Apple’s purchase of Beats may have made Dr. Dre hip hop’s first billionaire (at least according to him)…

And Dre isn’t the only one who has done very well from of the Beats buyout…

Co-founder Jimmy Iovine is also rapidly closing in on the nine-figure mark.

The purchase of Beats for $3 billion, made up of $2.6 billion in cash and $400 in stock, is BIG news – but why was Apple willing to pay so much for a company that makes headphones?

Here are some of the reasons why Dre and Iovine were able to bag themselves a $3 billion payday: 

#1 – Giving Customers A Better Result

There are few products that are quite as ubiquitous as headphones. You can purchase a pair for as little as couple of bucks, and they all do pretty much the same thing.

Right?

So I thought…

Dre and Iovine’s key realization was that there was a segment of the headphone buying market that wanted a higher quality – and higher prestige – product.

This was born out of their frustrations of spending countless hours in the studio perfecting the sound of their music, which then went unappreciated because their fans were listening to their songs on cheap headphones…

By charging a higher price for their headphones, Beats was able to elevate the perception of their headphones as a premium product.

And Beats hasn’t been the only one to benefit – by raising the price for headphones, consumers have benefited as well.

Huh?

“Is that a misprint?” you might wonder.

Nope…

At this higher price, Beats is able to reinvest in their headphone technology and give their customers a better listening experience.

That’s very difficult to do if you’re trying to compete on price by selling your product for only a couple of bucks, and trying to compete with the likes of Kmart and Wal-Mart.

#2 – People Buy for Other Reasons Than the Product Itself

Beats headphones are about more than the product itself…

They have also become a way for people to identify themselves as true music aficionados.

A status symbol.

When people wear Beats headphones – which are very recognizable – it shows that they take their music seriously.

The high price tag simply confirms that commitment.

The idea of headphones to “self identify” oneself isn’t original to Beats. In fact, it was Apple’s own white earbuds that were the original marker of status!

By wearing white earbuds, the owner showed that they were using an upmarket iPod rather than a generic MP3 player.

But over time, white earbuds have lost their distinguishing position – Apple’s purchase of Beats is a chance to regain that prestige…

The impact of Beats has also gone beyond the company itself.

Simon Cowell, 50 Cent, Jay-Z, and Ludacris now have their own branded headphones.

The idea of a “branded” headphone would have been unthinkable before Dre and Iovine.

The Lesson To Learn From Beats

The lesson is this:

When you can identify a core segment of your customer base that is passionate about the product you sell, you can charge premium prices – provided you give them the ultimate result they are looking for…

Focusing on the result (not the price) is how you grow a business that dominates your market.

In your corner,

Charlie