How Apple makes their supply chain more efficient

Apple’s developer contracts help to overcome supply chain inefficiencies and give Apple higher profits.

Supply chains are inefficient if the wholesaler and retailer both try to maximize their profits independently, this was examined in yesterday’s post. Today will look at one way to overcome this problem.

Yesterday we showed that in an efficient supply chain more units are sold at a lower unit price than in an inefficient supply chain. The extra units more than offset the lower price and the result is higher profits.

So to get profits closer to the maximum we want to try to increase the number of units (this is only up to a point but gives us the idea).

Revenue sharing contracts

A revenue sharing contract can help increase the number of units sold.

For example, Apple wants to maximize profits from its App Store. It could charge a large fee to allow developers to distribute apps through the App Store but a lot of small developers would not be able to afford it. What Apple do is charge a very small fixed fee and then take 30% of the revenue.

This revenue sharing contract allows Apple to increase the number of apps that are developed which allows them to increase their profits, as well as the profits of developers.

More generally, if the wholesaler tries to charge a high price then the retailer will only be able to buy a small number of units. The wholesaler won’t want to just drop the price as their profit will fall but if they charge less initially and have a revenue sharing deal then this can increase the number of sales and both will be better off.

Today’s takeaway: Consider charging your customers less and taking a share of their revenue rather than charging them a high amount up front. You might both be better off.

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