On Oct. 30, Apple (NASDAQ:AAPL) introduced its third generation of iPad Pro tablets. These devices represent dramatic upgrades from their predecessors, sporting an all-new design, new processor, TrueDepth camera (adding support for Face ID), and support for the company's new Apple Pencil.
They're really good devices that Apple, frankly, has every reason to be proud of.
What's interesting is that when Apple released its second-generation iPad Pro tablets back in June of 2017, it simply discontinued the prior-generation models instead of keeping them around at potentially lower price points. With this product launch, Apple did something different. Instead of dropping the older iPad Pro models altogether and offering the new ones at the same prices as the older models, it kept the older 10.5-inch model around with pricing unchanged and introduced the newer models at higher prices than the price at which their predecessors launched.
Let's go over why Apple would embark on such a strategy.
Boosting average selling prices, supporting a pricier product
The new iPad Pro tablets are probably significantly more expensive to produce than their predecessors were -- Apple really packed these products with a slew of feature upgrades. If this is the case, Apple likely was faced with two options with respect to pricing. First, it could keep pricing the same but take a hit on gross margins and, ultimately, net profitability.
The other option would be simply to price the new devices higher in the hopes that customers would find value in the added features and be willing to pay more. Those customers who didn't find value would then have the choice of buying the older iPad Pro models at the same prices that they launched at. Apple likely can get away with that because, to be blunt, the company's last-generation iPad Pro tablets are already head and shoulders above competing products.
This second option is the one that's most likely to maximize the profitability of Apple's iPad business. Since Apple has a history of making smart business decisions that generate fat profits for its shareholders, it's not surprising that it chose that route.
Why discontinue the 12.9-inch model?
You might be wondering why Apple didn't keep its older but larger 12.9-inch iPad Pro around as well. I think the answer is quite simple. Since Apple didn't reduce the prices on the 10.5-inch model, it would have been inconsistent to decrease the price of the older 12.9-inch iPad Pro. The device started at $799 for a 64GB version with only Wi-Fi connectivity.
In this case Apple would be giving customers a choice between a large, bulky previous-generation 12.9-inch iPad Pro -- the 10.5-inch model is noticeably sleeker with slimmer bezels -- and the new 11-inch iPad Pro for the same price. I believe that consumers would overwhelmingly pick the new 11-inch iPad Pro, so maintaining availability of the 12.9-inch iPad Pro, at least without a price cut, is practically pointless.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.