In every category where Apple competes, the company does something not enjoyed by the vast majority of competitors. In lieu of marketshare, Apple prefers profit share, and prices products accordingly. The new iPhones are but one perfect example.
Apple’s iPhone 5S, the flagship model, retains the same retail price tag of previous models. The introduction of the polycarbonate iPhone 5C brought nominal technology and a lower price.
Lower price does not necessarily mean lower gross margins, and some technology pundits estimate the iPhone 5C may have a larger margin than the more expensive iPhone 5S, despite the lower price tag.
By pushing a new, but lower priced model out the door that also costs substantially less to manufacturer, Apple maintains the same high profit margins on both the less expensive iPhone 5C and more expensive iPhone 5S
The lower priced product helps to maintain the higher priced products profit margins. What about all the discounting going on with the iPhone 5C? Isn’t that indicative of a slower selling product? Isn’t it obvious the iPhone 5C is a loser already?
No. Not at all.
Discounts? What Discounts?
When it comes to the iPhone’s actual price, the profits get sliced a number of ways. At&T, Sprint, Verizon, et al, pay Apple for each iPhone sold. The cell phone companies also pay retailers when they sell a smartphone with a contract plan. Think of it as a commission.
When Walmart or Best Buy discount an iPhone 5C, where does the discount come from? One or all of three places. Apple, the cell phone company, or the retailer. It’s unlikely that all three combine to create a discounted iPhone, but Apple has sufficient gross margin to be competitive with much less expensive Android-based smartphones. A discounted price can often spur demand, but only to a point.
Remember, Apple isn’t interested in the marketshare game for the sake of marketshare volume. Historically, Apple prefers to sell a large volume of products with a large gross margin. Mac, iPhone, iPad, iPod all work the same way. Big numbers. Very good profit margins.
The iPhone 5C is perfectly placed and priced. The $100 retail price difference is nominal to those who want the latest and greatest. But a $100 difference, plus a $50 to $100 upfront discount, appeals strongly to the price conscious smartphone buyer. Apple has no desire to sell a product to those buyers only interested in the lowest price.
The end result of this product migration pricing strategy should be obvious. Apple sells products in substantial volumes, yet the product line is not broad and expansive, yet the profit margins are high, and help fuel the rest of Apple’s ecosystem– Store, Genius Bar, new product innovation.
In every category, Apple owns the lion’s share of profits– Mac, iPhone, iPad, App Store, online media sales. And no other company has been able to challenge Apple’s supremacy in those categories.