Apple announced its newest iPhone dubbed iPhone 7 (and iPhone Plus) last week. The new phones will go on sale starting September 16th. Let us look at that phone and product decisions in the context of average selling price of iPhones. Average selling price is calculated as the total hardware revenue from iPhones divided by the total number of iPhones sold (all models offered). It takes into account the final phone price Apple takes in after promotions and channel discount and the the mix of different models at different price points sold during the period.
Take a look at these iPhone Models. Apple sells phones priced from $399 to $969. These are list prices, what Apple gets for each model can be lower than the list price for it from different sales channels.
These are the current models, over the past few quarters the models and mix were different but the math and definition apply. Now using data that Apple reports in its quarterly earnings reports let us see the Average Selling Price (ASP) changes over several quarters.
Let us note a few key things in this history that will help point to iPhone7 product decisions and the future.
- Despite all the threats of budget models from competition, Apple was able to keep its ASP and post higher profits. The lowest ASP was $561 that was attained during the quarter before iPhone 6 and iPhone 6 plus.
- There is seasonality in the ASP. It is always highest in fiscal Q1, the first full quarter following new phone release. Then it trickles down. This is because fans buying new phones right away and likely buying higher capacity models at higher price points.
- ASP drops right after the fiscal Q1, which is also the Holidays quarter, and reaches lowest the quarter before new release.
- Apple got one major bump in ASP with iPhone 6 release. There are two major product decisions for this bump. One is sticking with 16GB base model and two is offering iPhone 6 Plus.
- Before iPhone 6, the drop in ASP in periods following new models was steep. It dropped close to $75 with iPhone 5s. But with clever design of 16GB base model and lure of bigger iPhone 6 Plus Apple was able to stem ASP erosion. Between iPhone 6 and 6s the drop was only $28. And this matters not just for revenue but for profits.
- This changed with the introduction of low-end iPhone SE models which come only in one size and two capacity points. It is arguable that if not for these models Apple could have retained higher ASP but at the cost of lower sales (units and revenue). On the other hand these phones pack so much features that the lower price points tempted customers who otherwise would have picked pricier iPhone 6s.
- This one is on iPhone 7’s features that will affect ASP. Finally, Apple had no option but to up the base model capacity to 32GB from 16GB. Until now this was an effective lever in keeping ASP high but will definitely put pressure as more will choose 32GB than those who did 16GB. Apple made two changes to offset this.
One is to get more to choose the pricier iPhone 7 Plus by offering dual cameras only on that model. Two is the $159 AirPods. While AirPods are optional, we should look at that as part of iPhone hardware and incremental to ASP. There is only one immediate reason for AirPods – add to ASP.
So what can we predict about ASP next two quarters?
The current one is too short and is already baked in by lower priced models. So you should expect close to $600-$620 range.
For the next full quarter more of the sales mix will have iPhone 7 and iPhone 7 Plus models. But given the reviews declaring the new phone to be less than stellar and that there is far more value from $449 64GB iPhone SE we cannot expect ASP breaking $650 and definitely not reaching the high of $695 set last year.