There is no other smartphone brand that plays only premium; the average selling price of Apple phones is over $700.
If, over the next year or so, the price of flagship smartphones keeps going up, you can blame Apple. The tech giant from Cupertino has, over the past year or so, perfected the art of pushing up the price points of its latest phones, but without any significant impact on demand. However, the best thing for Apple is that, with this strategy, even a drop in volumes will ensure good revenue.
Thomas Husson of Forrester Research says that, at the end of the day, Apple’s primary objective is to augment the average selling price of entire iPhone portfolio, not to go after market share. “With the new iPhone XS line-up and its price repositioning, Apple demonstrates once again that it excels at extending the life-cycle of its product portfolio through incremental innovation, impressive technical specifications boosting performance of its devices, and smart marketing.”
Apple’s success comes from its understanding that smartphones are the most essential commodity for a lot of its users. This means they have very limited price elasticity, at least for those users. These customers will buy it a higher price as they are convinced of the value it brings to them.
Over the years, Apple has been able to push up the price with this crowd. Consider this: In 2014, the flagship iPhone 6 Plus was priced $749 onwards. Now, the iPhone XR, the most affordable of the 2018 pack, is priced the same. The top-end, the iPhone XS Max 64GB version, starts at $1,099. That is $350 more than the starting price of its top-end offering four years ago. And this process of pushing up the price of its products got a huge boost with the success of the iPhone X, launched last year with a starting price of $999. The iPhone X did really well despite all the initial criticism over the price, and this seems to have given Apple the confidence to push the envelope even further.
Ben Wood, the chief of Research at CCS Insight, agrees. “Because of the enormous value they associate with the smartphone, people are willing to use their disposable incomes for owning the best product. That is where Apple saw something others missed … they weren’t afraid to try and charge more for better products. We can see in the financial performance over the last 12 months that this was a financial strategy that delivered,” he says.
But while pushing the price point up with its new devices, it also wants to offer the feeling that it has more affordable products lined up. The iPhone XR is the product of this thinking. While the iPhone XS and XS Max look upwards of $1,000, here is a new phone that offers most of the features while costing just a third of the iPhone XS. This phone is ideally placed to capture those whose demand is elastic in relation to price. The so-called ‘hero effect’ of the iPhone XS series will clearly pass on to this phone, despite its awkward pricing. Don’t be surprised if a lot of users upgrading from the iPhone 6 and 7 series end up with this 6.1-inch LCD phone in their hands.
Over the past year or so, it has become increasingly clear than Apple sees itself as a premium brand. This is a unique position for the company, one that it would want to hold on to for long. There is no other smartphone brand that plays only premium, so much so that its average selling price is well over $700. According to IHS Markit’s ‘Smartphone Model Market Tracker’ report, Apple accounted for 86% of smartphones priced above $751 in 2017. In contrast, the only other manufacturer represented in the segment is Samsung, with 12% of the market. A lot of this has been achieved by the iPhone X, which crossed 60 million shipments in 10 months—the iPhone 6 achieved this in just six. Research firm Counterpoint says, however, that both models generated almost similar revenues during the first 10 months, and iPhone X is on track to surpass iPhone 6 in terms of revenues. The interesting aspect here, as per Counterpoint, is that India has contributed just 1% of iPhone X numbers.
Husson says the success of this strategy will depend on great execution in product experience and in go-to-market approach. “Apple masters this. The challenge is slightly different: Apple has to build more frequent and deeper digital relationship with its consumers. This will be key to accelerating the growth of its recurring service revenue among its customer base, to truly innovate with disruptive new products, and leverage its iconic brand to pivot to adjacent markets.”