store,
- iCloud,
- Apple Music
- ApplePay
- iBooks
Software
- Garage Band
- iWork
Warranties
- AppleCare
Almost all of those are large enough to be a large company in their own right.
Key Resources in the Apple Business Model
The most important key resources in the Apple Business model are:
- Product First Design Philosophy
- Supply Chain
- Walled Garden
Apple’s Product First Design Philosophy
If you look at Apple’s products you will find that they are often not better, on a technical sense
If you look at Apple’s products you will find that they are often not better, on a technical sense than its competitors. They are also priced similarly to the competitors’ premium products.
Apple, despite this, manages to extract far more profit from its products and services than its competitors.
This is a key feature of the Apple business model. When you charge the same price for a similar service and make a lot more money from it something must be going on under the hood.
The difference is Apple’s Product First Design philosophy.
This starts from the premise that they are going to make the best possible product for their market segment. Unlike competitors, they don’t initially think about scale and volume.
The focus is on how to make a product that will delight and inspire its users.
Those are the design constraints. Most other companies use budget and manufacturability as design constraints.
For them, a functional product is good enough. Customers understand that it is a functional product and treat it as one. In contrast, Apple’s focus is on creating a product that excels.
This is captured in their core values
- We believe that we’re on the face of the Earth to make great products.
- We believe in the simple, not the complex.
- We believe that we need to own and control the primary technologies behind the products we make.
- We participate only in markets where we can make a significant contribution.
- We believe in saying no to thousands of projects so that we can really focus on the few that are truly important and meaningful to us.
- We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot.
- We don’t settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when we’re wrong and the courage to change.
The result of this is that Apple’s business model creates products that work well. I mean well on a very deep level. They are hard to design, easy to manufacture and easy to use.
There is a significant amount of risk in doing this. If their idea of a product is wrong, if it doesn’t gel with the times, then they could lose a lot of money.
It’s a philosophy of perfection and, after their market entries, means that they will rarely be at the forefront of technology.
Design perfection means that they take longer to bring products to market. If they didn’t then they would lose the ease of use and many of the subtle components of the value proposition that makes the Apple business model so successful.
This key resource is composed of hugely talented people and a number of research and development labs working to bring products and services to fruition.
Supply Chain
The second key resource that Apple has is its supply chain. In some ways, this is a misnomer as Apple, as part of the design of its business model, has positioned itself as a designer of products
It has decided to buy the manufacturing of its products as a key resource delivered by key partners (ie Foxconn) rather than make them itself.
In contrast, many computer hardware manufacturers are, well, computer hardware manufacturers.
They have to spend a great deal of cash building and running factories, and then even more time focusing on the management of their supply chain to make sure that it works efficiently.
Imagine we have a management team that has a limited amount of time and attention.
It can decide to spend some of its time on manufacturing and some on design. That’s what most companies do. They produce good products as a result.
What Apple does in its business model is to focus ‘all’ its time on design. It then gets Foxconn to spend ‘all’ its time on manufacturing and supply chain.
As a result, it gets far better outcomes in both design and manufacturing than other computer hardware manufacturers do.
This also nicely ties in with the design focus of Apple’s business model.
Much of the visible design is focused on the consumer experience. A great deal of the invisible design is focused on the manufacturability of the product.
Because Apple gives another party critical control over a key part of its business model there is a huge risk of things going wrong.
The manufacturing design, done in Cupertino, work hard to design out as many faults as possible in the product. They are easier to manufacture as a result, and this, in turn, reduces the number of issues of product failure and reduces the need for customer support.
The Walled Garden
The final resource that the Apple Business Model has is the walled garden. This could also be called the Apple Ecosystem
Everything works smoothly together.
This delivers a key part of Apple’s value proposition. It’s easy, unlike Windows or Android
If we look back into history Microsoft Windows created a platform that worked with any piece of hardware and allowed almost any software to run on it.
The operating system was the middleware that allowed everything to happen. The problem was that hardware designers and software developers cared only about their own products and didn’t often follow standards.
That meant that Windows was often a frustrating product to use as software and devices didn’t work, couldn’t be installed easily or crashed with the famous blue screen of death
Apple in an attempt to differentiate itself from Microsoft kept tight control of the ecosystem – perhaps because early users were creatives and not good at IT (Slanderous assertion I know) – and ensured it was user-friendly in a way that Microsoft did not.
This was rolled over into the Apple Store when the first iPods and iPhones were released. It then became an increasing part of the Apple experience. Everything played nicely together.
That then provided additional benefits.
Because Apple made its money from hardware sales it has no need to mine customer data and sell it to other people.
Apple can give users privacy. It also provides them with safety and security from many of the threats on the internet.
Finally, the more Apple products you use the greater the synergy you have. With each product, you add you get fewer irritations and hitches in your electronic life.
Key Activities in the Apple Business Model
Apple has two key activities in its business model. The first is the design. The second is branding.
We’ve spoken a great deal about design already, so I won’t go into too much detail there.
Why did I talk about branding being a key activity rather than marketing?
Apple is fundamentally about associating their products and services with emotional feelings in its users.
Apple wants its users to feel successful. Apple wants them to feel that they have achieved. It wants them to feel different. It wants them to be special
This is not something that can be done with traditional feature-based product marketing.
Branding thus connects people who want to be a ‘Mac’ and creates the need to buy the product in them.
It is all about who they can be and the lifestyle that they will become part of if only they buy into the Apple lifestyle.
Branding also works well because Apple controls a big chunk of its direct distribution channels – the Apple Stores.
Key Partnerships in Apple’s Business Model
There are two groups of key partners in the Apple business model.
These are the:
- Contract manufacturers
- Telecoms companies
Telecoms Companies in the Apple Business Model
Whilst Apple does have 500 shops worldwide this is a small number compared to the shops of other mobile phone companies, telecoms companies and resellers.
Expanding this network to enable everyone who wants to buy a phone would be cost prohibitive.
Apple’s key sales channel is selling phones through telecoms companies. They bundle the Apple iPhone with a subscription and let consumers pay for the phone over a couple of years. They provide the consumer financing that lets many people afford an expensive phone.
Apple outsource sales to the phone companies and uses their distribution networks and million of direct customers to achieve scale far faster than it could through its own store and website distribution service.
Contract Manufactures
Apple made the decision to buy manufacturing services rather than making its own. It derisked this by focusing on its design and quality control. As a result it freed up a huge amount of cash on its balance sheet.
It thought, correctly, that by using a manufacturer that it had a deep long term relationship with that it could get lower prices, a lower cost per unit, than if it ran factories itself.
Costs in the Apple Business Model
Apple employs some of the most expensive designers in the world in one of the most expensive locations in the world.
Equally, it spends a great deal on branding and on sourcing high-quality components.
Does it make sense then to say that Apple is a cost-driven company?
I think it does.
The expensive designers mean that Apple’s products hit the value proposition sweet spot demanded by their customers. As a result, Apple makes more $ per designer’s time than competitors.
The expensive branding means that it has to spend far less on tactical marketing and sales.
The expensive components deliver a superior user experience that generates intense loyalty and significantly reduces the retention cost and churn of apple users.
As a result, this focus on spending a lot on very valuable activities means that the actual cost of making Apple products is remarkably low and this is the fundamental reason for Apple’s incredible profitability.
Cost is a strategic goal, not a tactical one in the Apple business model
That’s the secret of Apple’s business model!
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