Apple can reliably increase iPhone profits from systematic increases in average iPhone selling prices via price increases and offering more advanced models
SAN FRANCISCO–(BUSINESS WIRE)–A Simon-Kucher & Partners study of 10,250 representative US consumers identified significant opportunity for higher priced iPhones from those considering the upcoming Fall 2019 models. This was primarily driven by high willingness-to-pay for monthly financed plans, and demand for large screen devices from younger and less affluent consumer segments. The study showed that future price increases and higher priced models are likely to be profitable, with an iPhone priced at $2,400 possible in the short to medium term via a $99/month payment plan for 24 months.
The study found room for further price increases – and that Apple should be planning ahead for a $2,400 iPhone
The study showed that 10 percent of those consumers considering the new iPhones were willing to pay more than $2,000 for their device, and 15 percent would be willing to pay more than $1,800 – significantly more than the $1,549 expected price of the top of the range device (assuming a $100 increase from 2018 device prices as has occurred historically), indicating Apple has room to grow prices even further with some customers.
This was primarily driven by consumers that opted for 24 month zero percent financing over those willing to purchase up front. Consumers were willing to pay on average 50 percent more for the same device if they were paying monthly over 24 months versus up front – the study showed 10 percent of those consumers that prefer to pay monthly, would consider paying over $99 per month for 24 months ($2,400 in total), versus only one percent of those that prefer to pay up front would consider paying over $1,999.
The study also found that the revenue optimal price point for the new iPhones will be similar to what they are priced at today, given that many consumers were willing to pay less than others. Analysis of the study data showed that revenue dropped by three percent on average for prices $50 higher than the current price, five percent for $100 more, and nine percent for $200 more, and volumes dropped by nine, 15 and 25 percent respectively. However, Apple’s high margins meant that despite these volume losses, profits remained broadly flat at higher price points, indicating that if consumers switched to lower priced models rather than to competitors’, higher prices would be profitable.
“There is clearly a segment of customers that are willing to pay whatever it takes to access the latest and greatest iPhones. This segment is big enough to warrant Apple’s attention on its own, much as the original iPhone X was likely targeted at this segment,” says Nick Zarb, technology expert and Senior Director at Simon-Kucher & Partners. “The study showed that consumers are clearly thinking more about the monthly cost than the total cost, so Apple need only move customers from their top price of $60.99/month today, to the next psychological thresholds of $69.99 or even $99.99 a month.”
Younger consumers will drive demand for larger, more expensive models, which Apple can continue to serve with highly segmented pricing
Despite not yet having been announced, reasonable demand was seen for the upcoming iPhones, with five percent of consumers over 18 considering the new, as yet unannounced, models. Of those considering, 34 percent were primarily considering a top of the range large screened model (XS Max upgrade equivalent), 18 percent an XS equivalent, and 48 percent an XR equivalent. As the Apple marketing machine goes into full swing after the September 10th launch, many more consumers are likely to consider the upcoming devices as they become more familiar and desirable and their specifications are provided in more detail.
The trend for larger screens was strongest with younger and less affluent consumers, with 60 percent of 18-24 year olds, and 37 percent of those with household incomes below $100k, considering an XS Max upgrade equivalent, versus 60 percent of over 55s, and 21 percent of those with household incomes above $100k, considering the smaller screened XR upgrade equivalent.
“Apple smartly offers several versions of each iPhone model at $100 increments based on storage capacity, allowing consumers to self-select based not only on size, features, and functionality, but also their willingness-to-pay. This results in 16 different available price points to consumers from $450 to $1,450 today, capturing a larger segment of the market,” says Zarb.
An anchor pricing strategy is key to Apple’s continued success in growing Average Selling Prices (ASP)
“Apple is the master of anchor pricing. Even if Apple didn’t sell many Gold Edition Apple Watches when they were launched at more than $10,000, they shifted the entire conversation on just how much someone should pay for a smartwatch. $349 looked cheap in comparison, when actually it was significantly higher than competitor products,” says Madhavan Ramanujam, Partner and Board Member at Simon-Kucher & Partners and co-author of ‘Monetizing Innovation – How smart companies design the product around the price’ (Wiley). “Similarly the iPhone X made the iPhone 8 look attractive and affordable in comparison when they were launched. A customer may walk into an Apple store to check out their latest model, and walk out with a device that suits their budget, probably spending a little more than they might have originally planned to. The power of anchor pricing on an entire portfolio should not be overlooked.”
The full-survey results are available on request.
About the study:
The study “Willingness-to-pay for upcoming 2019 iPhone models” was conducted by Simon-Kucher & Partners in August 2019 in the US. In total, 10,250 US consumers were sampled, and 400 identified with propensity to purchase the upcoming 2019 iPhone models were asked about their willingness-to-pay for new models as well as their consideration set.
Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with more than 1,400 professionals in 39 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has more than 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.
Apple Inc. is not a client of Simon-Kucher & Partners now or previously.