Why you will see a $1400 iPhone?

I have written over years on the pricing excellence of Apple, a well executed and repeatable strategy across its entire product line. You should look at my writings on price fencing, iMac pricing, MacBook pricing, iPad pricing, and of course iPhone Pricing.

Now to iPhone 8, the big 10th-anniversary edition which is coming within a quarter and has already captured the imagination of fans and analysts. In a recent WSJ column, Christopher Mims wrote his thesis on iPhone pricing. Mims boldly predicts a $1400 price point for high end with a price range of $1000 to $1400.  I agree with this scenario, yes it is highly likely we will see higher price point versions with iPhone 8. Mims adds,

Yet there is plenty of evidence that those who say that price is untenable will be eating crow come fall.

As someone who has eaten crow a few times, I couch my statements in likelihoods, nevertheless evidence points (shall we say Bayesian reasoning?) $1000 to $1400 phones.

However, I  differ from the WSJ piece on four (four and a half actually) out of five reasons stated in that article. TLDR: there is only one reason.

Before we get there, let us start with the business goal for Apple. Afterall you start with your business goals before you touch pricing, don’t you?

Number one goal of any real business is growing profit. All the more true for a business that is $140 billion a year like the iPhone. What are the profit growth levers Apple has to pull? The same everyone has, grow revenue or reduce cost. Moment’s reflection will convince you growing revenue is a better and limitless lever so let us just focus on that.

Revenue is price times unit volume.

iPhone is no small business. Apple sells about 211 million iPhones a year, that is 7 iPhones a second. It has sales worldwide. How much more growth in unit sales can

iPhone is no small business. Apple sells about 211 million iPhones a year, that is 7 iPhones a second. It has sales worldwide. How much more growth in unit sales can it produce? It is struggling in India and faces challenges in China. Yes, it can solve these two big markets to drive more unit sales. This is going to be a long-haul effort, not something Apple can solve in a year.

So that leaves price. But you can’t increase pricing and expect customers to keep paying for it. Apple will follow its time tested repeatable playbook – product versioning. Define the right mix of product features, erect price fences, and let customers willingly self-select to the version they want to pay.

Today the highest price point for iPhone 7s is $969 for 256GB Plus version. The lowest price point is for $399 for 32GB iPhone SE. After channel pricing and other factors, we see the average selling price (average across all its models) is a tad less than $700.

I want you to take the following two statements as given (margin is too narrow to provide the proof)

  1. There exists a segment willing to pay more than $969 for an iPhone
  2. There exists a segment that finds $399 too high for iPhone and will gladly buy at lower price point.

The second segment is not interesting to Apple. Only the first segment is interesting. That is simply the case why you will see a $1000-$1400 price point for iPhone8.

While this segment is happy to pay more, it needs reasons to part with the money. Give customers reasons to pay more for your product. I do not mean raise prices like Starbucks does, I mean,  give them a product version that is compelling enough for them to upgrade to from the version they currently pick. Remember the perceived value from these features need to compelling enough for them to upgrade. (See Value step function.)

This is not a new concept. This is price discrimination, to be exact, Second Degree price discrimination, introduced by economist Pigou.

Back to WSJ article, as it suggests

premium features like an OLED screen, 3-D imaging and a retina scanner, and they expect it to command a premium price,

A standard iPhone 8 that is marginally better than iPhone 7s at current $649 price point. And bigger(?), better and cooler models at $1000-$1400 price points.

So where do I deviate from the WSJ piece? I believe the stated reason above – the need for profit growth based on standard economic theory and product design – alone is enough for making a case for $1400 iPhone. I would go on to say that is the only reason and nothing else. Perhaps this is because my thoughts are colored by the practitioner glasses I wear.

Briefly, on the 5 points WSJ article states:

  1. Boosting the Brand: It is already the most valuable brand, what more it can do or what does that mean to profit growth? 211 millions buy iPhones today, a $1400 is not going to attract more as stated in the article.
  2. Crazy New Tech  I disagree because based on track record Apple does not give any more than what is absolutely needed despite its cost to deliver it. See my past articles on Retina screen on MacBook Air and earbuds.
  3. Supplies are limited  Perhaps, but that is a product design decision and more importantly, the segment that values these features enough to pay a premium is limited too. Flip the question on its head, if a very large segment is willing to pay $1400 for these features won’t you think Apple would solve the supply chain problem? Or raise prices even more?
  4. All about the ASP  This I agree. The half I do not agree is it needs to be based on business goal (which I said before is profit growth).
  5. $$$$ = Desire This I strongly disagree. Mims states here that higher price point will make more covet the product. This is the notion of Veblen goods (conspicuous consumption anyone?). We are talking about a product that sells at the rate of 7 per second. This is no coveted product. $649 for a phone, while you can $99 is already a luxury price point. There are not enough ways to make the $1400 conspicuous enough for this factor to apply. How many bought the $10,000 Vertu phone because of its price? I have also not seen a product’s demand behaves like Veblen good beyond the initial excitement. I think Pigou is the stronger economist here than Veblen.

So there you have it. I can see a scenario for a $1400 iPhone 8. And it is only because of Apple’s search for profit growth. Nothing more.