What if Apple cut iPhone and iPad prices by $100?

“While Apple may have fought back Carl Icahn and David Einhorn in 2013, it’s getting clearer that its $147 billion in cash will remain a tempting target for activist investors. It’s equally clear that the company has no real idea what to do with the money. One idea tossed around here in the past resurfaced again yesterday over at Slate,” Mark Rogowsky writes for Forbes. “In short, ‘What if Apple cut prices on its products?’ While it isn’t possible to know precisely what would happen to Apple’s financials, there’s no doubt that volumes would rise even as profitability fell. In addition, costs would come down too, as Apple would be in a position to negotiate even better supplier arrangements and, more importantly, would get better at making its products more quickly than usual. Does such a plan make sense?”

“Realistically, this is a thought experiment. CEO Tim Cook is not going to announce after the holiday that Apple is engaging in any such wholesale price cutting. But he is advised to consider the effect of phasing in such an approach,” Rogowsky writes. “Apple will likely never again match the gross margin highs it was seeing a year ago from either product line. But beyond that, gradually lowering prices makes it difficult for the strategies of competitors to remain effective. Amazon, Google and Nokia (soon to be Microsoft) all rely on using products priced with virtually zero gross margin to compete with iPad and iPhone. The large gap between no margin and Apple margin makes those competing products look very attractive on price. Every dollar of the gap Apple removes squeezes that strategy.”

Rogowsky writes, “None of this is to say Apple needs to price its tablets like the Kindle Fire or its phones like the Moto G. On the contrary, by keeping them priced at a premium, albeit a smaller one, Apple can still garner the lion’s share of industry profits and a bigger share of industry sales.”

Muchd more in the full article here.

29 Comments

  1. A better idea would probably be to charge less for in-factory hardware upgrades. For example, to upgrade a Mac’s hard drive when you buy a Mac on the online Apple Store, Apple charges $150, which is what it costs to buy a new hard drive. Apple should only charge around double the actual extra cost of a larger hard drive. Also, $100 for each level up for iOS device storage upgrades is ridiculous. They should only charge $25 to $50 for each level up.

    1. As much as I hate the practice as a customer, this is exactly how Apple gets its industry-leading profit margins, though. Apple doesn’t make nearly as much money on a base-model iPad or iPad mini as it does on a decked-out model.

      If Apple wanted to keep its current profit margin under your model, it would have to essentially drop most of the base models altogether.

    2. “Also, $100 for each level up for iOS device storage upgrades is ridiculous. They should only charge $25 to $50 for each level up.”

      They do not charge $100 for each level “up”. That’s looking at it from the wrong perspective. The margin they are looking for does not come from the low-end model, it comes from an average of all three models and they are priced according to how many Apple thinks they’ll sell of each model. This is called an ASP (average selling price).

      Look at this way… Let’s say the middle iPad model (32GB@599) is priced close to where Apple expects its margins to fall. And if they only made one model, this is what we’d all pay for an iPad (possibly a little less, 549).

      However, Apple is not stupid and knows that not everyone needs 32GB and some may need even more. So, for a 16GB model users get a $100 discount. Even though that 16GB probably only cost $15, Apple is knocking $100 off the price. And the opposite is true, to double the memory to 64GB, Apple is charging $100 even though it may only cost them $30.

      The bottom line here is that they project to sell X devices and make on average $N per device. They balance out price and sales to attempt to hit that projection. They factor in making less on the low-end model and more on the high-end. And hopefully hit their projected ASP.

  2. This makes sense – how many people extend their ownership of their devices beyond the lifetime of their AppleCare plan just because they’re hesitant to shell out the money for a new product? And how many people would be more likely to buy that new product if it cost less? (Not to mention sell their old products on eBay?) It would definitely lead to more units sold and get more money flowing into the company. And Apple has enough cash to take a short term hit by doing so to get more customers in the long term.

  3. Use the billions to buy all available precious gems, stones, and metals and then build a giant vault like Uncle Scrooge on Duck Tales for safekeeping. I would take it one step further and blow up the vault using missiles or maybe just hurl it off into space for kicks.

  4. I am okay with the pricing as long as they keep pushing the envelope to new technologies. Who cares about an iwatch when you could have a computer that has a diamond infrastructure rather than silicon. Who cares about an iTV, when you could have flexible and bending screen technology.

  5. Much depends on how many more iPhones can be built. If they are already selling as many iPhones as they can make, there is no point in cutting the price as it will seriously reduce the bottom line.

    On the other hand, if they could boost iPhone 5C production by 50%, then selling them a bit cheaper might make sense, but I very much doubt that Apple would do that.

  6. Hey hey hey it’s Mark Rogowsky, Forbes flim flam man. Hey hey hey Moron, uh I mean Mark, can you back up this statement: “It’s equally clear that the company has no real idea what to do with the money.”

    I mean to be perfectly clear with that concept would require say Tim Cook to come out and say “we have no real idea to do with our money.”

    Listen to the crickets.

    How about one of those insider sources.

    Listen to the crickets.

    How about some so called expert.

    Listen to the crickets.

    How about some delusional wannabe speculator.

    Listen to the sirens, they are coming to take you away Mark. It’s equally clear that you need to be locked away. It’s for your own good, trust them, they are the government.

    1. They’re coming to take you away ha ha

      they’re coming to take you away he he

      to the funny farm where life is beautiful all the time

      and you’ll be happy with all the men in their clean white coats and they’re coming to take you away ha ha

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