The Macintosh was originally intended to be a very low cost, high volume personal computer. We wanted to keep the price as low as possible, so the Mac would be affordable to ordinary individuals, and Apple could sell them by the millions. The initial target price was $500, less than half the price of an Apple II at the time, but it quickly rose to $1000 after the design team added up the cost of various components.
In early 1981, after switching from the 6809 to the more expensive 68000 microprocessor and doubling our RAM size to 128K bytes, we realized that we'd have to raise the retail price to $1500 in order for Apple to make its standard profit margin. $1500 was approximately the original price of the Apple II, and it seemed like that was about as high as you could go while still being affordable to individuals. We worked hard to keep the price from rising further, and were able to hold it at $1500 for most of the time the product was under development.
Pricing a brand new computer is tricky, because costs are highly dependent on volume: the more units of a component that you were willing to order, the lower the price per unit. But how can you predict how well a new type of computer will sell? It's literally a confidence game, and we had no shortage of that. Steve Jobs knew that we were going to sell Macintoshes by the millions, and he was good at convincing our suppliers to share some of the risk with us via lower initial prices, to be rewarded as volumes soared in the years ahead. For example, Steve was able to get Motorola to commit to a price of $9.00 for the 68000 microprocessor, less than a quarter of what they were currently quoting at the time.
By the summer of 1983, it was becoming clear that the disk division's Twiggy floppy disk drive wasn't going to make it, and if we weren't careful, it could drag down the Macintosh with it. We had to scurry , but we were able to replace Twiggy with the Sony 3.5 inch drive without slipping the schedule, which was better in every way except one: it cost us an extra $50 or so. When combined with a few other recent splurges, it pushed us over the top, so we grudgingly accepted that the Macintosh would have to debut for $1995.
Meanwhile, Apple hired a new CEO, John Sculley, in April 1983. John was the former CEO of Pepsi, and a world-class marketing whiz, having invented the concept of the "Pepsi Generation" and other successful promotions. He was hired by Apple mainly to apply his marketing skills to the personal computer market, and the Macintosh in particular. But big time marketing costs big time money.
In October 1983, as plans for the Macintosh launch were being finalized, and we were frantically trying to finish the software, Steve Jobs strode into the software area one evening, looking angry. "You're not going to like this," he told us, "but Sculley is insisting that we charge $2495 for the Mac instead of $1995, and use the extra money for a bigger marketing budget. He figures that the early adopters will buy it no matter what the price. He also wants more of a cushion to protect Apple II sales. But don't worry, I'm not going to let him get away with it!"
The design team was horrified. One of the main reasons that we were so passionate about the Macintosh was that we thought we were working on something that we would use ourselves, along with our friends and relatives. It was crucial that it be affordable to ordinary people. $2500 felt like a betrayal of everything that we were trying to accomplish. We worked very hard to keep the price down in every aspect of the design, and now it was being artificially inflated for reasons that didn't make sense to us. But we thought that Steve would prevail, and be able to convince John that we'd do better at the lower price.
But finally, much to our surprise and dismay, after a week or so of wrangling, Steve was the one who gave in, and the Mac was priced at $2495 at launch. Even though it sold quickly at first, soon sales bogged down, partially due to the lack of available software, but also because of the price. Even after sales picked up in 1986, with the Mac Plus and the proliferation of desktop publishing, Apple continued to overcharge for the Macintosh, preferring huge profit margins to growing their market share, which eventually led to big problems when it caught up with them in the nineties.