Apple's (NASDAQ:AAPL) pricing power has long been the stuff of legends. By combining unrivaled industrial design (frequently using customized components) with differentiated software, the Mac maker is able to fend off hardware commoditization and enjoy incredible premiums for its gadgets. This isn't news to investors.
What is new to Apple, however, is the bold new pricing strategy that the company is implementing with Apple Watch.
The most expensive watch buckle we've ever made
At its "Spring Forward" event Monday, Apple finally detailed how it would price its forthcoming wearable -- and it gets really high. We're talking about $17,000 at the top for a 38-mm gold case with a gold modern buckle.
That's a pretty big leap from the Apple Watch Sport model that starts at $350. But here's the thing: All of the upsells to more expensive models are purely aesthetic. All of the customization and configuration available for Apple Watch pertains exclusively to materials and cosmetics. Upgrading to higher-end models does nothing for processing power, memory, or storage.
While that's not technically a first for Apple -- as it charged a $150 premium when it originally introduced the black MacBook nearly a decade ago -- this is by far the most dramatic implementation of such a pricing strategy.
Once upon a time, the Mac Pro was Apple's most expensive product. A fully loaded model that can meet any video professional needs comes in at $9,600 before adding in any accessories or displays. That's still less than the cheapest Apple Watch Edition model, which starts at $10,000.
Let's put this another way. See that model shown above? Buying a configuration with an identical case but the cheapest Sport band costs $10,000. That means that Apple is charging $7,000 for a watch band (the gold Modern Buckle, to be precise). Outside of the aforementioned Mac Pro, Apple has never charged that much for even its most technologically advanced products, yet now it's asking $7,000 for a piece of leather with a gold buckle.
And you thought Apple's current gross margin was high.
But will it work?
Apple is entering the high-end luxury watch market. This is a world where watches can easily cost $200,000, and $2.5 million watches are not unheard of. Quite frankly, consumers in this market segment don't really care all that much about price and are willing to spend on status symbols. In other words, there is virtually no price sensitivity when you start talking about watches that cost as much as a car, house, or a literal lifetime of saving.
This is precisely the consumer that Apple is targeting with Apple Watch Edition. However, there is one key difference: The existing luxury watch market is not on the same technological upgrade track that tech gadgets are on.
The most expensive watch in the world is the Henry Graves Supercomplication pocket watch. Originally made in 1932, this watch was listed for $15.6 million at Sotheby's last November. It sold for $24 million. In the process, it shattered the previous record of $11 million -- a record that it itself set when it was sold in 1999. This is a timepiece that has withstood the test of time (pun intended), crafted 83 years ago.
Smart watches are a nascent technology product category, and as such will see regular updates and refreshes that will improve performance and expand functionality. How will the buyer of a $17,000 Apple Watch Edition feel when Apple inevitably updates the product with a faster processor or new biometric sensors?
There is a whole new set of expectations that come along with tech products, and Apple will be challenged with straddling the line between those expectations and long-standing conventions within the luxury watch market.
As if it wasn't obvious enough from hiring Burberry former CEO Angela Ahrendts, Apple is now very much in the world of luxury fashion, where aesthetics come with a high price tag.
Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple and Burberry. The Motley Fool owns shares of Apple and BURBERRY GROUP PLC S/ADR. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.