Is the end really nigh for iPhone?

I find myself in an interesting place.

What started as a critical piece about Apple’s iPhone pricing, expecting to capitalise on recent reports of declining sales, has ended completely differently.

The media has been highlighting decreasing sales, especially in China, and are touting the ‘beginning of the end’ for Apple—the world’s most valuable brand.

On first reading these articles I figured Apple—synonymous with high-quality innovative technology, clever marketing strategies and delivering what ‘customers want, before they know they want it’—must be losing sales because prices were too high. It was the only element of the marketing mix I thought they no longer had right.

Apple products—iPhones in particular—are expensive. The current starting price for an iPhone in Australia is $700. This compares to estimated production costs of between $200 and $250; and almost half of global market substitutes selling for below $100.

Upon further investigation, Apple’s sales ‘dropped’ to 51.2 million iPhones for the quarter-ended March 2016. Apple’s profit for the same quarter: AUD$14 billion (55% more than the annual profit of Australia’s largest company—the Commonwealth Bank).

Not too bad for ‘poor’ results.

Regardless, I thought I’d continue to look at iPhone’s pricing strategy.

Apples bucks price trends

Consistent with a global market in late maturity stages, iPhone’s main competitor, Android, is facing downward price pressure:

Android average selling price

In contrast, iPhone prices are increasing:

Apple average selling price

Intuitively this seems impossible. How could Apple be bucking the entire market trend?

Udell suggests that product offerings are more important than price-points as customers purchase on more than price alone, and only through differentiation can companies obtain pricing freedom. Rao identifies that higher prices are typically cues to consumers of better quality, sentiments echoed by Sharma and Garg who identify price and brand strength as proxies for consumer perceptions of quality.

Given Apple has continuously popularized new technology by making it easy-to-use, high-quality and well designed—and clearly has brand strength—based on the research, Apple should be able to maintain its premium/high-value pricing (as defined by Kotler’s pricing model).

Apple’s marketing programs have also successfully exaggerated tangible and intangible benefits to users—creating positive brand associations and perceptions of quality—further supporting its price point.

Customer Demand

Customer demand for iPhones currently outstrips supply worldwide—leading to
upward price pressure—highlighting an inelastic demand for iPhones (at current prices), allowing price premiums to be maintained.

Landwehr and Herrmann note that Apple has created a cult-like following. The customer following is partly explained by Matos et al who identify the likelihood of consumers purchasing high-priced products increases as their friends purchase the same products. It is evident that customers are not just paying for a phone, or its internal components. They are paying to match peers (everyone else can’t be wrong can they?) and to enter the cool, exclusive Apple community.

This customer following, and the supposedly unfounded value they ascribe to iPhones, has led to jokes at users’ expense:

Market profits

Nimer identifies that typical pricing strategies for increasing market share focus on lower prices and lower margins. Nimer also notes that good differentiation, allowing price to represent the value a buyer ascribes to a product, is more likely to yield profits.

Apple clearly demonstrates this.

It does not maintain unit sales leadership in the market:

Market share

But it dominates market profits:

Profit share

Clearly Apple is doing something right. Apple’s mix of high-quality products, marketing strategies that create positive brand associations and passionate customers, has turned the iPhone from a communication tool into a modern-day necessity allowing Apple to maintain a price well above its competition.

Reflections

At dinner last night I realised that at a table of fifteen people; fourteen had iPhones—that’s 93% of people.

Ages varied (between 17 to 62), as did income levels and iPhone version owned. Regardless, the market penetration rate for a high-priced product was amazing.

It led me to think maybe Apple’s sales are slowing—not because of price—but because it is running out of new customers to sell to.

 

Jkyvelid; jkyvelid@deakin.edu.au

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