How Apple Will Handle Price Erosion with iPhone 7?

Apple is set to announce on September 7th  the next generation of its flagship iPhone. There are several rumors about the new model which no doubt will be called iPhone 7. I am not interested in the specific design changes, lack of headphone jack or any of the myriad subtleties that will get Apple fans excited. I am more interested in the most important part of the product – its price points. What are the different price points will its models be offered at to maximize Apple’s profit?

IKEA, which operates in a different domain and at the opposite end of price spectrum than Apple, says,

At IKEA we design the price tag first and then develop the product to suit that price.

Apple is no different because like IKEA, Amazon and Starbucks Apple is a Price Setter. With that let me make some predictions for iPhone 7 models and price points.

First prediction is a certainty at 100% confidence level. There will be two major models based on screen sizes – iPhone 7 and iPhone 7 Plus.

Second  prediction has more than 90% confidence level. Apple will announce 3 models under each screen size. The rule of 3 has been seen consistently throughout iPhone lifetime and we can safely say the same now.

Third  prediction has close to 90% confidence level. The price points of 3 models will be exactly same as the previous generation iPhone 6s as seen below.

iphone6s

Fourth prediction has higher than 90% confidence level.  The lowest capacity point will be 32 GB. There has been significant heartache among Apple fans and users on the capacity of lowest model. The 16GB has not been enough to store all the bloated OS, Apps, photos and music.

But that had served Apple well in delivering significant ASP (Average Selling Price) upside and profit. The table below is from opening weekend sales of iPhone 6, the first time Apple made the capacity points as 16GB, 64GB and 128GB.

iphone6-sales-forecast

As my previous analysis showed, Apple made about $4 billion additional profit per year by not offering more than 16GB for the lowest priced model. With iPhone sales slowing, Apple cannot allow for ASP erosion and profit drop because of 32GB model.  Which leads us to final prediction.

This final prediction has just 60% confidence level. There will be another feature that separates the iPhone models than just capacity. If Apple succeeded in the past by getting more to choose the 64GB version at higher price point by crippling the lowest priced version with 16GB capacity, it needs another way to make the lowest priced model unattractive to those who are tempted by the thinking 32GB is good enough at $100 less than next model.

The implied assertion here is the models won’t be simply 32GB, 128GB and 256GB but 32GB, 64GB and 128GB with a tweak to 32GB model.  The reasoning is based on Apple’s philosophy of giving customers just enough and nothing more. That is changing 16GB to 32GB does not mean the other too capacities double as well.

So expect the lowest priced 32GB model to lack a vanity feature that will prevent those who can afford to pay the additional $100 from choosing it, thereby help Apple keep its higher ASP and current profit levels.

If this prediction turns out to be false then you must start worrying about drop in profits the following quarter.