The Apple Tax: Why iPhones are getting so expensive

For many years now, Apple has been pricing products higher than competition. Their product positioning has always been clear: Premium quality with higher prices. When iPod touch was introduced at $399, the other music players were being sold around $200. Macbook Air was launched at staggering $1800. iPhone was launched at $449 with a 2 years contract. IPhone gold was introduced at $10,000 and it had gold worth $300 only. The question is, How Apple gets away with these price hikes?

Globally, the selling price of smart phones is decreasing in last 10 years. Here it is:

And here is Apple. The iPhone prices have been steadily increasing in last 5 years. 

People refer to these exorbitant prices as Apple tax.

Here are 5 reasons why iPhones have been so expensive: 

1. The market has saturated and iPhone unit sales has decreased. Apple has increased profit margins to keep their revenue stream healthy. 

The graph shows an interesting story of iPhone unit sales:

From 2007 to 2015, Apple had an ever increasing sale of iPhone units and it seemed like a fairy tale. However, the number has become stagnant since 2015. The markets in which Apple had significant share became saturated. They are not growing further.

 The two largest mobile phone markets, China and India did not react to Apple’s expectations. Their share in India is 1% due to high tariffs and lack of localization. They targeted 5x increase in revenue in 2015 but they are far from reaching the target as of today. On the other hand,Chinese market responded well to reasonable alternates such as Huwaei and it did not react positively to pricey iphones lately due to its economy slowing down. 

This has paused Apple's net income to grow further. Here it is:

By the end of 2018, iPhone unit sales were in decline and it forced Apple to announce that they will not publish number of iPhone unit sales anymore. The market share which stood around 30% a few years ago has been reduced to around 15%. Here is Apple’s market share during last 2 years: 

Finance 101 says there are two ways to make more profit: 

1. High sales at industry average profit margins: Sell more units, make small money from each transaction and get more revenue. 
2. Keep higher-than-industry average profit margin and make fewer sales. 

Now that market has saturated and Apple cannot find more new customers for their iPhones, they have decided to increase profit margins by raising prices for existing customers. For example, Apple manufactured the iPhone Xs in $443 but the selling price was $1249. iPhone X was being sold at gross margin of 64%. 

They have been really good at this game and it has worked for them. Other vendors focus on comparison of features with competitors to promote their phones. Apple advertises how the latest version of iPhone is better than the previous one. It never mentions a competitor in its advertising because it sees itself a different league than competition.

2. Apple has huge fan base and affluent customers who habitually buy brand new iPhones: Researches at University of Chicago concluded in 2016: "Across all years in our data, no individual brand is as predictive of being high-income as owning an Apple iPhone in 2016"

If Apple becomes a way to guess if you are rich of not, You will find millions of people to buy iPhones for status symbol. This group of customers are either Apple lovers or they have lot of disposable income to buy new iPhone every 12 months.

In past few years, Apple has been testing their price boundaries. They started raising prices and tested this group. To its joy, this group did not let Apple down. They were always willing to pay a price for premium quality. 

3. And its not just status symbol. It makes sense for logical customers to buy brand new iPhones: Purchasing an iPhone makes sense even if you are a customer looking for value for money. Other than affluent and loyal customers, There is another group of customers who have been buying new iPhones regularly. 

Phones are like cars, the value will reduce over time. After 12 months, it has been reported that latest iPhones can be sold between 55 % to 65 % of original price. For Samsung, the average is 38%. Considering iPhones being pricier options generally, that means a $1000 iPhone X can be sold at $550 next year when iPhone 11 is launched. So the users already have some money to buy the new phone. Look at it this way, if I have to spend $400 a year buying brand new iPhone, that is $33 a month to keep a premium quality phone. Shouldn’t be a big deal for many. 

4. Intelligent design of Apple’s ecosystem: 

Finance 101 again, There are two ways to increase revenues: 

1. Make new customers for iPhones
2. Sell more to existing iPhone customers 

There is another major group of Apple customers who do not buy brand new iPhones every year but they are still important for Apple. 

The technology behind smartphones is getting better and better. Apple being premium product is one of leading phone companies when it comes to superior product quality. And that is where Apple competes with Apple! 

For most users, Phone is all about Whatsapp, Facebook, emails, twitter and others social media. That doesn't require lot of complexity. The average person now waits 4 years to change their phone. In 2018, they would wait 3 years and in 2016, they would wait 2 years. That means people are happy with their phones being superior quality and its doing a good job for them. Not much motivation to switch their iPhones, or if they would buy, they can buy one of previous models at reduced price. 

Is Apple concerned with this group not buying brand new iPhones and just using the previous versions? The sale of iPhones bring 60% of Apple revenues afterall. 

The evidence suggests No. For example, iOS 12 still runs fine on iPhone 5s which was launched in 2012. The $30 battery replacement offer is an incentive to keep your old iPhone. 

Actually Apple should be perfectly fine with this situation. Remember what I said earlier in this article: Another way to increase revenues is to extract more value from existing customers. So here we go: 

1. All users of iPhones buy apps on the store, apple music, iCloud and all other services. 
2. iPhone users are important for Apple because they can sell them watch, iPads and accessories such as air pods later. It is gateway for many to Apple’s product ecosystem 
3. And then there are other incentives for Apple. For example, Google pays Apple $9 billion annually for its search engine to be used by Apple users. 

Effectively, Apple is playing the same game many tech companies are playing. Develop user base and we will setup new verticals to make money. 

I had written in one of my earlier articles that companies go through the following phases: Starting phase, Young growth, high growth, mature growth, stability and decline. The same applies to product lines as well. iPhone in its infancy years saw young and high growth. It has matured over time and this product line is now stable. To keep going, Apple has to embrace this group of existing users and sell them more. 

Apple has created a lucrative ecosystem where customers have high switching out costs. The ecosystem is designed to encourage users to remain part of Apple’s family. Think of all product lines Apple has introduced and You will understand their business model. 

5. And then, Apple is a cool brand, isn't it? 

Lets accept it. Apple has successfully established itself as a graceful and cool brand. It has established itself as most reliable player to produce premium and high quality products. The brand name is associated with royalness.

The personal charisma of Steve Jobs turned into an exceptionally strong brand and Tim Cook, despite having no visionary bone, has still been able to take Apple to new heights.

The share price and valuation has steadily increased under his command. 

Once Apple established its brand, it started testing price boundaries. And one can clearly see that people are really willing to pay much higher for the brand value. The market is filled with quality products, yet customers persisting with Apple is a lesson for building strong brand for everyone else. I must say, Apple is kind of outlier here. Because there are so many great brands historically which could not achieve the same price hike in fiercely competitive environment. 

Lastly, Money makes money. Apple is Leveraging their advantage with premium quality: 

So all of this draws a pleasantly optimistic picture for Apple’s future.

Being a premium product serving as status symbol, they will always find customers for brand new iPhones. If a percentage of them churns out, Apple can still get value from existing customers by putting them into a great ecosystem. Combined this with $250 billion surplus cash they have, they are able to bring premium features from time to time.

Most of their product introductions had a thing or two about it, which made it standout from competition. For example, iPhone 11 has A13 bionic chip and it is fastest CPU in smartphones so far. At Apple, Customers are assured that their money is worth it and their future with Apple products is in safe hands. 

Authored by: Kaleem Ullah (Head of Product Growth at UWorx and Chief Marketing officer at khojiforagile.com)